On-Risk E-Bulletin @ Gowlings: March 27, 2009

Edited by Paul Stein and Allison

Thomas

Contents

Message from the Executive Editors

A tale of twenty-six lubricated seals - Canadian National

Railway Company v. Royal Sun and Alliance Insurance Company of

Canada and others - The Supreme Court of Canada weighs in on the

exclusion for "faulty or improper design"

Insurer Precluded from Denying Coverage Under

"Settlement" Exclusion in an All-Risks Policy

Case Comment: McDougall v. Black and Decker Inc. et al.

Message from the Executive Editors

By: Allison Thomas, Toronto

In this issue of Gowlings' On-Risk E-Bulletin, Adam I.

Zasada from our Waterloo office comments on the recent Supreme

Court of Canada decision in Canadian National Railway

Company v. Royal Sun and Alliance Insurance

Company of Canada, where the Court overturned the decision of

the Ontario Court of Appeal. The SCC held that when insuring

something that has never been built before, it will be covered

despite any exclusion for "faulty or improper design", as

long as it was built to the state of the art at the time.

Tim Ryan from our Calgary office provides a case comment on the

recent decision in Engel Estate v. Aviva Insurance

Company of Canada, where the Alberta Court of Queen's

Bench distinguished Canadian cases and followed U.S. case law

regarding settlement exclusions in "All Risks"

policies.

David C. Hendricks from our Vancouver office comments on the

recent Alberta Court of Appeal decision in McDougall v.

Black and Decker Inc. et al., where the court reviews the

law on spoliation of evidence in Canada.

As always, please feel free to contact the authors of any of the

articles in this issue of On-Risk or the Executive Editors if you

have any questions.

A tale of twenty-six lubricated seals - Canadian

National Railway Company v. Royal Sun and

Alliance Insurance Company of Canada and others - The

Supreme Court of Canada weighs in on the exclusion for "faulty

or improper design"

By: Adam I. Zasada, Waterloo

The Essential Facts

This is not a story of slippery or drunken marine mammals. It is

an insurance story.

In the early 1990s, the Canadian National Railway Company

("CNR") embarked on a project to have a tunnel boring

machine ("TBM") designed and constructed to run under the

St. Clair River to connect Sarnia, Ontario and Port Huron,

Michigan. The TBM was a massive machine. One of the key design

considerations was keeping dirt and debris out of the bearing

housings of the TBM. Apparently, dirt in the bearing chamber is a

very bad thing. To this end, the TBM design team integrated

twenty-six specially lubricated seals into the TBM to act as a

"gauntlet" to protect the main bearing from dirt.

CNR purchased an "all risks" policy of insurance (the

"Policy") from a number of insurers (the

"Insurers") and paid a hefty premium for same. The Policy

insured against "All risks of direct physical loss or

damage...to...all real and personal property of every kind and

quality including but not limited to the TBM" but excluded

"the cost of making good...faulty or improper design"

"and inherit vice".

As the tunnel was being excavated by the TBM, engineers

discovered that some amount of dirt had gotten into the main

bearing chamber. Construction was halted, the TBM was repaired,

modifications to the seals made, and the tunnel completed. The

delay in completing the tunnel was a costly one; CNR claimed on the

Policy, the Insurers denied coverage, and CNR sued.

The evidence at trial established that the probable cause of

dirt making its way to the sacred bearing chamber was the

deflection (movement/bending under stress) of metals in the TBM

beyond what the engineers had anticipated in the design. The

engineers had anticipated and accounted for some deflection of

metals in the design but the degree of deflection that actually

occurred was much greater.

The Trial Decision

The trial judgment can be read at

http://www.canlii.org/eliisa/highlight.do?language=en&searchTitle=

Ontario&path=/en/on/onsc/doc/2004/2004canlii33029/2004canlii33029.html.

At trial, Justice Ground awarded CNR more than $30,000,000,

including costs. The trial judge found that the design and

construction of the TBM had taken all foreseeable risks into

account and that the design of the TBM was not "faulty"

or "improper", disentitling the Insurers from relying on

the exclusion in the Policy. The judge accepted that deflection of

metals will occur under stress but found that the degree of

deflection that actually occurred was beyond what was foreseeable

when the TBM was designed. As the designers had considered

foreseeable risks, designing the TBM to a very high level, the

trial judge held that the design was neither "faulty" nor

...