On April 12, 2011, the British Columbia Court of Appeal released its decision in Bulldog Bag Ltd. v. AXA Pacific Insurance Co. (2011) [Bulldog Bag]. The case is significant in that it was the first appellate decision in Canada dealing with a commercial general liability (CGL) policy since the Supreme Court of Canada's decision in Progressive Homes v. Lombard General Insurance Co. of Canada (2010) [Progressive Homes], and appears to have substantially broadened the scope of CGL coverage in terms of loss of use of the insured's product.
Bulldog Bag Ltd. (Bulldog) was a manufacturer of plastic and paper packaging in British Columbia. In late 2007, an order was placed by Sure-Gro Inc. (Sure-Gro) for a significant volume of printed plastic bags that Sure-Gro was going to use to package soil and manure for sale to Canadian Tire. For the 2008 season, Bulldog supplied Sure-Gro with over 1.1 million printed bags. Sure-Gro began to fill the bags, but quickly discovered that the ink from the bags came off the packaging, not only rendering the bags unreadable but also mixing with the soil and manure, making that product potentially unusable as well.
Bulldog manufactured new bags for Sure-Gro and Sure-Gro used the replacement bags in time to meet its contractual commitments to Canadian Tire. Sure-Gro then claimed against Bulldog for $784,221.34 for losses arising from removing the materials from the defective packaging, disposing of the defective packaging, and the loss of about 10% of the raw material in the salvage process. Bulldog settled the action with Sure-Gro and then sought indemnity from its insurer, AXA Pacific Insurance Company (AXA).
Bulldog's CGL policy was relatively standard. It provided that Bulldog had coverage for "property damage" due to an accident or occurrence and defined "property damage" as "physical injury to or physical destruction of tangible property, including loss of use thereof, or loss of use of tangible property that has not been physically injured or destroyed". The trial judge ruled that the policy covered only the value of the lost contents, specifically the 10% of soil and manure not salvaged by Sure-Gro, which amounted to approximately $12,000. Bulldog appealed that decision.
In between the trial decision and the appeal being heard, the Supreme Court of Canada issued its reasons in Progressive Homes, which stated that there was nothing in the terms "property damage" or "occurrence" in CGL policies that restricted their application to third party property, rather than property supplied and/or constructed by the insured. As a result of that decision, it is clear that "property damage" may include damage to any tangible property, including the insured's own product.
As a result of the decision in Progressive Homes, AXA conceded that Bulldog's claim constituted "property damage" because Bulldog's faulty bags were "injured" and Sure-Gro lost the use of them. As well, AXA conceded that the faulty workmanship that led to the defective bags was an "accident" or "occurrence" within the meaning of the policy and resulted in property damage to 10% of Sure-Gro's product.
Despite these concessions, AXA argued that the policy's work and product exclusion applied to exclude Bulldog's claim. That exclusion stated that the insurance did not apply to claims for property damage to "goods or products manufactured or sold" by Bulldog. AXA argued that the losses suffered by Sure-Gro occurred solely as a result of Sure-Gro's loss of use of the damaged bags and that the exclusion of Bulldog's claims was consistent with the general purpose of liability coverage and the own product exclusion.
The Court of Appeal rejected this argument, finding that while the clause operated to exclude claims for damage to Bulldog's bags, it could not be extended to compensation for Sure-Gro's costs in separating those bags from its product, repackaging it in different bags and salvaging the old product some months later. The Court found that the exclusion clause did not exclude coverage for "claims that flow from" the plaintiff's defective work or product and excluded only coverage for property damage to goods supplied by Bulldog, i.e., the bags themselves. The Court noted that this was consistent with the agreement of the insurer to cover damages "because of property damage" and that to hold otherwise would be a "perversion" of the decision in Progressive Homes.
AXA also argued that the "work performed" exclusion in the policy, which stated that there was no cover for claims arising from the loss of use of tangible property that was not physically injured or destroyed resulting from the failure of Bulldog's products or work performed, operated to deny Bulldog's claim. However, the Court of Appeal rejected this argument, finding that it was clear that the 10% of the product that had remained stuck to the defective bags was physically injured or destroyed, at least in the sense that it had ceased to be useable for its intended purpose, such that the requirements of the exclusion were not satisfied.
The decision of the Court of Appeal with regard to the work and product exclusion appears to broaden the coverage for damages flowing from defective products supplied by insureds. In the event that the damaged or defective product results in costs related to replacing and repairing the product, and any resulting damage to other property, it appears likely that the work and product exclusion will not operate to bar coverage and the insurer will be required to indemnify the insured for these amounts.
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