O.J. No. 3763
2010 ONSC 4869
Ontario Superior Court of Justice
W.U. Tausenfreund J.
September 10, 2010
The applicant, Aviva Canada Inc., brought an application seeking a declaration that the respondent, Intact Insurance Company of Canada, was required to defend and indemnify Jamfamco Investments Ltd. and its principal, John A. Macdonald, in a civil action brought against them and their subcontractor, Murphy, in relation to alleged deficiencies in a log home constructed by them in 1990. The allegations in the civil action were that in 2006 the plaintiffs discovered that pieces of the log exterior were becoming dislodged. A log restoration expert subsequently determined that a substantial number of the logs on the home were suffering from casement rot, which required remedial attention. Aviva appointed counsel to represent Jamfamco and Macdonald in the civil action and put Intact on notice and asked it to respond to the action. Intact denied coverage on the following stated grounds:
(a) The policy provides coverage for property damage resulting from an “accident”. Faulty workmanship does not constitute an “accident”;
(b) The policy excludes coverage for damage to property, the restoration, repair or replacement of which has been made necessary by reason of faulty workmanship by Jamfamco and its subcontractor.
It was agreed between the parties that Jamfamco did have valid “products and completed operations hazard” coverage during the period the house was constructed and that coverage existed for Jamfamco’s independent contractors, both subject to applicable conditions and exclusions. It was also agreed that the work and operations performed by Jamfamco relating to the civil action were “operations usual to a building contractor” under the definitions of the policy and that the alleged damage to the log home constituted “compensatory damages caused by property damage” within the meaning of the policy. It was also agreed that under the policy, Jamfamco was entitled to indemnity and a defence for compensatory damages to property caused by an accident, subject to applicable conditions and exclusions.
The following provisions of the policy were relevant:
“C. PROPERTY DAMAGE - DEFINED OCCURRENCES BASIS
This insurance does not apply to:
(y) property damage …
(2) except with respect to liability under a written sidetrack agreement or the use of elevators, to…
(iii) the restoration, repair or replacement of which has been made necessary by reason of faulty workmanship thereon by or on behalf of the insured;
(z) with respect to the completed operations hazard, to property damage to work performed by the named insured arising out of the work or any portion thereof, or out of materials, parts or equipment furnished in connection therewith.”
Intact took the position that exclusion (y) applied and that coverage was not available to work carried out “by or on behalf of the insured”. Aviva’s position was that the applicable exclusion was (z), as it referred to the “completed operations hazard”, which was at issue in this case. Aviva argued that pursuant to exclusion (z), only work carried out by the named insured would be excluded, but not work performed by the subcontractor.
With respect to the issue of whether the property damage alleged was the result of an “accident”, Intact argued that the damage to the log home was caused by faulty workmanship and/or design, which were matters which did not constitute an accident so as to bring the underlying claim within the scope of the policy. Aviva argued that the damage to the log home was the result of external forces, namely “the harsh elements characteristics of weather conditions in Ontario” and was not the result of faulty workmanship and or design. The court noted that the pleadings in the civil action spoke to the issue of a failure to warn and of use of construction material which was not necessarily defective, but ill-suited to local weather conditions. The court concluded that these allegations brought the claim within the scope of the definition of accident in the policy.
With respect to whether exclusion (y) or (z) applied, the court considered the meaning of “completed operations hazard”. As there was no definition of completed operations hazard, the term was to be given a liberal and plain interpretation. The pleadings indicated that the home was finished when the plaintiffs took occupancy in 1990 but that the damage was not discovered until 2006. The court found that this brought the claim under the umbrella of “completed operations hazard” and therefore concluded that exclusion (z) applied. The court further confirmed that exclusion (z) only applied to the named insured and referred to the Ontario Court of Appeal decision in Bridgewood Building Corp. v. Lombard General Insurance, wherein it was held that “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”. The court found that exclusion (z) therefore applied but that this did not operate to exclude the work of the subcontractor and in the result held that there was a duty on Intact to defend the civil action.