In November 2016, in Parkhill Excavating Limited v. Royal & Sunalliance Insurance Company of Canada (RSA Canada), the Court of Appeal for Ontario reversed a motion judge’s finding that there was no duty to defend a construction deficiency claim in respect of the installation of septic systems.
At first instance, Justice Susan Healey of Ontario’s Superior Court of Justice ruled in October 2015 that there was no defence obligation as the subcontractor exception to the “your work” exclusion did not apply because the subcontractor was a supplier and not a contractor. The Court of Appeal held that because consequential damages were alleged, the exclusion could not apply, a defence was owed, and it was unnecessary to go on to consider the “subcontractor exception” to the exclusion.
In 2004, BGS Homes Inc. and B.G. Scugog Inc. retained Parkhill Excavating Limited to design, install and supervise the construction of 36 septic systems in homes it had constructed. The work was performed over a six-year period from 2004 to 2010.
In May 2010, the local health unit wrote to 25 of the homeowners warning of potential problems with their septic systems, all of which had been installed by Parkhill Excavating. Subsequently, pursuant to Ontario’s Building Code Act, the health unit issued “orders to comply,” identifying a number of contraventions, to all 36 homeowners. As a result, BGS Homes and Tarion Warranty Corporation replaced all 36 septic systems in August 2011.
Michael Teitelbaum, Partner, Hughes Amys LLP
In 2012, BGS Homes sued Parkhill Excavating for negligence and breach of contract, alleging that from 2004 to 2010, Parkhill Excavating supplied and installed incorrect and non-compliant filter mediums. In addition, BGS Homes alleged that the calculations and designs used by Parkhill Excavating to obtain the permits for the septic systems in 11 of the homes did not conform to the features of the houses as required under the Building Code Act.
During the period of 2004 to 2010, Parkhill Excavating had commercial general liability (CGL) policies with three different insurance companies: Economical Mutual Insurance Company from 2003 to 2006; Royal & Sunalliance in 2007; and Northbridge General Insurance Corporation from 2007 to 2010. Parkhill Excavating, in turn, alleged that each of the insurers were at risk for a portion of the relevant period and owed it a duty to defend, which the insurers denied.
Parkhill Excavating subsequently commenced a third-party claim against Robert E. Young Construction Ltd., alleging that the latter supplied deficient filters for the septic systems.
SUPERIOR COURT DECISION
Parkhill Excavating sought a declaration compelling the three insurers to provide a defence on a motion for summary judgment. Justice Healey found that none of the insurers owed the company a duty to defend.
The justice further found that the allegations raised in the claims were within the coverage of the CGLs, as the allegations were for defective or faulty workmanship or materials, and, therefore, constituted property damage caused by an occurrence triggering the duty to defend. In addition, she found that the “your work”
exclusion applied to preclude coverage because Parkhill Excavating failed to discharge its burden to demonstrate that Robert E. Young Construction was a subcontractor, rather than a supplier, to oust the exclusion.
ISSUES ON APPEAL
The principal issue on the appeal was whether or not the motion judge erred in not finding that the mere possibility that consequential damages were being claimed thereby triggered a duty to defend, which meant the “your work” exclusion could not apply.
COURT OF APPEAL DECISION
As established in Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, released by the Supreme Court of Canada in September 2010, all that is required to trigger the duty to defend is a mere possibility that a claim falls within coverage under the subject insurance policy. Pleadings must be given the widest latitude when determining whether or not the mere possibility of a claim under a policy exists.
Citing Progressive Homes, the Court of Appeal for Ontario also noted that when a claim is limited to the direct costs of repairing or replacing the defective work, “your work” exclusions will generally apply. However, if consequential damages are alleged, the exclusion applies only with respect to the cost of repairing an insured’s faulty work, and there is coverage for the consequential damage.
The insurers submitted that the true nature of the action was an attempt to recover the costs the plaintiff incurred to correct the deficiencies in Parkhill Excavating’s work and that there was no allegation of any consequential damage, whether express or implied, in the action.
However, this submission was inconsistent with the motion judge’s findings. In her reasons Justice Healey found that, among other things, “the damages sought in the underlying action are approximately four times what Parkhill was paid to install the septic systems,” it is alleged the “[b]uilder has incurred costs and continues to incur costs performing remedial work necessary to satisfy the orders to comply,” the claim alleges the plaintiffs “are expected to perform further remedial work at their own expense,” and the claim refers to the cost of the remedial work, “including the higher cost of remedying work once the homes had been sold.”
“Accordingly, in addition to the question of whether defective work can be an accident, which has been answered affirmatively by Progressive Homes…, it is not at all clear from the claim that the damages sought are restricted only to the replacement of the allegedly deficient systems due to the work performed by Parkhill.”
Justice Healey had written that the damages claimed might not have been restricted to the cost of replacing the allegedly deficient systems as she noted that the claim makes repeated reference to remedial work. The claim for the increased cost of remedying the work once the homes had been sold implied claims for consequential damages.
Having made that finding, the appeal court found that Justice Healey had erred as she should have concluded there was a mere possibility that claims for consequential damages were being asserted, which should have ended the analysis. This meant the “your work” exclusion did not apply and the “subcontractor exception” did not require consideration.
Accordingly, the Court of Appeal for Ontario reversed her decision. A declaration was granted that the insurers were obliged to provide a defence to the main action except for fraud allegations against one of the defendants, which it was conceded did not attract a defence.
And, in supplementary reasons, the appeal court noted it was subsequently advised RSA Canada had settled the claims made by Parkhill Excavating against it prior to the hearing of the appeal, so the declaration was amended to apply against the other two insurers only. The insurers withdrew reliance on the “professional services exclusion,” which the court originally declared remained to be determined. Further, the costs award of $15,000 to the insureds was vacated because of an agreement among the parties that if the appellant insureds were successful, they would be entitled to full indemnity costs, which are to be agreed upon or fixed by the panel.
There are four noteworthy points from the Ontario appeal court decision:
1) The court affirmed that consequential or resulting damage attracts coverage. This is consistent with the comments to this effect recently made by the Supreme Court of Canada in Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., where the court observed its interpretation of the faulty workmanship exclusion in a builder’s risk policy “as precluding from coverage only the cost of redoing the faulty work breaks no new ground in the world of insurance, as it mirrors the approach courts have adopted when construing similar exclusions to comprehensive general liability insurance policies. These policies cover the risk that the insured’s work might cause bodily injury or property damage. However, they generally contain a ‘work product’ or ‘business risk’ exception, which excludes from coverage the cost of redoing the insured’s work…”.
2) Consistent with the obiter comments in Progressive Homes, the determination as to whether the claims were excluded depended on the allegations and the application of the “your work” exclusion, as there was no dispute that the allegations of defective or faulty workmanship or materials may constitute “property damage caused by an occurrence,” thereby triggering coverage.
3) The motion judge’s decision was of particular note because it appears to have been the first Canadian case that addressed whether or not the application of the “subcontractor exception” can be constrained by a finding that the subcontractor was engaged only as a supplier, and not as a contractor. A determination of this point will have to await another case.
4) The parties agreed that full indemnity costs would be payable to the successful insured. While the trend of the courts is in this direction, there have been cases where if it is shown that there were legitimate questions regarding insurance policy interpretation raised by the insurer requiring adjudication, then partial indemnity costs were ordered. It is unclear whether the court’s original costs award of $15,000 was on a full, substantial or partial indemnity basis.
Michael Teitelbaum, Partner, Hughes Amys LLP
Many thanks to Leah Dick, student-at-law in Hughes Amys LLP’s Toronto office, for her excellent assistance in the preparation of this article.