January 1, 2016 by Douglas D. Everett, President, IIC Services and CHES Special Risks
In Canada, there is no standard wording for a commercial general liability (CGL) policy. Most are based on Insurance Bureau of Canada (IBC)’s revised CGL, which is intended to cover property damage as a result of an accident, but was never anticipated to cover inferior workmanship on the part of construction contractors.
Contra proferentem (Latin: “against [the] offeror”), also known as “interpretation against the draftsman”, is a doctrine of contractual interpretation. It provides that – where a promise, agreement or term is ambiguous – the preferred meaning should be the one that works against the interests of the party who drafted the contract.
In 2010, the Supreme Court of Canada ruled that when the policy language is ambiguous, a court “should prefer interpretations that are consistent with the reasonable expectations of the parties…..so long as such an interpretation can be supported by the text of the policy.”
Where general rules of contract construction “fail to resolve the ambiguity, courts will construe the policy contra proferentem – against the insurer,” wrote Justice Marshall Rothstein on behalf of Canada’s highest court, in its decision against Lombard Insurance Company of Canada. Progressive Homes was successful in obtaining a court ruling that Lombard Insurance had a duty to defend Progressive in a lawsuit by the British Columbia Housing Commission.
DUTY TO DEFEND
As a result of the Progressive Homes v. Lombard decision, the nature and extent of the claims made in court pleadings – in an action against a contractor or subcontractor – will be of utmost importance in triggering an insurer’s duty to defend under a CGL policy.
When faced with a claim under a CGL policy, an insurer needs to consider the Progressive Homes ruling – and what the Supreme Court of Canada ruled on an insurer’s duty to defend a liability claim – when deciding whether or not to deny a claim. Insurers have relied on the following proviso in their insuring agreement: “However, we will have no duty to defend the insured against any action to which this insurance does not apply.”
Essentially, the contra proferentem rule stipulates that if the wording in a policy is vague, the court is going to rule against the party who drafted the contract. That is not supposed to be the case if the intent of the wording is clear.
A recent ruling by Ontario’s Superior Court of Justice in a disputed home insurance claim, raises doubts as to whether Canadian courts will take into account the intent of policy wording. In the decision, in Choukair vs Allstate Canada, the court awarded damages to the insured, which resulted from increased costs associated with Ontario’s Building Code. This despite the fact that the policy excluded “losses or increased costs of repair or cost of improving or upgrading dwellings or structures due to the operation of any by-law regulating the zoning, demolition, repair or construction of buildings and their related services.”
The City of Ottawa had adopted the provincial Building Code, by reference, in its municipal bylaw, to ensure that building permits conform to the Building Code.
Most insurers would agree on the intent of the exclusion that was an issue in this claim. The direction from the Progressive Homes ruling, that courts “should prefer interpretations that are consistent with the reasonable expectations of the parties,” seems to have been overlooked in the Choukair case. The expectation of the insurer was disregarded completely. So where does that leave an insurer when the language of the policy is vague in some way?
Consider the complex issue of faulty workmanship and the CGL policy.
An article published in Randy Maniloff’s Coverages Opinions newsletter, May 8, 2013 and updated in July 2015, listed 66 cases in various state courts in the United States relating to faulty workmanship and the CGL. Of these, in 31 decisions based on the specific facts of each case, the court found failure to perform – or faulty workmanship – is not covered under the CGL policy.
Maniloff also referenced 19 U.S. Federal Court decisions on this issue. Of those, there were 11 judgments in which the court ruled that faulty workmanship was not covered by the CGL.
That represents a large shift from just two years ago.
However, there remains a distinct difference in how courts in Canada and the U.S. consider the interpretation of the exclusions relating to faulty workmanship.
There are no exact “standard” CGL wordings in Canada. However, the majority find their origins in IBC’s CGL wording, updated in 2005.
For coverage to be considered, it must cause property damage and/or bodily injury resulting from an occurrence and subject to the exclusions and conditions and occurring in the coverage territory.
Occurrence is defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions giving rise to one or more claims.”
Many CGL policies do not provide a definition of the word accident and, therefore, courts typically look for the meaning of the word elsewhere.
Here are a few examples taken from various court rulings in the U.S.
• the requirement of a fortuitous loss is a necessary element of insurance policies based on either an “accident” or “occurrence;”
• accident usually is interpreted to mean an “undesigned, sudden and unexpected event;” and
• an accident is “an event or condition occurring by chance or arising from unknown or remote causes.”
The courts in the U.S. have had difficulty finding the results of poor or faulty workmanship can fall into the definition of an accident, because if a job is done poorly, it is likely that something bad may happen. Many courts have stated that by granting coverage for faulty workmanship, an insurer could be covering a business risk, and this may work against the public good.
AMBIGUOUS POLICY WORDING
In Canada, as demonstrated by the Supreme Court of Canada decision in Progressive Homes v. Lombard, the court saw the fault laid in the unclear policy wording – that when in doubt, the victim must be compensated. At least in this case, there was sufficient evidence that Lombard must defend the allegation.
Progressive Homes had been sued by the B.C. Housing Commission, which alleged that four condominium developments had water damage due to defects. A B.C. court ruled in 2007 that Lombard did not owe a duty to defend Progressive Homes under its CGL policy. That ruling was upheld on appeal but overturned by the Supreme Court of Canada, in its decision released in September 2010.
In Progressive Homes, the high court ruled that “whether defective workmanship is an accident is necessarily a case-specific determination.” That determination “will depend both on the circumstances of the defective workmanship alleged in the pleadings and the way in which ‘accident’ is defined in the policy,” Justice Rothstein wrote, adding he “cannot agree with Lombard’s view that faulty workmanship is never an accident.” There is “no impediment to concluding” that defective workmanship is an accident, “unless, of course, it is not supported by the specific language of the policy.”
The court disagreed with the conclusion, of B.C.’s appeal court, “that such an interpretation offends the assumption that insurance provides for fortuitous contingent risk,” the ruling states.
“Fortuity is built into the definition of ‘accident’ itself as the insured is required to show that the damage was ‘neither expected nor intended from the standpoint of the Insured,'” Justice Rothstein wrote.
Canada’s highest court was also “not persuaded by Lombard’s argument that equating faulty workmanship to an accident will convert CGL policies into performance bonds.” Quoting case history, Justice Rothstein noted that a performance bond “ensures that a work is brought to completion…whereas the CGL policies in this case only cover damage to the insured’s own work once completed.”
With the definition of accident accepted by the Supreme Court of Canada, the accident need not be a sudden event. An accident can result from continuous or repeated exposure to conditions.
The pleadings made by the B.C. Housing Commission sufficiently allege an “accident”. There is no reference to intentional conduct by Progressive Homes. This would suggest that the property damage was expected or intended.
The pleadings allege negligence. On its face, that allegation suggests that the damage was fortuitous.
In addition, it is clear from the pleadings that the damage alleged is the result of “continuous or repeated exposure to conditions”, which squarely fits within the definition.
A number of Canadian law firms have expressed concerns over a possible change in direction in interpreting this issue under the CGL.
A trial would determine what is actually covered or excluded with respect to damages. Coverage itself may or may not apply. The key point is that now there is an opening for defective workmanship to trigger a defense under general liability insurance, where it has not done so before.
There is no doubt that the decision of the Supreme Court of Canada will affect or has the potential to affect the landscape in commercial general liability. The supreme court found, in this case, that there is a possibility of insurance coverage (under a CGL) for defects in an insured’s own work. The Court also found there is clearly the possibility of coverage for resulting damage.
If there are any conclusions to be drawn following the release of this decision, they are as follows: (1) the wording of the applicable CGL policy is key in determining the possibility of coverage and, consequently, an insurer’s duty to defend; and (2) the nature and extent of the claims made in a court pleadings in an action against a contractor or subcontractor will be of utmost importance in triggering an insurer’s duty to defend under a CGL policy. They will also be highly suggestive of the extent of an insurer’s obligation to indemnify its insured.
The practical result of this case will likely be a re-evaluation of decisions by CGL insurers to deny coverage for claims. Going forward, it is anticipated that this decision will cause insured parties to carefully reconsider the wording of their policies, to determine if coverage may be available in circumstances where it may have been previously denied. In Canada, it appears that this issue has been resolved, at least in relation to the insurers’ obligation to defend. However, as in many disputed casualty claims, it costs the insurer money, if even the insurer is right.