June 12, 2013 by Greg Meckbach, Associate Editor
An Alberta judge ruled last week against The Dominion of Canada General Insurance Company when it decided the carrier has a duty to defend a construction contractor against a lawsuit filed by a condominium corporation.
In a ruling June 4, Mr. Justice V.O. Ouellette of The Court of Queen’s Bench of Alberta cited the Supreme Court of Canada’s interpretation of property damage in commercial general liability (CGL) policies in a 2010 ruling.
At that time, the court ruled Lombard General Insurance Co. of Canada had a duty to defend Progressive Homes Ltd. in a lawsuit over buildings that were damaged by water leakage.
In the more recent case, Judge Ouellette had ruled that The Dominion has a duty to defend a former liability policyholder, Canalta Construction Co. Ltd., which was a developer and general contractor of a condo project. That work included conversions and renovations taking place between 2003 and 2005.
Canalta had a CGL policy written by The Dominion from November 2002 through January 2008. A watermain on the condominium property failed in July 2008. Two years later the condominium corporation sued Canalta for breach of contract and negligence due to alleged deficiencies, which resulted in damage to a common area but not the condo units themselves.
Canalta acknowledges that some of the alleged damage “could fall” under an exclusion in its Dominion policy for “property damage” arising from its work and “included in the “products-completed operations hazard,'” but Canalta noted the exclusion clause did not apply if the damaged work or the work out of which the damage arises was performed by a subcontractor. Canalta had argued it used subcontractors to design and construct its condo.
For its part, The Dominion argued it did not have a duty to defend and contended the alleged property damage “occurred outside the applicable policy period.”
The Dominion also argued that “essence of the action is a claim for breach of contract,” that the property was sold by Canalta before the damage occurred, and that the definition of “property damage” in Canalta’s policy was “limited to third-party property damage.”
But Mr. Justice V.O. Ouellette of The Court of Queen’s Bench of Alberta ruled against The Dominion, finding that the damage occurred “when the actual design and construction occurred,” which was when Canalta’s policy with The Dominion was in effect.
Judge Ouellette cited case history, including the Supreme Court of Canada decision, released September 2010, in Lombard General Insurance versus Progressive Homes. Progressive Homes had been sued by the British Columbia Housing Management Commission, which alleged negligence and breach of contract on the part of Progressive Homes after some buildings were damaged by water leakage.
Progressive’s liability policies required Lombard to defend and indemnify Progressive Homes if it is “legally obligated to pay damages because of property damage caused by an occurrence or accident.” A B.C. Supreme Court judge found in 2007 that the claims “did not fall within the initial grant of coverage” and therefore Lombard “did not owe a duty to defend.” The lower court also found that “defective construction is not an ‘accident’ unless there is damage to the property of a third party.”
The B.C. Court of Appeal in 2009 upheld that ruling in favour of Lombard, finding that 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 B.C. Court of Appeal “accepted that in some circumstances work performed by a subcontractor could be covered by the policies, but only if the damage was caused by a distinct item installed by a subcontractor, such as a boiler exploding.”
However, the appeal court noted, in B.C. Housing’s lawsuit against Progressive Homes, B.C. Housing had “alleged that integral parts of the building itself failed to function properly and were not ‘distinct components’ that could be covered.”
Progressive Homes appealed all the way up to the Supreme Court of Canada, which in 2010 overturned B.C. Court of Appeal ruling, deciding in favour of Progressive Homes. Among other things, the Supreme Court of Canada had found that “property damage” in construction contractors’ CGL policies is not limited to damage to “third-party property” but can include damage from one part of a building to another part.
In his ruling June 4, Judge Ouellette noted that The Dominion’s argument — that the definitions of property damage under the CGL policy it wrote for Canalta restricts it to third-party property — is an interpretation that was rejected by the Supreme Court of Canada in its decision on the Progressive Homes appeal. The Supreme Court of Canada also found in 2010 that “the term ‘accident’ may, depending on the facts of each case, include the consequences of defective workmanship …”
Canalta had argued its case was analogous to the Progressive Homes case in that “faulty or deficient work can fall under the definition of property damage under a CGL policy” and that “if that were not the case, it would leave no work for the work performed exclusions.”
In his ruling last week in favour of Canalta, Judge Ouellette noted that in Progressive Homes, the Supreme Court of Canada found that the test to determine an insurer’s duty to defend “is one of a mere possibility” that a claim may fall within a CGL.
The Supreme Court of Canada ruled at the time that the duty to defend does not depend on the policyholder “actually being liable and the insurer actually being required to indemnify.”
“What is required is the mere possibility that a claim falls within the insurance policy,” wrote Mr. Justice Marshall Rothstein on behalf of the Supreme Court of Canada in 2010 in Progressive Homes. “Where it is clear that the claim falls outside the policy, either because it does not come within the initial grant of coverage or is excluded by an exclusion clause, there will be no duty to defend.”
In the Canalta case, The Dominion had argued that the “essence of the claim” was breach of contract, even though the condo corporation suing Canalta had pled “negligence in the alternative” in its statement of claim.
Judge Ouellette disagreed.
“Although the Statement of Claim alleges deficiencies as a result of Canalta’s breach of warranty misrepresentation, breach of contract, breach of fiduciary duty and negligence or any of them, it cannot be said that the deficiencies due to negligence are simply a derivative of the breach of contract,” Judge Ouellette wrote.