Oh! Canada

April 2, 2023 — by Steve Nance
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A talked about case in Canada (which was appealed and the appeal dismissed) has given some insight as to the operation of a LEG 2 exclusion clause, albeit that it seems to have polarised some opinions. Although in a different jurisdiction to Australia, it nonetheless gives us some insight as to how the exclusion may be interpreted here.

The LEG2 96 wording states:

“The Insurer(s) shall not be liable for

All costs rendered necessary by defects of material workmanship design plan specification and should damage occur to any portion of the Insured Property containing any of the said defects the cost of replacement or rectification which is hereby excluded is that cost which would have been incurred if replacement or rectification of the Insured Property had been put in hand immediately prior to the said damage.

For the purpose of this policy and not merely this exclusion it is understood and agreed that any portion of the Insured Property shall not be regarded as damaged solely by virtue of the existence of any defect of material workmanship design plan or specification”

I have always considered this to be a relatively simple exclusion to interpret, albeit that it complicates things by introducing another parameter over its DE cousins, time.

The first thing to determine is “when did the damage occur?” Books have been written on damage, and it is not the intention of this paper to go into this now, but for the purposes of this paper we will accept that damage occurs when a detrimental change in the physical properties of something occurs. I think it is well enough understood that damage does not occur at the time the defect is incorporated into the item, and this is clarified in the exclusion.

So something can be constructed with a defect in it, but it is not until it falls over, cracks, settles, or whatever the mechanism of damage happens to be that the damage occurs.

The other word which is used in the exclusion which also has an impact is the word “immediately”. It does not say sometimes before, or leaves out the descriptive term, rather specifically requires the clause to be looked at “immediately before” any damage occurs.

I do not know what the basis of the exclusion was, but imagine that the drafters considered that if the insured knew of a defect within the construction (albeit the clause puts this in hindsight), then the insured would at that stage not have a claim, and would have a duty of care to rectify the fault at that time. The word immediately has been used to define the time when this is to be considered, removing any doubt as to when the repairs would have to be undertaken. It is these costs which are excluded from the cover.

The issue with the exclusion as I see it is that the outcome can vary greatly depending on the circumstance. It also brings in the ability of “supplementary” repairs to “put the issue in hand”; not necessarily requiring a reconstruction identical to the original.

Take the example of a balcony/patio that has been built off a dwelling. The structure includes timber bearers and floor joists over which compressed fibro is placed, on top of which is a waterproofing membrane and floor tiles. The above are on timber columns. Let’s assume the joists are under sized (defective design) and the excessive deflection of the floor damages the tiles, the membrane, and the compressed fibro.

Let’s also assume the balcony is 2m above ground level. To “put in hand” the defect immediately before the damage would require the installation of some supplementary joists to improve the design. All the builder has to do is position and fix supplementary joists to the structure, which she can do easily from underneath the balcony. This means that the damaged items under a LEG2 exclusion would be covered, including the tiles, membrane and compressed fibro.

If we assume, however, that the balcony is 200mm above the ground, it would not be possible to slip in some further joists and fix these to the structure. Rectification of the defect “immediately before” the damage would require the removal of the tiles, membrane and compressed fibro, introduction of some supplementary joists, and the rebuilding of those damaged components. In this scenario, the entire claim would be excluded, even though it was only one detail that changed.

The Canadian case, as with all interpretive challenges, turns on the facts, and as such it is important to understand these.

The Acciona Lark Joint Venture were contracted on a design and construct basis to undertake the construction of a new 500 bed, four level building at the Royal Jubilee Hospital in Vancouver. It was to be used as a medical facility, and as such equipment and patients were to be moved about on trolleys and beds with castors, so it was necessary to have floors level and within specification.

The construction was of conventional reinforced concrete for both floors and columns. The floors were designed with an upward bow in the floor such that after loads were fully applied to the floors they would deflect into a flat floor plate.

The formwork system that was being used was a fly-form type, which is a “modular” system of forms that consists of shutters of a certain area and can be removed and installed very much quicker than conventional formwork. The formwork was supported on props to keep it in place whilst the concrete was being poured.

One of the pertinent issues here is the extent of propping required to support a wet concrete floor that has just been poured (before it hardens). As floors are constructed at higher levels, the weight of the wet concrete is supported through the formwork and the props to the floor below. The problem here is that the floor below is not designed to withstand the excessive loads that the wet concrete can exert on the floor. Although the floor below is “strong enough” to take the dead and live loads to which it is to be subjected, these are somewhat less than the full weight of a wet concrete floor. The way to get around this is to put in props between the floor below the concrete pour, and the floor below that. Depending on the loads, it may also be necessary to prop below that as well. In this way, the load of the wet concrete is being supported by up to three or four floors below, which is sufficient to support the pour. This is generally termed “back propping”.

There are a couple of engineering issues here which are also pertinent to the case. The first is that concrete takes some time to set, and also hardens over a period of time. For example, the nominated strength of concrete is usually specified as the compressive strength of the concrete at a time 28 days after the concrete is made. For example, a 40 megapascal (MPa) concrete should reach that minimum strength at 28 days. However, at 4 days, although hard enough to walk on, may only have a strength of 12MPa and at 16 days may be 32MPa, but it is not until it is 28 days old does it reach the 40MPa strength. And yes, it does get stronger after this time, but not much. The point here is that the nominated strength of 40MPa is what the designers use to design the slab for the loads to which it may be subjected to, and this is theoretically not reached for about 28 days.

Further to this, concrete also has an ability to move or creep when it is not properly supported, or is not of sufficient strength.

Given the propping requirements, and the time required to allow the concrete to strengthen, it is not surprising that if one starts to remove the propping below a newly poured concrete floor slab before it has reached sufficient strength, it is likely to deflect, albeit by a small amount.

There is also a third engineering issue that must be considered to understand what happened in this case. This relates to the design of the concrete slabs themselves. Specifically, is a slab which has been “under-designed” according to a standard, defective in design? Many engineers “travel close to the wind” when undertaking some designs. All standards incorporate factors of safety. These are incorporated to allow for issues such as inconsistencies in materials and workmanship, which can be expected in many instances. If workmanship and the materials, for example in the construction of a concrete floor, are of a very high quality, then a lesser factor of safety could be used. Indeed, one lower than a code may recommend.

Of course in doing so the designer runs the risk that the workmanship and/or materials may not be good, in which case he may have some explaining to do. It is a very subjective area, which is what makes most good engineering an art rather than purely a science.

In coming back to our medical centre, what happened was that at a time towards the end of the structural concrete works it was found that the already constructed slabs were deflecting downwards and were concave on top of the slab, not flat or slightly “hogged” as designed. Investigations were made but no definitive cause was found, and construction continued. The deflection was not great, but enough to be well outside of specification tolerance, and had the potential to allow trolleys and the like to move by themselves.

The contractor put a claim against the Construction Material Damage insurance policy, and the claim was rejected by insurers on the basis of the LEG2 wording which existed in the policy. Insurers appeared to argue that the slab was defective in design, and as such the claim in its entirety was rejected. In this case, the slabs were agreed by the experts to not be designed strictly in accordance with the code of the time, arguably the slab being too thin. Given the various factors of safety that are considered in any particular code, however, the slab was considered strong enough for its intended purpose so long as all other parameters such as propping and the like were undertaken properly. In this way the Court ruled that there was no design defect.

There is insufficient information in the judgement, but I wonder if the insurers argued that the whole slab was defective and as such would have had to be replaced, in which case the “cost” which would have been incurred immediately before the damage (the deflection) occurred would have been the rebuilding of the entire slab(s) (or the topping of the slab with a self-levelling compound), which would have reduced the claim to nil.

To assist in understanding if the slabs were insufficient in design, it would seem that the slabs were repaired using grinding and a levelling compound. I would have thought that if the slabs were under designed then supplementary strengthening would have been required, not just the addition of load (further levelling compound/topping).

The contractor argued that the slab design was satisfactory; however the process by which the slabs were constructed was defective. The contractor’s experts (who were preferred by the court) found that the problem was with the back propping, being that it had been taken out too early in order to retrieve the fly forms, and/or not replaced with sufficient propping to support the weight being exerted. This allowed the deflection of the slabs and caused them to harden in that way.

The Court found that the cause of the loss was insufficient propping. The propping which had been placed was insufficient, and should have been supplemented with some more propping, at which stage the floors would not have deflected when and to the degree that they did.

And the cost of such supplementary propping (which would have “put in hand” the problem “immediately before” the damage)? Not much. This is the amount which was excluded.

In Australia there has been some debate as to whether the Court came to the correct decision. Based on my understanding of the facts, and the acceptance that the slab was not defective in design, I think it did.

Steve Nance
B.E.(Hons), M.I.E.Aust., F.C.L.A., ANZIIF (Fellow), F.C.I.L.A., A.I.A.M.A.
Chairman & Executive Adjuster
Technical Assessing Pty Limited


David Cambridge

In 2017, David became Technical Assessing’s Managing Director and in mid-2020, he led the Management Buyout (MBO) with the key management team. Since the MBO, David has overseen TA’s expansion and delivered a revamped rebrand which included a new positioning statement of Talent Chooses UsTM to better reflect the belief that our people choose to work at TA.

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