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    Defective Design PDF

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    Raveen Lingam

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    HOLMAN FENWICK & WILLAN EXCLUSIONS FOR DESIGN DEFECTS IN CONTRACTOR’S ALL RISK INSURANCE COVER: MAKING SENSE OF THE COVER Presented by Guy Hardaker VIG‘s HOLMAN FENWICK & WILLAN Copy MARLOW HOUSE LLOYD’S AVENUE LONDON EC3N 3AL www.hfw.com Defective or faulty design and/or workmanship is frequently excluded from all risk cover Introduction The ambit of the exclusion varies depending on the wording of the clause but the variety of exclusions has led to confusion as to what is or is not covered in the event of loss from a defect in design, materials or workmanship. The aim of this paper is to review case-law in relation to the application of “defective design” exclusion clauses in insurance policies covering industrial and construction project risks, to highlight some of the general issues which have arisen in relation to these types of exclusion, and to summarise the approach of the courts to their resolution. 1. ‘Typical Exclusions ‘There are a wide variety of defect exclusion wordings in use. Two industry standard Wwordings are those of the London Market Direct Exclusion (DE) and London Engineering Group (LEG), The full wordings form an attachment to this paper. In summary, the London Markét DE clauses provide five different and distinct levels of cover: DEI: Outright Defect Exclusion. Excludes aity and all damage due to property in a defective condition. This excludes everything. Extended Defective Condition Exclusion. Exchides damage to (a) property that is in a defective condition, or (6) property that relies on (a) for support. Consequential damage to any other property free of defective conditions, however, is covered. DE3: —_ Limited Defective Condition Exclusion: Excludes damage to property that is in a defective condition, in whole or in part; but covers consequential damage to any other property free of defective conditions. This excludes the whole object even if a minor component is defective but covers resultant damage to other property. DE4: _ Defective Part Exclusion. Excludes damage only to that constituent part of the HOLMAN FENWICK & WILLAN ocTower 2003 property that is deemed defective (the "faulty part"); covers consequential damage a to any other property free of defective condition. This only excludes the minor detective coniponent DES: Design Improvement Exclusion. Covers all damage excluding only the : additional cost of improvements to the original design, materials, ete. In contrast to DEI this covers everything but for improvement expenses. In each of the clauses "defective condition” includes a defect in design, plant, specifications, materials or workmanship. Damage caused to property to enable the defect to be repaired is not covered and the mere presence of defect does not constitute damage; there must be -nephysicalloss.-.-.. =e “Thé LEG Has also produced exclusion wérditigs iit only thiée’as opposed fo the five DE wordings. These are: an outright defect exclusion a "consequences" wording LEG3: a full defects wording save for improvements 2. Cover included ‘Though modem policies usually exclude cover for defective design, this is not the invariable oO practice at least in the past. In Mitchell Conveyor and Transporter Co Ltd v. Pulbrook ‘the cover included "any loss for the cost of replacing any defective and/or faulty material or workmanship and/or design or imperfections in the original or substituted construction of the property insured ..". ‘There was a problem with the mix of contract used for the flooring of a power station which led to cracking and failure to bond with an underlying layer of concrete. Insurers declined to cover the cost of rectifying the richer mix which the contractor used, The Court held that the [1933] 45 LR 239 HOLMAN FENWICK 4 WILLAN 6 OCTOBER 2003 contractor succeeded against insurers since it had agreed the design or plan of work (for . which it ‘was responsible under the design and build corifract) as recommended by the : “employer's eriginicer (But not Specified ii Tie cofitiact) and since thar was the cause’of the ~ problem, it was held to be part of the designing or planning of the work which was faulty. + In Shell (UK) Limited v. CLM Engineering’, the cover extended to include the costs of repair or replacement of the defective parts. The issue was whether Shell could recover the pure ‘economic loss which it suffered in replacing defective parts in the pipeline serving the Gannet ‘A platform in the North Sea. There was no physical loss or damage suffered to the pipeline; the material which the contractor used to insulate the pipeline failed and thus the insulation did not maintain the temperature of oil flowing through the line. The Court held for insurers that-pure-economic-loss-was-not-covered;-only losses arising from physical loss or. damage to the insured works. 3 _What constitutes a “Design”? ‘This can be relevant when it is necessary to identify which actions are included with the new design’. ‘The main difficulty which arises in relation to the definition of a “design”, is deciding where the boundary of the definition should be drawn in relation to the specifications and - instructions which must be followed in.order to achieve a particular design. O (@)__Pentagon Construction (1969) Co. Ltd. v. United States Fidelity & Guaréntee Co.? In this case, the British Columbia Court of Appeal suggested that the word “design” includes only the-designer’s concept of the finished product. Thus if the finished product as it was conceived would have functioned, there is no defect in the design. “The Claimant building contractors were insured undér a contractor's all risks insurance policy containing exclusions for loss or damage caused ‘by faulty or improper material, workmanship or design, They were engaged to build 2 sewage treatment plant for a local * (2000) 1 AER 940 HOLMAN FENWICK 2 WILLAN OCTOBER 2003 © authority, one part of which was a concrete tank. The plans required a number of steel struts to be laid across the top of the plank and welded in place, After the struts were laid, but ~~ before they were welded the ‘claimants tesied the tank by pouring water into if Since the struts were not yet welded in place one side of the tank bulged, ruining the entire tank, The contractors attempted to claim the cost of repair from the defendant insurers, who denied liability under the exclusion clauses. The issue was whether faulty design included the failure to include in the plans the requirement that the steel beams be welded in place before testing took place. A majority of the British Colombia Court of Appeal held that the insurers ware not entitled to escape liability by relying on the exclusion for improper design since the Jack of instructions as to the order of welding and testing was not a defect in the design. The Court did find however that the insurers could rely on the exclusion relating to improper and ‘The jidges agréed that where there is an exclusion for losses arising from defects in the specifications, that exclusion will relate to the processes by which the design is to be achieved. Robertson J reasoned that the “design” was the conception of the project as it would be after completion. His view was that the finished project finds its expression in the plans and specifications, but they arc not themselves the design. It followed that the absence instructions as to the order to construct and test the tank did not affect the quality of the design. However, Bull J (in his dissent) found that a design is not just the concept of the structure in the designer’s mind but in complex projects will include the drawings and specifications to be followed in the construction of the project. In his view therefore, the insurers could also have relied upon the defective design exclusion to the cover. (b)____Simcoe & Erié General Insurance Co. v Willowbrook Homes (1964) Ltd. * This case concerned a concrete wall which was constructed by the assureds but which "collapsed ‘during a severe windstorm. The cause of the loss was that the temporary wall bracing which was stipulated by the designer for use during construction was inadequate to > [1978] 1 Lloyd’s Rep 93 * 1980 ACWSI LEXIS 11306, Alberta CA. HOLMAN FENWICK & WILLAN 6 octonER 2003 cope with the forces applied by heavy winds. The Insurers sought to deny liability, = contending that the loss fell within a “defective design” exchision. ‘The Alberta Court of Appeal found in favour of the Insurers, concluding that the failure to use adequate bracing during the construction of the wall amounted to a design defect. ‘The Court asked itself: "Ts the design error the failure to design a stable bridge, or can there be design ‘in stages’, or aspects, which is capable of being plucked out of the overall concept...? It appears abundantly clear to me that ‘design' accompanies the totality of the Mo-th -superstructure-and:- that each and every part-of the superstructure. was inte whole... The design was in my view fundamental to the whole, when the design was in + error, Uié whole of te siiperstrisétivre was doomed to fail and did indeed fail” In effect therefore, their lordships rejected the narrow view of a design and adopted the wider definition set out in Bull J’s dissenting speech in Pentagon. In their view, the design consisted of more than the imagined concept, and included the specifications and conditions to be met during the construction process itself. ‘The difficulty then is in establishing whether instructions as to the methods of assembly are 7 part of the design of a particular project. It is clear that if there is an exclusion for ‘defective specifications’, that will encompass defects in the processes by which the design is to be O achieved. What remains somewhat at issue, is whether those specifications can form part of the design where there is only an exclusion in respect of defective design. It was accepted that “design” should have a wider meaning in Simeoe as suggested by Bull J in Pentagon, and that would seem to be the more logical approach. It follows therefore that requirements as to site conditions should also fal! within the meaning of a “design” since the wider view is likely to prevail. What is a “defective design”? HOLMAN FENWICK 2 WILLLAN soctosER 2003 This issue itself can be divided into two different components: the “buildable” test (ie. “can it be built?”) and the “fit for its intended purpose” test (j.e. “does it work?”) 1) A “Buildable” Design It is obvious that a sound design is necessarily one which can be implemented: an impossible design is clearly a defective design. So, for example, the failure to achieve a design which requires site conditions (such as soil density) to be maintained to an impossible level, is not a failure of workmanship. Since it was impossible to realise, the design was inherently defective. However, if the conditions could have been met (albeit with an exceptional ..standard- of- ‘workmanship-and. care). but were. not met,_then- it-is is-possible- to-argue- that-the- failure to achieve the design was the result of a manufacturing defect. Certainly the narrow definition of a design would support the'view that tlie imagined design itself was not flawed. ‘The crucial question, therefore, is where to draw the line: is it possible for a theoretically achievable design to be defective? ‘There is little direct English insurance law on this issue, but it is useful to consider the position in relation to construction law and the duties of designers to their employers. @ uitable ture Assets Corporation Ltd. v. William Moss Group Ltd. and Others’ The case concerned the nature of the architect’s duty to his client. Judge John Newey QC conéluded that: “I think that if implementation of part of a design requires work to be carried out on site, the designer should ensure that the work can be performed by those likely to be employed to do it, in the conditions which can be foreseen, by the exercises of the care aiid skill ordinarily to be expecied of them. if the work would demand exceptional skill, and particularly if it would have to be performed partly from scaffolding and often in windy conditions, then the design will lack what the experts in evidence F 2ConLRI HOLMAN FENWICK d WILLAN socTORER 2003 described as ‘buildability’. Similarly, J think that if a design requires work to be carried out on site in such a way that those whose duty it is to supervise it and/or “Check that i has been dowe will encounter great Aifficilty iW doing so, then Uke desigi’ ———~ will again be defective. It may perhaps be described as lacking ‘supervisability’.” Tt was clearly his view that an unbuildable design is a defective design. But more important is his comment that the threshold of buildability is whether or not, given the foreseeable conditions, the work would require more skill than is to be expected of those likely to be carrying it out. It follows that a design which was theoretically possible but which was unlikely to be likely to be defective. ____. -achieved by.contractors exercising ordinary-standards of skill (6) ~~ Déiit of National Heritage v. Steensen Varming Mulcahy (a firm)* The Canadian court here agreed with the concept of ‘buildability’ in the context of a designer's duties: if the designer has failed to design a buildable design, he has breached his duty. It follows that the designer would have failed to provide a sound design. Judge Bowsher emphasised however, that “It is not to be assumed in every case that the work is to be done by the ‘ordinary’ tradesman ... Thé designer is entitled to look at the.facts of the project on which he is engaged and consider what is the standard of the workmen required by the employer and agreed by the contractor to be provided to do the particular work.” Whether a design is unbuildable and therefore defective is dependent upon the likely standard ‘of workmanship to be employed in the construction process. If specialists with expert skill are likely to be used, a more complex and demanding design would be justified; whereas such a design could fall to be “defective” if ordinary labourers were foreseeably going to be employed. * 60 Con LR 33 at p.85, per Judge Peter Bowsher QC. HOLMAN FENWICK & WILLAN GocTOBER 2003 Although the point has not yet received judicial consideration, it makes logical sense that such principles should apply in the context of insurance law. It would be extremely hard to design and which did in fact occur during construction — but not through negligence of workmanship ~ should not fall within the design defect exception. It would also make sense that a designer on site who relaxes his stipulations as to site conditions will have thereby varied his design. Any resultant loss may then properly be characterised as falling within the definition of defective design. 2) A defective design does not require that the designer be negligent ~ the “fit for its stended.purpose” test Preséntly in English insurance law, exclusions using the words “defective design” and “defect in design” do not require fault or negligence to be proved on the part of the designer. () Queensland Government Railways and Electric Power Transmission Pty. Ltd. v, Manufacturers’ Mutual Insurance Ltd’ Contractors working on a replacement railway bridge in Australia were insured under an all risks policy which contained an exception for losses sustained as a result of “faulty design”. The original bridge had been swept away by flood waters and during the erection of the replacement piers the area was subjected to a period of exceptionally heavy rains. This resulted in flood waters which caused the replacement piers to be overtumed. Insurers denied liability on the basis that the loss was due to the faulty design of the piers. ‘The arbitrator's finding was that given the state of technological knowledge at the time of their design, the new piers were satisfactory (that is, they matched accepted industry standards). He further found that by the time of the arbitration hearing, further investigations into pier failure had revealed that during floods, piers were subjected to far greater transverse forces than had previously been realised. There was therefore no basis for finding that the [1969] 1 Lloyd’s Rep. 214 - decision of the Australian High Court HOLMAN FENWICK & WILLAN eoctoseR 2003 : "designers had been-negligent. However, the High Court of Australia came to the conclusion 5 the loss was caused by "faulty design": ~ “We think it is an error to confuse faulty’ with the personal failure or non-compliance with standards which would be expected of designing engineers. On - the part of designing engineers to design something that will not work simply because at the time of its designing insufficient is known about the problems involved and their solution to achieve a successfitl outcome is a common enough incidence of faulty design.... The exclusion is not against loss from negligent designing: it is against loss from a faulty design”. thé manner in Which something was’ done, to fault on the part of a workman, Faulty designing was thus comparable to faulty workmanship. It held in favour of the insurers that the collapse of the piers was as a result of their design being faulty. The fact no-one had been negligent did not mean the design was not faulty and so excluded from cover. That case was approved but distinguished by the English Court of Appeal in Hitchens (Harfield) Lid. v. Prudential Assurance Co. Ltd?, where the cover provided that there be no recovery for the increased costs of redesigning the property insured which was ‘defectively - designed’ and the Court held that the insurers ‘were required to prove that there had been negligence or fault on the part of the designers. The decision tumed solely upon the particularly wording of the design exclusion clause which in that case excepted cover where the loss was the result of the structure being “defectively designed”. Since the wording was not in the nature of “defective design” or “design defect”, it was held that the meaning of that particular clause was different and required proof of negligence in the design process. The distinction between faulty design as a statement in fact and faulty workmanship as a personal blameworthy activity was used in this case to decide that the increased costs exclusion only jéd costs iricurred by reason of a design that Was originally’ negligent. * [1991] 2 Lloyd’s Rep. 580. HOLMAN FENWICK & WILLAN s 0cTOBER 2003 (b) Cementation Piling and Foundations Lid v, Aegon Insurance and CU PI ‘THUS Case there was Cover Which excluded the costs of rectifying defects in design. ‘The exclusion provided that The insurers shall not be liable in respect of the costs of replacing or rectifying defects in design, materials or workmanship unless the property insured suffers actual loss, destruction or damage as a result of such defect. However additional costs of introducing improvements, betterments or corrections in the rectification of the design material or workmanship causing such .loss or damage shall always be excluded". ‘This exclusion was held not to exclude those additional costs incurred to remedy physical defects in the property where the defect in design resulted in damage to property and rectification did not produce a better structure, (©) James Langley y. Forest Giles Ltd-'° ‘The defects exclusion in the contractors’ public liability cover provided that insurers were not liable in respect of: "Damage to the defective part of any... contract works or the costs or expenses incurred in repairing, replacing, recalling or making any refund in respect of the defective part of any... contract works...", In the case, the Defendant had laid viny! floors pursuant to a sub-contract with the Plaintiff, James Langley. The floor was defectively laid as the adhesive used did not cure adequately. The flooring had to be removed and replaced. The Court held that the damage to property did not extend beyond the floor itself and any resuliant loss was excluded from cover. In this respect the earlier case of Cementation Piling was not followed and the insured 11995) | Lloyd’s Rep 97 "2002 LRIR 421 HOLMAN FENWICK & WILLAN 6 ocToRER 2003 Oo unsuccessfully argued that those costs incurred by other contractors to store marked materials pending rectification of the works were recoverable. 3) Limitations to the “fit for its intended purpose” test? The removal of the requirement of fault from the definition of a “defective design” was an important development in the law, but it also throws up further issues: for example, is it now the case that if a design fails, any consequential losses will fall automatically within a defective design exclusion? Again it is necessary to turn to the Canadian authorities to see how the caselaw has evolved. Foundation Co. of Canada Ltd. v. American Home Assurance Co.'' Contractors insured against all risks were engaged in excavation when a portion of the rock bed of the river collapsed causinig damage to a cofferdam structure which was being used to keep the excavated area free of water. Insurers contended that this ‘blow-in’ was the result of the defective design of the construction process. The Judge’s view was that the decision in Queensland could be distinguished, and ruled that the design was not defective despite the collapse. Consequently the insurers were held liable. The decision was based upon: the reasoning that the flood which destroyed the piers in Queensland was a foreseeable occurrence, and so the design in that case was defective in that it was not sound in respect of all foreseeable dangers. In contrast, the blow-in in the instant, case was triggered by the stress of construction upon an abnormally soft fractured rock bed which was further weakened by gas pockets trapped within it. In the Judge’s view, the blow- in was entirely unforeseeable, and the design was otherwise perfect with respect to the foreseeable risks. The Judge concluded that the design was not defective. ‘The effect of this was to suggest that the principle in Queensland is limited in the sense that a design is not conclusively defective just because it fails. Rather a design will be defective if "1995 A.C.W.S.1. LEXIS $0317 - Ontario Court (Gen, Division), per Wilson J. HOLMAN FENWICK & WILLAN GOcTORER 2003 it is unfit for the foreseeable conditions. If a design is sound with respect to all foreseeable conditions, it is not defective even if it fails due to an unforeseeable event. However, this limitation might itself be open to criticism: the flood in Queensland was foreseeable but due to the limitations of engineering knowledge at the time the strength of the transverse forces was not. On the analysis in Foundation Co. of Canada, had the floods not been foreseeable the exception would not have applied, and the contractors would have been able to recover under their insurance for the cost of repair. But if the dangers need to be foreseeable for a design to be defective, that effectively imports some element of “fault” — and if the danger is foreseen, but as in Queensland there is no fault in failing to adapt the design, it scems strange that the design should still be defective. Tt should also be noted that although the Court of Appeal of Ontario agreed with the “foreseeability’ limitation to the Queciilavid principle, it was left open whether the correct test would be the design’s adequacy in the face of all foreseeable events, or just those reasonably foreseeable events." 4, Conclusion (1) The definition of a “design” is likely to include the specifications and plans necessary to achieve it in the case of complex construction projects. Where a policy also includes an exception for defective specifications however that issue is unlikely to arise since it will be clear that such loss resulting from defects in such items should-be excepted. 2) In relation to site conditions and the conditions which must be met for a design to be implemented, the issue is likely to tum upon whether or not those stipulations are likely to be attainable and maintainable by the type of workers who the designer should foresce are likely to carry out the work. In essence, is the design ‘buildable’? Certainly where the design is so difficult to attain as to be impossible, that design can be said to be defective. "1997 A.C.WS.J. LEXIS 156684, HOLMAN FENWICK & WILLAN 6 ocToBER 2003 “GJ Itis clear moreover, that the meaning of the phrase ‘defective design’ does not require 7 fault to be proved on the part of the designer. Ifa design fails to fulfil its intended design it would seem to be prima facie defective, although that may be dependent - upon whether the forces which caused the failure were actually foreseeable. HOLMAN FENWICK & WILLAN, SocroaeR 2003 ATTACHMENT — DESIGN CLAUSES DEI Oiitright Déféet Exclusion "This policy excludes loss of or damage to the property insured due to defective design, plan, specification, materials or workmanship". DE2 _ Extended Defective Condition Exclusion "This policy excludes loss of or damage to and the cost necessary to replace, repair or rectify (@) Properly inured which is in a defective condition due to a defective design, plan, specification, materials , or workmanship of such property insured or any part thereof, () —_ Property insured which relies for its support or stability on (a) above. o Property insured last or damaged to enable the replacement,-repair ‘property insured excluded by (a)-and b) above.~ Exclusion (a) and (b) above shall not apply to other property insured which is free of the defective condition but is damages in consequience theréof. For the purpose of the policy and not merely this exclusion, the property insured shall not be regarded as lost or damages solely by virtue of the existence of any defect in design, plan, specification, materials or workmanship in the property insured or any part thereof”. DE3 —_ Limited Defective Condition Exclusion "This policy excludes loss of or damage to and the cost necessary to replace, repair or rectify (@) Property insured which is in a defective condition due to a defect in design, plan, specification, materials or workmanship of such property insured or in any part thereof. () Property insured lost or damaged to enable the replacement, repair or rectification of property insured excluded by (a) above. Exclusion (a) above shall not apply to other property insured which is free of the defective condition but is damaged in consequence thereof. For the purpose of the policy and not merely this exclusion, the property insured shall not be regarded as lost or damaged solely by virtue of the existence of any defect in design, plan, specification, materials or workmanship in the property insured or any part thereof”. DE4 —_ Defective Part Exclusion “This policy excludes 1083 of or damage to tinil the cost nécessiry to replace, repair oF rectify @ Any component part or individual item of the property insured which is defective in design, plant, specification, materials or workmanship. HOLMAN FENWICK & WILLAN 6 OCTOBER 2003 (b) Property insured lost or damaged to enable the replacement, repair or rectification of ==

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