A Supreme Court of Canada decision two years ago involving a commercial general liability (CGL) claim from a construction firm remains relevant today, raising questions with respect to whether or not some CGL policies of some insurance firms are in need of a reno.
In the September 2010 decision, Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, the highest court in the land ruled against Lombard General Insurance when it determined that the insurer had a duty to defend Progressive Homes, a general contractor, against a claim by the British Columbia Housing Management Commission (BCHMC). The court did not rule on the merits of BCHMC’s claim, which alleged negligence and breach of contract after some buildings suffered water damage.
That case — and others it cited — addressed numerous issues: whether or not negligence constitutes an accident; if CGL policies for construction companies are intended to cover poor workmanship; what responsibility general contractors have for the work of their subcontractors; and the overall purpose of liability insurance.
“This case has fundamentally changed the law that had been adopted by various lower courts previously,” suggests Thomas Heintzman, a litigation lawyer in the Toronto office of McCarthy Tetrault. Heintzman suggests there may be instances where an insurer will need to be more specific in its exclusions. “If the exclusion is intended to be limited to the work done by the contractor, then I think the insurance company has to understand that it will be interpreted to apply to everything else.”
In a blog post last September, Heintzman noted that an April, 2011 ruling out of British Columbia had applied the Progressive Homes decision. The case at bar, Bulldog Bag Ltd. v. AXA Pacific Insurance Company, revolved around a claim by Bulldog Bag on a policy issued by the insurer.
In 2008, Bulldog Bag made printed plastic packaging for soil and manure to be sold by a different firm, Sure-Gro, to Canadian Tire, but ink on the bag damaged the product. Bulldog Bag reimbursed Sure-Gro for more than $832,000 and made a claim of approximately $732,000 on its liability insurance policy with AXA.
AXA initially denied the claim, citing an exclusion clause on “goods or products manufactured or sold by the insured,” but B.C.’s Court of Appeal disagreed and ordered AXA to indemnify Bulldog Bag for its claim.
In ruling against AXA, the province’s appeal court cited Progressive Homes v. Lombard, noting that the Supreme Court of Canada confirmed the “primary interpretive principle” for insurance policies is that “when the language of the policy is unambiguous, the court should give effect to clear language, reading the contract as a whole.”
In overturning a decision from the B.C. Court of Appeal, which upheld a lower court ruling, Canada’s high court also noted that “property damage” in such policies is not limited to damage to “third-party property,” but can include damage from part of a building to another part. “The term ‘accident’ may, depending on the facts of each case, include the consequences of defective workmanship...,” the court added.
Allegations of negligence
BCHMC had initiated four separate actions against Progressive Homes, claiming “significant water damage caused rot, infestation and deterioration” to four condominium developments. The housing authority alleged that the general contractor breached its contract and was negligent.
The defects and damage are alleged to have included water leaking through the exterior walls, improper and incomplete installation and construction of framing, stucco walls, vinyl siding, windows, sheathing paper, flashings, ventilation, walkway membranes, flashing membranes, eavestroughs, downspouts, gutters, drains, balcony decks, pedestrian walkways, railings, roofs and patio doors.
For its part, the court noted, Progressive Homes alleged the “inadequate construction” was completed by subcontractors responsible for the installation of vinyl decking, a waterproof membrane and a ventilation system.
Several commercial general liability insurance policies that Progressive Homes had with Lombard required the latter “to defend and indemnify Progressive when Progressive is legally obligated to pay damages because of property damage caused by an occurrence or accident.” However, Judge Bruce Cohen of the Supreme Court of British Columbia, who initially heard the case in 2007, found that the claims of Progressive Homes “did not fall within the initial grant of coverage under the policies and, therefore, Lombard did not owe a duty to defend.”
B.C.’s appeal court upheld Judge Cohen’s ruling two years later, noting the purpose of insurance is to transfer “fortuitous contingent risk” and that the “expected consequences of poor workmanship can hardly be classified as fortuitous.”
The Supreme Court of Canada disagreed, overturning that decision and ruling that Lombard had an obligation to defend Progressive Homes.
Having subcontractor involvement a good idea
Commenting on Progressive Homes, “there has been perhaps an increased awareness of the need to review the involvement of subcontractors in a construction project, and perhaps there has been some slight modification in the approach our underwriters take to rate our coverage of those projects,” reports Roger Keightley, a consultant for Aviva’s commercial lines property group. “Aside from that, our appetite for this type of risk hasn’t changed as a result of that court case,” Keightley says.
The approach taken by Aviva is based on another case involving Lombard, one that was subject to a ruling by the Court of Appeal for Ontario in 2006. A construction contractor with a Lombard liability insurance policy, Bridgewood Building Corp., was constructing houses in Brampton, west of Toronto, which ended up having cracked foundations that were considered unsafe. Bridgewood blamed the problem on a subcontractor, Dominion Concrete.
“The faulty concrete caused damage to the homes such that the footings and foundation walls would not support the weight of the structures,” Judge Elizabeth Stewart of Ontario’s Superior Court of Justice, notes in her 2005 ruling. “Indeed, the concrete material had deteriorated to the extent that, in extreme cases, it could be scooped out by hand,” the decision notes.
Bridgewood was required to provide new homeowners with a seven-year warranty for major structural defects under the Ontario New Home Warranties Plan Act. Judge Stewart’s ruling notes Lombard agreed the policy it provided for Bridgewood applied to damages “that are sought in an action for which (Bridgewood is) legally obligated to pay by reason of property damage.”
But Lombard countered that Bridgewood failed to qualify for coverage because “there must be some demonstration of fault on the part of the applicants, or a determination that they are ‘legally obligated to pay,’ before liability can be brought to bear,” despite Bridgewood’s obligations under the new home warranty law.
Lombard argued at the time that if general liability coverage was provided for the subcontractor’s work, then “liability policy effectively becomes ‘enormously expanded,’ opening the floodgates to claims that would include building code infractions, substitution of sinks, repair of chipped tiles, drywall repair and essentially all of the (contractor’s) work.”
Judge Stewart ruled against Lombard, a decision that was then upheld on appeal.
Ruling in favour of Bridgewood, the Ontario Court of Appeal noted: “If insurance companies do not wish to indemnify general contractors for the shortcomings of their subcontractors, they need only say so in clear and unambiguous language in their policies.”
With regard to exclusion clauses for subcontractors’ work, Heintzman said what Lombard sought to do in the Progressive Homes case “was to argue that the exclusion had a wider impact, that it applied not just to the work done by the contractor but to, let’s say, work done by the subcontractors, or consequential damage to other property.”
Defective work not covered
It was never the intent of CGL policies to cover defective work of a subcontractor, a spokesperson for the Insurance Bureau of Canada notes in an email response. Although the Supreme Court of Canada “decision was with respect to the duty to defend, where the threshold is lower than the duty to indemnify, the intent has never been to cover defective work of either the insured, or any subcontractor working on its behalf,” the spokesperson writes.
Heintzman does not believe insurance firms are going to try to have the rules on CGL changed. “I just think they want to understand.... what they’re covering, and now they are being told by the Supreme Court that they’re covering such things as work done by others and not by the contractor, consequential damage to other property and things like that,” he says.
“They may have to charge a larger premium for that. It’s a question of, what is the risk and have they properly allowed for it?”
In deciding if something is an accident, the key question is whether or not it was intentional, comments Mike Riley, assistant vice-president and national claims counsel at Aviva.
In Lombard, says Riley, the court explained “unless you intentionally go out to create a defective building, that’s an accident, it’s unintended, unforeseen.” If something is done incorrectly, “that’s what a third-party liability policy is intended to pick up.”
If an accident does not include negligence, Heintzman says, then a CGL policy could become meaningless. “If it’s not covering negligence, then we’re not going to have anything to cover.”