Copyright 2010, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Litigation & Dispute Resolution, October 2010
On September 23, 2010, the Supreme Court of Canada (the SCC or the Court) released its decision in Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33. The case provides guidance on the interpretation of liability insurance policies, re-affirms several principles of policy interpretation and the duty to defend, and clarifies certain important and controversial points.
A general contractor ("Progressive" or the "Insured") was engaged to construct housing complexes. Four related claims were bought against Progressive that alleged water damage had caused rot, infestation and deterioration of four buildings. The Insured had commercial general liability (CGL) insurance policies with Lombard (the Insurer) which required the Insurer to defend and indemnify the Insured if the Insured was under legal obligation to pay damages arising from property damage from accident or occurrence. The Insurer claimed that it was under no duty to defend the claims because there was no basis for coverage based on the allegations in the Statement of Claim. Progressive brought an application for a declaration that the Insurer was under a duty to defend. The application was dismissed on the basis that the claims did not fall within the initial grant of coverage under the policies. The British Columbia Court of Appeal (BCCA) dismissed the appeal. The SCC overturned that decision.
Comments on Policy Interpretation Generally
The SCC revisited the long-established principles that govern the duty to defend. The duty to defend is owed where the facts alleged in the pleadings, if proven to be true, would require the Insurer to indemnify the Insured for the claim (Nichols v. American Home Assurance Co.,  1 S.C.R. 801). It is irrelevant whether the allegations in the pleadings can actually be proven; what is important is that there is a possibility that a claim could require indemnification by the Insurer (Nichols). The nature, or substance of the claim is what is considered, not the language used by the plaintiff in the underlying action (Non-Marine Underwriters, Lloyd's of London v. Scalera, 2000 SCC 24). Therefore, the duty to defend depends on the allegations in the pleadings in the underlying action, and the policy of insurance at issue.
The Court also commented on general principles of insurance policy interpretation. When interpreting the language of the policy, if no ambiguity exists, courts will give effect to the language of the policy, reading the contract as a whole (Scalera). If there is ambiguity, courts will rely on general rules of contract construction. Interpretations consistent with the reasonable expectations of the parties are preferred, provided they are supported by the text of the contract (Scalera). Unrealistic results that would not have been contemplated by the parties are to be avoided (Scalera). Courts will strive to construe similar policies consistently (Co-operators Life Insurance Co. v. Gibbens, 2009 SCC 59). If these rules of construction fail to resolve an ambiguity, contra proferentem will be applied to interpret against the drafting party (Gibbens, Scalera). Coverage clauses are interpreted broadly, and exclusion clauses are interpreted narrowly (para 24). The onus of showing that the pleadings fall within the initial grant of coverage is on the Insured. The onus then shifts to the Insurer to show that the facts alleged in the pleadings fall unambiguously within an exclusionary clause such that there is no possibility that liability to indemnify could result from the underlying action (para. 12).
Policy Provisions in this Case
The operative coverage clauses of the policies in this case covered "property damage" caused by an "accident". The question for the SCC was the meaning to be given to these terms (para. 29).
In the first policy, property damage was defined as:
"Property Damage" means physical injury to or destruction of tangible property which occurs during the policy period, including the loss of use thereof at any time resulting therefrom, or loss of use of tangible property which has not been physically injured
or destroyed provided such loss of use is caused by an accident occurring during the policy period.
In other policies, the definition was: "Property damage" means:
- Physical injury to tangible property, including all resulting loss of use of that property; or
- Loss of use of tangible property that is not physically injured.
The Court rejected an argument by the Insurer that there must be damage to third-party property to trigger a liability policy, and that "property damage" does not occur if damage to one part of a building arose from another part of the same building. This argument was made in part based on a distinction between property damage and economic loss in tort law. The Court held that "the focus of policy interpretation should first and foremost be on the language of the policy" and that the "general principles of tort law are no substitute for the language of the policy" (para. 35).
The Court interpreted "property damage" on the basis of the plain language of its definition. It held that property damage included any damage to tangible personal property, even if the damage was to the Insured's own property (para. 36). The Court accordingly held that the pleadings asserted "property damage" sufficient to engage the duty to defend (para 41).
Next, the Court considered the definition of "accident", and the argument of the Insurer that faulty workmanship was not an accident. That argument was accepted by the majority of the BCCA, where the majority held that, since the consequences of faulty workmanship are expected, they are not fortuitous and therefore not covered because insurance provides for fortuitous contingent risk.
On further appeal, Justice Rothstein, writing for the SCC, found that there is no categorical bar to concluding in a particular case that faulty workmanship is an accident. The specific language of a given policy is determinative. Justice Rothstein pointed to another SCC case, which held negligent repair of a crane to be an accident (Canadian Indemnity Co. v. Walkem Machinery & Equipment Ltd.  1 S.C.R. 309 at pp. 315-317).
In this case, the definition of "accident" required that the Insured show that the damage was "neither expected nor intended from the standpoint of the Insured". The Court held that faulty workmanship can satisfy this definition.
Giving the definition of "accident" its plain meaning, Justice Rothstein held that the pleadings asserted an "accident" since there was no reference to intentional conduct that would suggest intent or expectation. Accordingly, the definition was satisfied (para. 49, 50).
The onus then shifted to the Insurer to show that coverage was clearly and unambiguously precluded by an exclusion clause (para. 12). The only exclusion clause substantively examined was the "work performed" exclusion, which is a common exclusion that precludes coverage for damage to the Insured's own work once completed (para. 52). Since the pleadings asserted that much of the work was done by subcontractors, the Court had to consider whether this work was unambiguously excluded. There were three different versions of the clause in the CGL policies at issue.
The initial version of the clause was the standard form which excluded "property damage to work performed by or on behalf of the Named Insured". The Insured purchased an upgraded policy, and the exclusion clause was changed to exclude only "work performed by the Named Insured" (para. 55). The Court found that this amended clause did not exclude work completed by subcontractors. This interpretation was consistent with the reasonable expectations of the parties because the Insured would have expected something more than the standard form exclusion for its additional premiums (para. 57). Accordingly, the duty to defend was triggered.
The second version of the clause excluded "Property damage to 'that particular part of your work' arising out of it or any part of it and included in the 'productscompleted option hazard'". "Your work" was defined as: (a) Work or operations performed by you or on your behalf; and (b) Materials, parts or equipment furnished in connection with such work or operations (para. 59). While this version had no subcontractor exception, the Court interpreted "that particular part" as separating the work of the Insured into parts, such that only defects are excluded and not resulting damage. Since the pleadings alleged resulting damage, the duty to defend was triggered (para 62-65).
The third version of the clause included an express exception to the exclusion, excepting from the exclusion the work of subcontractors on behalf of the Insured (para. 66). The Court readily found that the duty to defend was triggered by the allegations of subcontractor deficiencies (para. 69).
Progressive Homes is important because it reinforces, again, the primacy of the policy and the language used therein in assessing the duty to defend together with a presumption that the facts in the pleadings are true.
Also importantly, the Court rejected the decision of the BCCA that, generally, faulty design or workmanship does not satisfy the fortuity requirement of an insurance policy. The Court must, in fact, examine the language of the policy, to determine whether there was an intention to exclude faulty design and workmanship.
Finally, the SCC also rejected a presumption that a liability policy does not cover damage to property of the Insured itself.
While there are general interpretative principles that are, and continue to be, used by the courts, the SCC is clearly not comfortable with presumptions about what is or is not covered that are not expressly reflected in the language used in the policy.
Some caution is in order when considering this decision as it only considers the duty to defend and the possibility of a duty to indemnify. It does not conclude there was coverage for the loss beyond defence cost, as that issue was not before the Court.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.