A central aspect of construction litigation is insurance coverage for the key players such as the general contractor. This is important both for the general contractor as a defendant—as without insurance it may have insufficient assets to pay for the defence costs of the litigation and to settle the claim or pay a judgment—and for the owner or other parties who have a claim against the general contractor, as that claim may go unsatisfied if the general contractor has insufficient assets and no insurance coverage.
On September 9, 2005, Mr. Justice Nathan Smith of the British Columbia Supreme Court handed down his reasons for judgment in Swagger Construction Ltd. v. ING Insurance Company et al.1 This case dealt a significant blow to liability insurance coverage for general contractors in construction litigation.
Swagger was the general contractor for the construction of the Forest Sciences Centre at the University of British Columbia. Swagger brought a claim against UBC for amounts it alleged were owed under its construction contract. UBC brought a counterclaim for alleged construction deficiencies in, and resultant damage to, the Forest Sciences Centre. The alleged defects were, for the most part, related to the building envelope and resulting water penetration.
Swagger had a number of commercial general liability ("CGL") policies covering the period of time when it was involved in the design and construction of this building and during the time the damage to the building was alleged to have occurred. The wording of the CGL policies was standard. They provided coverage for liability for compensatory damages for claims of bodily injury or property damage. For a property damage claim, as with most CGL policies, they required that there be injury to tangible property.
Prior to the Swagger decision, the general view of Canadian insurance coverage lawyers was that in order for a claim to fall within the insuring agreement clause of a CGL policy, there had to be not only an allegation of construction deficiencies, but also an allegation of physical damage to the building resulting from those deficiencies. For example, it was not enough to allege that the building lacked adequate flashing. For coverage to be triggered, there had to be an allegation of resultant damage caused by the lack of flashing, such as rotten wood or other water damage. Following Swagger, most Canadian insurance coverage lawyers continue to be of this view, notwithstanding the Swagger decision.
Further, if the claim fell within the insuring agreement clause, the claim could be excluded by the "your work/your product" exclusions. In the 1980s and 1990s, the wording of the "your work/your product" exclusions in CGL policies underwent significant changes, the result of which was that these exclusions usually did not bar claims against general contractors in "leaky condo" claims.
This was confirmed in two British Columbia Supreme Court decisions, in which this court found that insurers under a CGL policy had a duty to defend the general contractor in leaky condo litigation: Axa Pacific Insurance Co v. Guildford Marquis Towers Ltd.2, and F.W. Hearn/Actes – a Joint Venture v. Commonwealth Insurance Co.3
In Swagger, the Judge held that the claims against Swagger did not fall within the insuring agreement clause, because in his view, the physical damage did not occur to something other than Swagger’s own work or product. In Swagger’s case, its work and product was the entire building; thus for coverage to be triggered, there needed to be damage to something other than the building. The Judge relied on tort cases in which the courts rejected the "complex structure theory." According to this theory, one element of a structure may be regarded as distinct from another, such that damage to one part of the structure caused by a defect in another can qualify as damage to other property.
The difficulty with Swagger is that tort cases were applied in the insurance context. Whether insurance coverage is triggered is wholly a matter of interpreting the specific policy wording and the pleadings. If the policy provides coverage for claims for injury to tangible property, as long as there is some physical damage resulting from the construction defects, the claim should fall within the insuring agreement clause. The central question is then whether the "your work/your product" exclusions bar coverage. The standard wording of the "your work/your product" exclusions in CGL policies usually do not bar coverage because (a) for the "your work"exclusion there is an exception for work done by subcontractors on the insured’s behalf, and (b) real property, which includes buildings, is carved out of the definition of "your product." Somewhat surprisingly, the Judge did not analyze the "your work/your product" exclusions in his reasons for judgment. It is curious why insurers would have taken such pains to draft the "your work/your product" exclusions if damage to one’s work or product did not fall within the insuring agreement clause of CGL policies to begin with. The decision results in these exclusions being superfluous for general contractors.
Swagger appealed the decision but abandoned the appeal before it was heard. Consequently, based on Swagger, in B.C., general contractors apparently do not have insurance coverage in "leaky condo" litigation or any other form of construction litigation where the alleged damage is limited to the work which the general contractor was retained to do and does not include resultant damage to something other than the general contractor’s work.
Regardless of the Swagger decision, if general contractors are faced with a claim, they should promptly report that claim to their insurers in order to preserve the coverage they have and obtain legal advice as to whether the claim is covered. A careful analysis of the policy wording is required to determine whether coverage arises. Although the wording of CGL policies is fairly standard, there are differences in the wording between one policy and the next, which can significantly impact on coverage.
1. 2005 BCSC 1269
2. (2000), 74 B.C.L.R. (3d) 194
3. (2000), 75 B.C.L.R. (3d) 272
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