Supreme Court of Canada
Foundation of Canada Engineering Corp. Ltd. v. Canadian Indemnity Co. et al., [1978] 1 S.C.R. 84
Date: 1977-02-08
Foundation of Canada Engineering Corporation Limited (Plaintiff) Appellant;
and
The Canadian Indemnity Company and The Employers Liability Assurance Company Limited (Defendants) Respondents.
1976: October 21; 1977: February 8.
Present: Martland, Ritchie, Dickson, Beetz and de Grandpré JJ.
ON APPEAL FROM THE COURT OF APPEAL FOR MANITOBA
Insurance—Claim for sum paid for damage arising out of appellant’s professional negligence—General liability policy excluding errors and omissions—Whether addition of professional insured can create professional liability coverage.
Appellant was the construction manager of a project to build a plant that it had designed for the Inland Cement Company Limited (“Inland”). Under the terms of an agreement between the two, the appellant contracted to inspect all work carried out on the project and to indemnify Inland for any loss or damage arising out of its failure to do so. A contract to manufacture and install concrete roofing for the plant was made between Inland and Preco Limited (“Preco”) under the terms of which Preco’s own designs were to be substituted for the appellant’s. The appellant agreed to this substitution but failed to verify the new design in detail. The new design was defective and a beam collapsed causing damage to Inland’s property. Inland sued the appellant and Preco for damages and the action was settled out of court, with the appellant agreeing to pay 40 per cent of the sum claimed.
The appellant now claims indemnity under the terms of insurance policies granted to it by the respondents. Both were for general liability, but while the policy issued by the first‑named respondent expressly excluded liability “imposed on or assumed by [the appellant]… Due to defective designs, plans or specifications…”, the policy issued by the second-named respondent expressly excluded only claims for damage “where the cause of the occurrence is defect” in the work done (exclusion F) or claims for third party liability assumed by the insured (exclusion H).
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The trial judge held that the appellant was liable to Inland because its supervision of the work done by Preco was inadequate and it could not claim indemnity from the first-named respondent because of the express exclusion in its policy. He held that the second-named respondent was liable to indemnify the appellant because of the broad terms of its policy.
On appeal by the appellant and the second-named respondent the Court of Appeal dismissed the appellant’s appeal and allowed that of the second-named respondent on the grounds that exclusion H was applicable.
Held: The appeal should be dismissed.
The appeal against the first-named respondent could not succeed and counsel for that respondent was not called upon. The appeal against the second-named respondent was dismissed on the grounds that both exclusion F and exclusion H in their policy were applicable and that a general liability policy is not a professional liability one. The policy must be examined in its context. It was issued to a group of manufacturing concerns not involved in the preparation of plans and designs and when the group was enlarged to include the appellant it was stipulated that the policy would remain otherwise unaltered. The mere addition of the appellant could not transform a policy which until then excluded errors and omissions responsibility into a professional negligence coverage.
Dominion Bridge Company Limited v. Toronto General Insurance Company, [1963] S.C.R. 362; The Canadian Indemnity Company v. Andrews & George Company Limited, [1953] 1 S.C.R. 19, referred to.
APPEAL from a judgment of the Court of Appeal for Manitoba[1], dismissing appellant’s appeal and allowing that of the second respondent from a judgment of Wilson J. Appeal dismissed.
R.J. Scott and M.T. Green, for the plaintiff, appellant.
G. Jewers, Q.C., and K.D. Klein, for the defendants, respondents.
The judgment of the Court was delivered by
DE GRANDPRÉ J.—Prior to 1964, Inland Cement Company Limited (“Inland”) decided
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upon the construction of a cement manufacturing plant in the parish of St. Charles, in the Municipal District of Charleswood and Rosser, in Manitoba. The engineering design was entrusted to appellant (“Fenco”) under the terms of a first agreement between the parties. The design having been completed, Fenco became the construction manager of the project under the terms of a second agreement which was eventually reduced in writing on October 9, 1964. One of the terms of this second agreement was that Fenco would
inspect all workmanship carried out on the Project, it being understood and agreed that it is the duty and responsibility of Fenco to reject such workmanship which is not of good and adequate quality and which does not meet specifications.
In addition, reference should be made to s. 16 of this second agreement:
Fenco does hereby agree to idemnify and save harmless Inland of, from and against any and all claims, demands, actions, causes of action, losses, damages or things of any nature whatsoever arising out of or resulting from the breach, non-compliance or wrongful compliance by Fenco with any of its covenants hereunder.
It is not without interest to note that in the negotiations that led to this second agreement, Fenco had described to Inland in a letter of January 13, 1964, the duties of a construction manager, duties which were said to include
checking of shop drawings and other submissions required from the contractor.
In that same letter, the construction manager was described as acting in a dual function, namely “as the general contractor and as the owner’s representative”.
The general scheme, therefore, was for Inland to pass direct contracts with various contractors for different parts of the work. One of these contracts was entered into with Preco Limited (“Preco”) for the fabrication and erection of roof beams and panels from precast, prestressed concrete. With the approval of all interested parties, Preco modified the design prepared by Fenco under the first agreement and substituted its own. It is common ground that this new design was not verified in
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detail by Fenco and that it was defective. Eventually, on November 22, 1966, a beam collapsed causing extensive damage to the premises of Inland. An action was started by Inland against both Fenco and Preco, action which was eventually settled out of Court for $220,000 of which Fenco would contribute 40 per cent or $88,000 and Preco 60 per cent or $132,000. It is Fenco’s share of the settlement, plus other expenses, that Fenco is endeavouring to recover from the two respondents, its insurers under two policies which now have to be described.
The Employers’ policy was issued on March 1, 1964. It is called a comprehensive liability policy. It was issued to Inland and other companies of the Sogemines group. The main insuring agreement spells out that Employers agree to pay on behalf of Sogemines Limited and/or companies of that group and/or
any Agent having care, custody or control of the property or operations of the aforementioned while acting within the scope of his duties as such
…
All sums which the Insured shall become obligated to pay by reason of the liability imposed by law and/or assumed under any contract or agreement for damages… because of
A. Bodily injuries…
B. Damage to or destruction of property, including loss of use thereof and consequential loss, caused by accident or due to an occurrence as defined herein, which takes place anywhere during the policy period;
This insuring agreement is subject to a number of exclusions to be found in Agreement III, the relevant ones being:
| Defects in Products or Work |
F. This policy shall not cover claims for damage to or destruction of products manufactured, sold, handled or distributed by the Insured, or a work done by or for the Insured, where the |
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|
|
cause of the occurrence is defect in such products or work. |
|
|
… |
| Construction or Demolition Operations |
H. This policy shall not cover claims for third party liability assumed by the Insured under contract for construction or demolition operations. |
Two other extracts from the policy are pertinent to this appeal:
1. by condition K, Employers agreed to treat every insured individually “to the same extent as if a separate policy had been issued to each” with the result that Employers, if otherwise responsible under the policy, is obliged to indemnify one insured against the claim of another insured;
2. by endorsement no. 6, dated April 1, 1964, Fenco was added as additional insured “but only with respect to the construction, erection and installation of a cement plant, in the Municipal District of Charleswood and Rosser, Manitoba.”
The Canadian Indemnity policy is also called a comprehensive general liability one. It was issued on April 1, 1965, directly to Fenco and to the companies of that financial group. Its insuring agreement and exclusions are similar to the ones found in the Employers policy. The following exclusion, however, is additional to the ones I have quoted from the Employers policy:
| Defective designs, Plans or specification |
D. This policy shall not apply to claims arising out of the liability |
|
|
(A) imposed upon or assumed by Foundation of Canada Engineering Corporation Limited, or |
|
|
(B) assumed by any other Insured covered by this policy as respects breach of professional duty of any Engineer, Consultant or Architect. |
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Due to defective designs, plans or specifications, but this exclusion shall not be construed to apply:
(I) to bodily injury, sickness or disease including death at any time resulting therefrom, sustained by any person or persons not engaged to perform duties in respect to construction, erection or installation operations of any building, structure or other project which is the subject of a claim, because of a defect in designs, plans or specifications, providing such person at the time of an occurrence giving rise to a claim is not within or upon such building, structure or project;
(II) to damage to or destruction of property which does not form any part of or is not within or upon any building, structure or project which is the subject of a claim because of a defect in design, plans or specifications.
The trial judge, in his oral reasons, made the following findings:
1. Fenco “had a prime responsibility to Inland Cement for the production of a factory in which could be built cement”;
2. Fenco’s responsibility “was to insure to Inland Cement, the owner, that the work would be done properly”;
3. “…part of the basis for the contract between Inland and Fenco was the declaration in the documents that Inland was relying upon Fenco’s expertise in the matter of construction of a cement plant, and so it was Fenco’s responsibility throughout to check the work that was done and the material that was built into the plant”;
4. “Fenco had to satisfy itself, satisfy the owner, that Preco’s work was properly done”.
5. “The initial design was the responsibility of Fenco. Because of the change in the approach from the one form of concrete to another, there was to that extent a redesign, and it was the responsibility of Fenco to check the work which went into this alteration, and the proposed work.”
The trial judge then went on to conclude that Fenco’s efforts were “hopelessly inadequate”, a conclusion which, as I have mentioned before, is
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not challenged. On these facts, the trial judge concluded that Canadian Indemnity could not be found liable under its policy because of exclusion D quoted above relating to defective design. In support of his conclusion that the loss was covered under the policy issue by Employers, the trial judge had this to say:
Fenco was added as a party to the policy, as an insured under the policy, with respect to the construction, erection, and installation of this plant. As I have said with respect to this, it is so broad as to include work done not only on the plant side, but at the offices of Fenco, where the checking of designs ought to have been done. Fenco’s duties extended to all areas of work and all materials going into it.
Now, the accident occurred because of the collapse of a beam which was improperly installed, which was in turn, because of a failure to maintain adequate supervision. That was Fenco’s job, and they didn’t do it. In other words, the destruction of property occurred as a result of that omission.
He did not go any further nor did he in particular refer to exclusions F and H quoted above.
Both Fenco and Employers appealed to the Court of Appeal. The judgment of that Court is now reported at [1974] 3 W.W.R. 23 and at 44 D.L.R. (3d) 298. It is sufficient for my purpose to note:
1. that the findings of the trial judge were accepted by the Court of Appeal;
2. that the appeal of Fenco was dismissed as to Canadian Indemnity, the Court of Appeal being in agreement with the trial judge that exclusion D in that company’s policy was a full answer to the claim;
3. that the appeal of Employers was allowed and the action dismissed as against that company.
On this last aspect of the appeal, the reasons of the Court are to be found at p. 26 of 3 W.W.R. and at p. 301 of 44 D.L.R. (3d). The Court of Appeal, relying on Dominion Bridge Company Limited v.
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Toronto General Insurance Company[2], confirmed in this Court[3], and on Canadian Indemnity Company v. Andrews & George Company Limited[4], was of the view that exclusion H is applicable to the claim put forth by Fenco.
At the hearing before this Court, after listening to appellant’s arguments, we were unanimously of the view that the appeal could not succeed against Canadian Indemnity; accordingly, we did not call upon counsel for that respondent and dismissed with costs the appeal against it. Only the appeal against Employers was taken under advisement.
I will state immediately that I am in agreement with the reasons and conclusion of the Court of Appeal as to Employers. It seems to me, however, that it is also possible to invoke in favour of that conclusion both exclusion F and the principle that a general liability policy is not basically a professional liability one.
Without attempting to cast a mould meant to shape all future possibilities, it must be noted that historically a public liability policy is a contract insuring the general responsibility in tort of the insured to the world at large. It is sufficient here to recall that for many years policies of that type were limited to accidental events and clearly kept outside of the coverage all claims resulting from contractual arrangements. Admittedly, this concept has been broadened over the years as appears from the insuring agreement in the case at bar which refers to occurrence as well as to accident and which refers also to liability assumed by contract as well as to liability imposed by law. The question is: Does the insurance protection under examination here extend to the consequences of professional negligence, the cause of the loss having been determined as “gross under-design”? As already stated, the answer, in my view, must be in the negative.
That particular defence was raised in the plea. The only evidence thereon, we are told, is to be found in the evidence of Mr. Harris, the Casualty
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Manager of Employers. The following question was put to him:
What is the practice in the industry with respect to, in your firm anyway, the practice of insurance companies with respect to insuring professional engineers against liability for professional negligence by error or omission?
and his answer was:
The general practice in the industry is to issue a special form of coverage to provide this cover that the engineer might need.
That general practice is in accord with statements to be found in various text books. For example, Peter Madge in Professional Indemnity Insurance, London, 1968, states at p. 74:
The public liability policy however, which is the policy designed to cover the insured’s legal liability for injury to persons or damage to property, normally excludes claims due to professional negligence on the grounds that this is really the province of professional negligence policy.
Of interest also, MacGillivray, Insurance Law, 6th ed., London, 1975, no. 2278 and Colinvaux, The Law of Insurance, 3rd ed., London, 1970, no. 600. In the United States, the existence of the distinction is recognized generally, for example in Appleman, Insurance Law and Practice, no. 7486, at p. 628:
The principles governing the construction of errors-and-omissions policies for professional men are the same as those applied to indemnity and liability policies.
That distinction has been explored in many interesting articles, including “Comprehensive General Liability Insurance—Perspective and Overview” by George H. Tinker in FIC Quarterly, Spring 1975, p. 217, and “Professional Negligence Insurance” by D.J. MacKay in (1971) 6 V.U.W.L. Rev. p. 119.
Of course, what has to be examined is the contract of insurance in the instant case, not the general procedure adopted by the insurers. But I cannot avoid the conclusion that the text of the policy expresses the practice which itself is founded on the distinction between general liability in-
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surance and professional negligence coverage. Exclusion H, examined by the Court of Appeal, is but an application of that approach. Another example is to be found in exclusion F, the relevant words of which are worth repeating:
This policy shall not cover claims for damage to …a work done by or for the Insured, where the cause of the occurrence is defect in such… work.
As construction manager, the assured Fenco was doing work, or at least had work done for itself, which was damaged because of a defect therein. Hence, no coverage exists for the present claim.
It is true that the Employers’ policy does not contain words similar to exclusion D in the Canadian Indemnity contract dealing with defective design, an exclusion which was successfully invoked by that company throughout this litigation. This absence is not fatal to Employers’ position. Its policy must be examined in its context. As written at the outset, it was issued to a group of manufacturing concerns (and their parent company) not involved in the preparation of plans and designs. Thus exclusion F was enough to keep outside of the coverage claims resulting from the professional negligence of companies involved in the manufacturing field. When by endorsement no. 6, on April 1, 1964, the group of insured persons was enlarged to include Fenco, it was stipulated that otherwise the policy would remain unaltered. Although the new insured was engaged in the preparation of plans and designs so that obviously the inclusion of a clause similar to exclusion D in the Canadian Indemnity policy would have gilded the lily, I cannot see that endorsement no. 6 could have transformed a policy which until then excluded errors and omission responsibility into a professional negligence coverage. The history and the text of the policy convince me otherwise.
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For these reasons and for those of the Court of Appeal, I would dismiss the appeal against The Employers Liability Assurance Company Limited with costs.
Appeal dismissed with costs.
Solicitors for the plaintiff, appellant: Thompson, Dorfman, Sweatman, Winnipeg.
Solicitors for the defendant, respondent, The Canadian Indemnity Company: Fillmore & Riley, Winnipeg.
Solicitors for the defendant, respondent, The Employers Liability Assurance Company Limited: Klein, Ament & Co., Winnipeg.