The Supreme Court of Canada's recent decision in Progressive Homes Ltd. v. Lombard General Insurance Company of Canada represents a major change in the law as it relates to a general liability insurer's duty to defend a contractor against a claim in which it is alleged that the contractor's work or materials are defective and have resulted in damage to other components of the project for which the contractor was contractually responsible.
Before Progressive, the law in British Columbia developed over 19 years to a point where it was generally understood that a claim for the cost of repairing or replacing a contractor's defective work product and related damage to the project was not a claim that triggered the obligation of a general liability insurer to defend the contractor under a policy which provided coverage for the insured's liability arising out of property damage.
Such damage is defined to mean physical injury to, or destruction of, tangible property caused by an occurrence such as an accident or unlooked for mishap or event. The seminal decisions in this area were two B.C. Supreme Court cases: Privest v. Foundation Co. of Canada (1991) and Swagger Construction v. ING Insurance Company of Canada (2005). Both concluded that the cost of repairing defective work and materials was not a claim for physical injury to or destruction of tangible property (i.e. property damage) but rather a claim for pure economic loss.
The Court in Swagger went further. It concluded that the delivery of faulty work product or materials could not be classified as an accident or occurrence in the sense that the activity or lack of activity that resulted in the faulty work product or materials could not be said to have been unexpected or unintended from the contractor's perspective. Even the consequences of the faulty materials or work product, when restricted to work adjacent to or part of the overall work product of the contractor, would not be the result of an occurrence or accident. To the contrary, they are part of an overall obligation, or failure, by the contractor to deliver a project without faulty work product or materials.
The Swagger decision's treatment of the meaning of the term "occurrence" or "accident" was consistent with the Supreme Court of Canada's 2009 decision in Co-operators Life Insurance Co. v. Gibbens. In this case, the Court found that paralysis resulting from a herpes infection was a natural consequence of sexual activity that could not in any sense of the word be described as an accident. Similarly one would have thought that a contractor delivering faulty workmanship or materials could not in any sense of the word be involved in an activity that could be considered accidental. But the Supreme Court of Canada in Progressive thought otherwise.
The law in British Columbia in this area, prior to Progressive, allowed the courts to achieve a particular policy objective. Simply put, the presence of insurance should not be used to obviate a contractor's obligation to perform work in a good and workmanlike manner and to supply materials fit for their intended purpose. If insurance was available to correct such transgressions by the construction industry, contractors would tend to rely on insurers to make good shoddy workmanship and materials and not discharge the contractual obligations placed on them to deliver a project fit for its intended purpose. Although Progressive does not necessarily dismantle this policy objective, it makes some significant inroads in that direction.
The issues in Progressive were familiar: did Lombard owe a defence obligation to a general contractor under its Commercial General Liability (CGL) policy for claims seeking the cost of repairing or replacing faulty workmanship by that general contractor and damage to other building components as a result? The pleadings alleged that Progressive Homes was negligent in its construction of four housing units. The buildings had multiple alleged construction defects and water damage was said to have penetrated other building components as a result. Lombard initially undertook Progressive Homes' defence but withdrew when the Swagger decision was released by the B.C. Supreme Court.
Mr. Justice Marshall Rothstein wrote the Progressive decision for the Supreme Court of Canada. On the question of whether Lombard's policy covered only third party property damage, he noted that there was no restriction in the language of the policy at issue limiting coverage to third party property. Addressing the real issue before the Court, he found that, on a plain reading of the policy's language, it was not clear that defective property per se was excluded from the definition of property damage. In other words, according to the Court, defective construction in and of itself could be property damage (or at least it was not obvious to the Court that it was not property damage).
The test for the duty to defend being whether or not there was a claim advanced which might possibly trigger the duty to indemnify, Justice Rothstein concluded that the duty to defend in the Progressive case arose accordingly. In his opinion the proper forum for determination of whether or not there is in fact property damage in the presence of defective construction, and its immediate consequences, was in a trial of the issues raised in the pleadings and not at the stage of determining whether or not there was a duty to defend those allegations. The pleadings, at least in the Progressive case, met the "low threshold" required to trigger the duty to defend.
On this point: if the Court's mind had been directed towards the remedy the plaintiffs were seeking — and it is not clear from the judgment that the Court was directed to this — then one wonders whether a different result would have arisen. Recognizing that the claim in the case was for the cost of redoing or replacing work product or materials not properly carried out or installed in the first instance would surely be seen as a claim for pure economic loss and not a claim for property damage.
Focusing on the wording of the policy alone, the only issue the Court seems to have addressed on this point is whether or not the presence of faulty workmanship of materials might "possibly" constitute physical damage to or destruction of tangible property. In context, the claim advanced was not one that complained about physical damage to property. Rather, it was one maintaining that the work Progressive Homes had undertaken in the first place was not done properly. Looked at from this perspective, it was not a claim for property damage.
Rejecting the argument that this reasoning would turn the liability policy into a performance bond, Justice Rothstein delineated the difference between a performance bond and a general liability policy. A performance bond, he wrote, guaranteed performance during the course of construction whereas a general liability policy took over once the project was complete. Of course, that is not correct. The general liability policy is in force during the course of construction as well as after. It is required to respond in both time frames provided there is property damage caused by an occurrence. So, if it was important to the result reached by the Court, then the Court was misdirected.
On the question of whether or not defective workmanship or materials might constitute an "accident" or "occurrence", the Court recognized that the answer to this question is to be determined on a case by case basis. It is the underlying facts described as constituting the accident which are important. Once again, Justice Rothstein concluded that it was "possible" defective construction may have been the result of an accident. Although the evidence might eventually demonstrate that that was not the case, the allegation was sufficient to clear the "low threshold" required to trigger the duty to defend.
Consequently, there is no longer a categorical bar militating against a finding that delivery of faulty workmanship or materials constitutes an accident within the meaning of a general liability policy. On this point, the Court was influenced by the reasoning that, where the pleadings allege negligence rather than intentional conduct, the allegations are properly construed as giving rise to the possibility that the delivery of faulty workmanship or materials was an accident. As previously noted, this finding seems to fly in the face of the reasoning of the Supreme Court of Canada in the Gibbens decision. But that debate will have to wait for another day, another case and another fact pattern.
As is common in cases of this nature, the Court went on to consider various work product exclusions found in the various general liability policies issued to Progressive Homes. It first clarified that coverage cannot be found in the wording of exclusions which were not in the original coverage grant and held that "it is generally advisable to interpret the policy in the order described above:
coverage; exclusions; and then exceptions [to the exclusions]." The Court then determined that none of the exclusions were specific enough to preclude the possibility that the allegations made in the case might possibly trigger coverage given by the original coverage grant. The exclusions were either not specific enough in their wording or, the Court found, they were ambiguously worded.
Perhaps the most important aspect of this portion of the judgment in Progressive is the clear guidance given to insurers. If they wish to avoid the prospect of extending coverage to remedy defects in workmanship and materials or the failure to meet contractual obligations, the exclusions in the general liability policy will have to be very clearly and specifically worded. By way of example: excluding coverage of the cost of remedying any actual or alleged "property damage" to the project itself would presumably have avoided the result in Progressive and would have protected underwriters from exposure to the cost of rebuilding a project which their insured did not build properly in the first place. Having regard to the wideranging effects of Progressive, in the arena of duty to defend and, possibly, in the arena of the duty to indemnify, one would expect the insurance industry to react at an early date and tighten up policy wording to make its intentions clear.
On a final note, Progressive is not just about the case's fact pattern. The reasoning and findings in this case will likely awaken a sleeping giant as one would expect insurers will have to revisit earlier declinations of coverage in cases and fact patterns similar to those confronted in Progressive.
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