Dr. Leslie G. Hampson

The appellants (CNR) insured a custom-built tunnel boring machine under an 'all risks' policy that excluded the cost of making good 'faulty or improper design'.

During construction, the machine failed due to excess differential deflection, allowing dirt to penetrate the main bearing and causing significant delay and repair costs.

The insurers denied coverage based on the design exclusion.

The Supreme Court of Canada held that the exclusion did not apply because the design was state-of-the-art and accommodated all foreseeable risks at the time it was finalized.

The Court concluded that a design is not 'faulty or improper' simply because it fails to withstand all foreseeable risks, provided it meets the highest engineering standards of the day.

The plaintiffs (CN companies) retained a manufacturer to build a custom tunnel boring machine (TBM) for a railway tunnel project.

The TBM broke down due to excess differential deflection, causing significant project delays.

The plaintiffs sought coverage under a builders risk insurance policy issued by the defendants.

The insurers denied coverage based on exclusions for faulty or improper design and inherent vice.

The trial judge found in favour of the plaintiffs, holding that the excess differential deflection was not foreseeable and thus the faulty design exclusion did not apply.

On appeal, the Court of Appeal allowed the appeal, finding that the trial judge erred in his foreseeability analysis.

The Court held that the risk of differential deflection was known and investigated by the designer, making it a foreseeable risk that the design failed to accommodate.

Consequently, the faulty or improper design exclusion applied, and the action against the insurers was dismissed.