The insured subcontracted a builder to build 53 prefabricated modular units for its residential blindness rehabilitation facility. The insurer denied an indemnity for water damage under a partly completed roof saying that the applicable exclusion barred coverage for ‘that particular part’ of property on which the policyholder or its subcontractors ‘are performing operations’.

The units were covered by a plywood substrate with roofing to be added later by a different contractor. There were delays and water damage occurred despite the subcontractor’s effort to protect the roofs with plastic tarps.

The court said that the present tense construction ‘are performing operations’ indicates that the exclusion applies only to damage caused during physical construction activities. The ‘particular part’ of the property was property that must be ‘restored, repaired or replaced’ because work was incorrectly performed on it. The exclusion was for faulty workmanship and not for damage to the general area of the construction site where the building was unfinished. The exclusion refers to the specific part of the project where there is faulty workmanship and this was not the case on the facts.

[The case is North American Capacity Insurance Co v Kadena Pacific Inc.]