August 28, 2015 by Canadian Underwriter
Intact Insurance Company has a duty to defend a construction firm sued for negligence, over a restaurant damaged by fire eight years after the policy was in effect, an Alberta court recently ruled.
Court records indicate that ING Western Union Insurance Company wrote a liability policy for Tri-Stad Construction Inc., which was in effect in 2001 when Tri-Stad built a Kelsey’s restaurant. That restaurant was damaged by fire in 2009. ING Insurance Company of Canada was re-named Intact in 2009.
Tri-Stad was sued both by the property owners and tenants who alleged – among other things – that Tri-Stad built “an improper horizontal concealed space” in the building, contrary to Alberta’s building code. The allegations have not been proven in court.
At the time of the fire, Tri-Stad was covered by Economical, but Tri-Stad sought a declaration that Intact owes a duty to defend, wrote Mr. Justice Walter Breitkreuz, of the Alberta Court of Queen’s Bench, in a decision released Aug. 25.
Intact argued “that the only compensatory damages claimed by the plaintiffs in the underlying actions are those arising from the Fire,” Justice Breitkreuz wrote. “It contends that although negligence can be an ‘occurrence’ under the policy, the occurrence for which the plaintiffs are actually claiming damage is the Fire, which occurred well outside of the policy period.”
In ruling against Intact, Justice Breitkreuz suggested it is “unclear” in the lawsuits filed against Tri-Stad “what damage is claimed for what time period and from what action.” The wording of the plaintiffs’ pleadings led him to conclude “that there exists at least the possibility that some of the damages sought in the actions may have arisen from only the negligent acts of the defendants, including Tri-Stad, and are not limited to the damages from the Fire,” he added. “The existence and extent of such damages will be determined once the facts in the underlying trial are discovered.”
Justice Breitkreuz cited a 2010 decision, by the Supreme Court of Canada, that Lombard General Insurance Co. of Canada had a duty to defend construction contractor Progressive Homes Ltd., which was sued by the British Columbia Housing Commission over water damage to condominium buildings, which were alleged to have been constructed improperly.
A B.C. court ruled in 2007 that Lombard did not have a duty to defend Progressive Homes, based on a finding that defective construction is not an accident if it damages the building that was improperly built rather than a third party’s property. That ruling was upheld on appeal, based on a 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.” But that decision was reversed by the Supreme Court of Canada.
The highest court based its decision, in part, on its interpretation of the meaning of both “accident” and “property damage.”
Lombard had argued that “damage to other parts of the same building is pure economic loss,” rather than property damage, and that including “defective workmanship” in the definition of “accident” would convert commercial general liability policies into performance bonds.
The Supreme Court of Canada disagreed.
“I see no limitation to third-party property in the definition of ‘property damage,'” wrote Mr. Justice Marshall Rothstein, of the Supreme Court of Canada, in 2010 on behalf of the nine judges who heard the Progressive Homes case. “Nor is the plain and ordinary meaning of the phrase ‘property damage’ limited to damage to another person’s property.”
Justice Rothstein also suggested that faulty workmanship could be an accident in some cases, depending on “both on the circumstances of the defective workmanship alleged in the pleadings” and on how the insurance policy defines accident.
“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 added. “This definition is consistent with this Court’s core understanding of ‘accident’: an unlooked-for mishap or an untoward event which is not expected or designed.'”
The B.C. Housing Commission had alleged that one of the “defects” in the Progressives Homes’ construction “was an inadequate ventilation system,” Justice Breitkreuz noted in his Aug. 25, 2015 decision that Intact must defend Tri-Stad.
“As in [the Progressive Homes] case, the plaintiffs [against Tri-Stad] allege defects that could amount to ‘property damage’ as that term has been interpreted, depending on the evidence at trial, including: a horizontal concealed space that was contrary to the Alberta Building Code, improper fire stopping mechanisms, inadequate duct access for cleaning, and improperly sealed ducts, all of which resulted in negative air pressure, higher than normal grease accumulation and inefficient heat exhaustion.”
Intact had cited a 1976 Supreme Court of Canada against Pickford Black Ltd., a Halifax stevedoring firm which made a claim against Canadian General Insurance Company, which had written a liability policy for Pickford Black.
Canadian General Electric Company Ltd. had sued Pickford Black, after cargo was damaged at sea in early 1965. Pickford Black employees were alleged to have been negligent in stowing cargo. The highest court found that an exclusion in the Canadian General Insurance policy, for accidents occurring outside of Canada and the U.S., applied, because the shifting of the cargo occurred outside of Canadian waters.
“No doubt the defective stowage was due to an act or omission which reasonably competent stevedores should have foreseen would have been likely to damage the cargo, but the fact that this negligence was causative of the accident which later occurred does not serve to translate the locale where the accident itself ‘occurred’ from the broad Atlantic to the dockside at Halifax,” wrote Mr. Justice Roland Almon Ritchie, on behalf of the Supreme Court of Canada in Pickford.
“The Supreme Court held that it was necessary to distinguish between the originating cause of the accident and the accident itself,” Justice Breitkreuz wrote, of the Pickford decision, in his ruling against Intact. “For this reason, although the negligent stowage was the cause of the accident, the accident itself was the shifting at sea, which occurred outside the coverage territory.”
But, Justice Breitkreuz suggested the circumstances in Tri-Stad vs Intact were different.
“In Pickford, no property damage was alleged until the load shifted at sea whereas here, the underlying actions allege damages which might be simultaneous with the negligent construction.”