The decision of the Supreme Court of Canada in Progressive Homes Ltd. v. Lombard General Insurance Company of Canada, 2010 SCC 33 resolves a discrepancy between decisions of the Courts of Appeal of British Columbia and Ontario on an important point concerning the scope of Commercial General Liability insurance policies as they apply to construction projects. The Court preferred the broader view taken in the Ontario court, finding that the policies provided coverage for claims against the insured general contractor alleging errors arising from the work of subcontractors. Hence the insurer, Lombard, was obligated to defend the contractor. The decision takes a broad view of the availability of coverage for claims involving defective work, and rejects a number of arguments that some insurers have employed to resist providing coverage for claims in this area.
The Progressive Homes decision does not explicitly change the roster of interpretive principles that Canadian courts commonly employ in insurance coverage disputes; however, it exemplifies an objective application of those rules, and a healthy scepticism toward a number of limiting principles, not set out in the policy wording, that some insurers have tended to rely upon.
Some elements of the Court's reasoning may well apply to first party property insurance claims in which similar concepts come into play, including the question of whether damage flowing from one part of a structure to another part amounts to property damage and can be said to be a fortuitous (and hence insurable) loss.
This was a case in which a general contractor, Progressive Homes Ltd. ("Progressive"), named as a party in four 'leaky condo' actions, sought a declaration that its insurer under a commercial general liability ("CGL") policy, namely Lombard General Insurance Company of Canada ("Lombard"), had an obligation to provide defence costs for it in the actions. Progressive had lost this argument at the trial court and before the British Columbia Court of Appeal. However, in a unanimous judgment, the Supreme Court of Canada overturned the B.C. Court of Appeal and ruled in favour of Progressive, holding that Lombard had a duty to defend Progressive in the four actions.
The insured, Progressive, was hired as a general contractor by the B.C. Housing Management Commission ("B.C. Housing") to build several condominium complexes pursuant to a provincial government program for affordable housing. After completion, in late 2004 and early 2005, four actions were initiated by B.C. Housing against Progressive claiming breach of contract and negligence. Each action concerned a separate condominium complex that had been built by Progressive and its subcontractors. B.C. Housing alleged various construction defects, including defects in framing, stucco, windows, flashings, venting and roofs, which it alleged caused moisture penetration into and through the building envelope. Most of the allegations were related to work done by subcontractors to Progressive.
Lombard is a liability insurance company that had issued successive CGL policies to Progressive from 1987 to 2005. In the simplest of terms, these CGL policies required Lombard to defend and indemnify Progressive when Progressive was legally obligated to pay damages because of property damage caused by an occurrence or accident.
Lombard initially defended the underlying actions on behalf of Progressive but later withdrew on the basis that it did not owe a duty to defend because B.C. Housing's claims were not covered under the CGL policies. Progressive commenced its action by way of petition to the B.C. Supreme Court for a declaration that Lombard owed a duty to defend them in the four actions.
The sole issue was whether, under the terms of the CGL policies, Lombard was obligated to defend Progressive with respect to the actions. Specifically, the question that came before the courts was whether the language of the Lombard CGL policies provided coverage in respect of damage to a project which resulted from the negligence of Progressive's subcontractors.
Supreme Court of British Columbia
Progressive Homes Ltd. v. Lombard General Insurance Company of Canada, 2007 BCSC 439
Lombard asserted that the essence of B.C. Housing's actions was that Progressive had breached its contract with B.C. Housing by delivering an entirely faulty product. As such, the CGL policies did not afford coverage to indemnify Progressive for failing to meet its contractual obligations. In other words, Lombard argued that because the damages were simply the normal expected consequences of poor workmanship, it did not qualify as property damage caused by an occurrence or accident.
Progressive asserted that the definitions of "accident" and "occurrence" in the CGL policies negated any element of suddenness that may be associated with those terms and made it plain that coverage may extend to property damage that takes place over a long period of time. Thus, they argued that B.C. Housing's claims fell within the language of the CGL policies. Progressive also relied on the decision of the Ontario Court of Appeal in Bridgewood Building Corp. v. Lombard General Insurance Co. of Canada, 266 D.L.R. (4th) 182, 79 O.R. (3d) 494 ("Bridgewood"), where the Court looked to the "subcontractor exception" and held that the exception extended coverage to damage caused by subcontractors, which was the same claim made by Progressive in this case.
Mr. Justice Cohen ruled in favour of Lombard and found that the claims did not fall within the initial grant of coverage under the CGL policies and therefore Lombard did not owe a duty to defend.
Cohen J. first cited the test from Nichols v. American Home Assurance Co.,  1 S.C.R. 801, (1990) 68 D.L.R. (4th) 321, which provides that if there is a possibility that the claims in the actions fall within the coverage provided by the CGL policy, the insurer is under a duty to defend. Any doubt over whether the pleadings in the underlying actions brought the claims within the coverage of the CGL policy should be resolved in favour of the insured.
Cohen J. went on to review a number of relevant insurance cases. He stated that he was bound by the B.C. Supreme Court decision of Swagger Construction Ltd. v. ING Insurance Company of Canada, 2005 BCSC 1269 ("Swagger") and held that the case required the dismissal of Progressive's application on the following grounds:
- When the court is considering a building which is an integrated
whole, and where the entire structure is allegedly defective, it is
improper to artificially divide it and claim that one part of the
work has caused damage to some other part of the work. The
pleadings in the underlying actions did not create any division,
nor could the court create such an artificial division for
insurance coverage purposes (unless that is the clear intention of
the entirety of the policy).
- The claims in the underlying actions sought to recover costs to
remediate allegedly faulty buildings that failed to keep out the
elements and such allegations did not qualify as an
"occurrence" under the insurance contracts.
- Defective construction is not an "accident" unless there is damage to the property of a third party.
Therefore, on the basis that B.C. Housing's allegations did not allege "property damage" (or an "occurrence" or "accident") as those terms were used in the CGL policies, coverage could not be triggered and Lombard was under no duty to defend Progressive.
British Columbia Court of Appeal
Progressive Homes Ltd. v. Lombard General Insurance Company of Canada, 2009 BCCA 129
A majority of the Court of Appeal dismissed the appeal by Progressive. Ryan J.A., writing for herself and Kirkpatrick J.A., accepted that the duty to defend must be resolved on the wording of the policy. She also accepted that the plain meaning of the insuring provisions could support the conclusion that the claims against Progressive fell within the insurance coverage. However, she concluded that "such an interpretation flies in the face of the underlying assumption that insurance is designed to provide for fortuitous contingent risk". In her view, damage resulting from faulty workmanship could not be considered fortuitous.
Ryan J.A. went on to examine the "work performed" exclusion. Ryan J.A. accepted that in some circumstances, work performed by a subcontractor could be covered by the CGL policies, but only if the damage was caused by a distinct item installed by a subcontractor, such as a boiler that exploded. However, she found that this was not the situation in this case. On her reading, the pleadings alleged that integral parts of the building itself failed to function properly and were not "distinct" components that could be covered. Therefore, she maintained that Lombard did not owe a duty to defend.
Madam Justice Huddart dissented. She accepted Progressive's argument that the CGL policies provided for coverage for the contingent risk that the negligence of a subcontractor might give rise to an "accident" or "occurrence" that could cause "property damage". She did not accept that such an interpretation "flies in the face of the underlying assumption that insurance is designed to provide for fortuitous contingent risk". Rather, she held at para. 92 that:
The natural consequences of careless conduct will be fortuitous to the victim of that negligence who neither expects nor intends them. Whether knowledge of careless conduct (or poor workmanship) precludes the triggering of coverage is a question of fact, requiring evidence.
On her reading of the CGL exclusion clauses, she could find no basis to exclude coverage for property damage resulting from the defective work by subcontractors.
Huddart J.A. went on to say that that she was not bound by the Swagger decision and refused to adopt the reasoning contained therein. In her view, the definition of property damage in the CGL policy could apply to physical injury to property including the insured's own work product and not simply to the property of a third party. Therefore, Huddart J.A. found that Lombard owed a duty to defend.
Supreme Court of Canada
Progressive Homes Ltd. v. Lombard General Insurance Company of Canada, 2010 SCC 33
The B.C. Court of Appeal's decision was overturned in a unanimous Supreme Court of Canada decision written by Justice Rothstein which again framed the sole issue as whether Lombard owed a duty to defend the claims against Progressive. A detailed review of Justice Rothstein's reasoning is summarized below.
General Insurance Principles
The Court reviewed a number of well-established principles regarding the duty to defend before applying them to the facts of the case:
- An insurer is required to defend a claim where the facts
alleged in the pleadings, if proven to be true, would require the
insurer to indemnify the insured for the claim.
- It is irrelevant whether the allegations in the pleadings can
be proven in evidence. What is required is the mere
possibility that a claim falls within the insurance
- Where it is clear that the claim falls outside the policy,
either because it does not come within the initial grant of
coverage or is excluded by an exclusion clause, there will be no
duty to defend.
- In examining the pleadings to determine whether the claims fall within the scope of coverage, the parties to the insurance contract are not bound by the labels selected by the plaintiff. What is determinative is the true nature or the substance of the claim.
The Court went on to review the general principles of insurance policy interpretation, which are also worth reiterating here:
- The primary interpretive principle is that when the language of
the policy is unambiguous, the court should give effect to clear
language, reading the contract as a whole.
- Where the language of the insurance policy is ambiguous, the
courts rely on general rules of contract construction to resolve
- When these rules of construction fail to resolve the ambiguity, courts will construe the policy contra proferentem — against the insurer.
The Court then examined the CGL policies in some depth. The Court held that it is generally advisable to interpret insurance policies in the order of: coverage, exclusions, and then exceptions.
As for coverage, the onus was on Progressive to show that the pleadings fell within the initial grant of coverage. Each of the CGL policies in this case covered "property damage" caused by an "accident".
Lombard's main argument was that "property damage" does not result from damage to one part of a building arising from another part of the same building. According to Lombard, damage to other parts of the same building was pure economic loss, not property damage. Lombard relied on the Supreme Court of Canada's findings in Winnipeg Condominium Corporation No. 36 v. Bird Construction Co. (1995), 121 D.L.R. (4th) 193,  1 S.C.R. 85, 100 Man. R. (2d) 241, 176 N.R. 321,  3 W.W.R. 85, 23 C.C.L.T. (2d) 1, 18 C.L.R. (2d) 1, 43 R.P.R. (2d) 1, in which the Court addressed what is called the 'complex structure' theory, and found that when one part or component of a complex structure damaged another part or component, the result was economic loss, not property damage. Relying on this analysis, Lombard argued that "property damage" was limited to third-party property.
The Court did not agree with Lombard's interpretation of "property damage" on the basis that the focus of insurance policy interpretation should first and foremost be on the language of the policy at issue. The Court held that a plain and ordinary meaning of "property damage" in this case includes damage to any tangible property and is not limited to damage to third party property. In making this ruling, the Court essentially upheld the Ontario Court of Appeal's conclusion with respect to the similar definition of "property damage" in Bridgewood.
In obiter, Rothstein J. also remarked that it was not obvious that defective property could not also be "property damage". Moreover, where a defect renders the property entirely useless, it may be arguable that defective property may be covered under the definition of "property damage" as well.
Progressive relied on the plain meaning of the definition of accident as well. It argued that "accident" included the negligent act that caused damage that was neither expected nor intended by Progressive.
Lombard argued that when a building is constructed in a defective manner, the end result is a defective building and not an accident. It relied on Ryan J.A.'s conclusion from the Court of Appeal that a different interpretation would offend the assumption that insurance provides for fortuitous contingent risk. Lombard also argued that interpreting accident to include defective workmanship would convert CGL policies into performance bonds.
The Court disagreed with Lombard, holding that "accident" should be given the plain meaning prescribed to it in the policies and should apply when an event causes property damage neither expected nor intended by the insured. According to the definition, the accident need not be a sudden event. An accident can result from continuous or repeated exposure to conditions. The Court concluded that whether defective workmanship is an accident is necessarily a case specific determination and will depend both on the circumstances of the defective workmanship alleged in the pleadings and on how "accident" is defined in the policy.
Having found the claims in the pleadings fell within the initial grant of coverage to Progressive, the onus shifted to Lombard to show that coverage was precluded by an exclusion clause. Because the threshold for the duty to defend is only the possibility of coverage, Lombard had to show that an exclusion in the CGL policies clearly and unambiguously excluded coverage.
The central exclusion in the appeal was the "work performed" exclusion. This common exclusion clause and its relationship to work completed by subcontractors have received a great deal of attention in both Canada and the United States.
Lombard argued that the "work performed" exclusion excluded coverage for damage to the worked performed by Progressive — in this case the four housing units in their entirety.
The Court held that Lombard had not discharged its burden of showing that the "work performed" exclusion clearly and unambiguously applied to all of the claims made against Progressive, meaning that there was a possibility of coverage under each version of the CGL policy. In other words, depending on which version of the CGL policy applied, there was a possibility of coverage for damage to work completed by a subcontractor; for damage resulting from work performed by a subcontractor; or for damage resulting from the particular part of Progressive's work that was defective. Therefore, the duty to defend was triggered.
The Supreme Court of Canada's decision ultimately turned on the specific language of the policies at issue. Undoubtedly, therefore, CGL insurers will be reviewing policies and policy language. However some of the remarks of the Court may send a wider message. The Court reminds insurers that policies will be read contra proferentem, in favour of reading the language of exclusions narrowly. The Court also referred to the need to give support to the reasonable expectation of the parties, stating:
"In purchasing the Broad Form Extension Endorsement, Progressive would have expected to receive something different from the standard CGL form. To give clause (Z) the same meaning as the standard form clause would deprive the replacement of any meaning. Indeed, coverage for work completed by subcontractors seems to be the purpose of upgrading to the Broad Form Extension (see American Family Mutual Insurance Co. v. American Girl, Inc., 673 N.W.2d 65 (Wis. 2004), at para. 68; see also M. Audet, "Broad Form Completed Operations: An extension of coverage or a trap?" (1984), 51:10 Canadian Underwriter 36, at p. 38; Annotated Commercial General Liability Policy, vol. 2, at p. 22-11"
For the last several years, following the Swagger decision, CGL insurers in British Columbia have declined to contribute or to contribute substantially to settlements in some kinds of litigation, citing Swagger and then Progressive. From a very practical perspective, at least for the foreseeable future, this decision of the Supreme Court of Canada will likely change the approach of CGL insurers in settlement discussions in litigation where a duty to defend will now arise.
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.