Insurers must pay up on the tunnel project claims - so says the Supreme Court of Canada. The decision by the highest court in the land closes out a long litigious battle that started with the insurers refusing cover on claims for loses caused by the TBM sealing problems and consequent delays experienced on the St Clair under-river rail tunnel project in the early 1990s. Project owner CNR (Canadian National Railways) took the case to court in 2004 and won. Royal and Sun Alliance Insurance Co of Canada, as head of the insurance syndicate, appealed and had the Ontario Superior Court ruling overturned in March 2007. In taking the issue to the Supreme Court, CNR wins a final ruling that finds once again in favour of tunnel engineering and rules that the insurer must pay more than $Can30 million in claims, pre-judgment interest, and costs.

The clause at the core of contention was the definition and scope of the exclusion clause 'faulty or improper design' within the context of the policy that insured CNR against ‘all risks of direct physical loss or damage ... to ... [a]ll real and personal property of every kind and quality including but not limited to the [TBM]' but excluding both 'the cost of making good ... faulty or improper design' and 'inherent vice'. The syndicate of project insurers rejected a claim to cover the

The 9.25m under river LOVAT EPBM

cost of sinking an emergency shaft to remove the cutterhead and inspect suspected failure of the TBM’s main bearing sealing system, denying coverage on the basis of the 'faulty or improper design' exclusion.

The original trial judge in 2004 found that despite the failure of 26 of the TBM’s main bearing seals at just 14% into the 1.8km long under-river drive, design of the TBM “accommodate all foreseeable risks within the then limits of engineering knowledge”. The 9.25m diameter LOVAT TBM was one of the largest EPB machines in the world and the largest, and one of the first EPBMs used in North America. The judge acknowledged that the design proved, in the result, to be defective, but found that it was not 'improper' or 'faulty' according to the state of the art at the time and therefore held the insurers liable for the $29,582,638.91 claim, including pre-judgment interest, plus $1,150,837.35 in costs.

In 2007, the Ontario Court of Appeal, by majority, allowed the appeal stating that, in its view, a design error may, but need not, depend upon designer negligence and that since the failure was attributable to 'design', the exclusion clause applies since the foreseeability standard also mandated that the relevant design succeed in withstanding all foreseeable risks. The trail court ruling was overturned.

In writing for the seven to three majority in the Supreme Court, Judge Binnie allowed the counter appeal, stating that its 'all risks' policy “afforded the CNR greater protection than that which the majority in the Court of Appeal was prepared to allow. The policy did not exclude all loss attributable to 'the design', but only loss attributable to a 'faulty or improper design'”.

“In my view,” he continued, “the insurers did not meet the onus of bringing the loss within the exclusion. …..The design exhausted the state of the art but left a residual risk. Failure is not the same thing as fault or impropriety. ….The insurers make a beguiling argument but I do not think it should prevail. The CNR was entitled to insure against the possibility that a design might fail even though not improper or faulty according to the state of the art. The insurers cannot rely simply on the benefit of hindsight to discharge their onus of proof. ….It was for the insurers to demonstrate that the exclusion applies.”

Conceptual design of the challenging Sarnia under-river railway tunnel project that connects Sarnia in Ontario, Canada and Port Huron, Michigan, USA, started in August 1991. Canadian consultant Klohn Leonoff was the owner’s lead project engineer and Hatch Mott MacDonald completed detailed design of the tunnel structures and provided engineering services on site during construction. A JV led by Traylor Bros of the US with Frontier Kemper (US), Wayss & Freytag (Germany), and Foundation Company (Canada) operated the owner-procured machine under a Can$53 million contract and breakthrough on the US side occurred in December 1994.

Despite the delay to sink the temporary shaft and repair the cutterhead sealing systems, the project opened to rail traffic in April 1995. LOVAT confirmed that at no time was the integrity of the machine’s main bearing compromised and repair of the cutterhead sealing system, by LOVAT and at no cost to the project, did not in itself result in an insurance claim.

References

Tunnels & Tunnelling, Jan and Nov 1995, p17 and p36
T&T North America, Dec 1994, p7