On July 14, 2011, Justice Daniel W. Payette of the Quebec Superior Court issued a very interesting judgment dealing with an insurer’s duty to defend under a CGL insurance policy.1 The judgment clarifies the implications for Quebec of the recent Supreme Court of Canada decision in Progressive Homes Ltd. v Lombard General Insurance Co. of Canada.2
The Université de Montréal (the University) noted abnormal deterioration of the outer surface of one of its pavilions in the spring of 2008, leading it, in October 2010, to bring an action against all parties who had been involved in designing and building the pavilion between 1992 and 1994. Placements Lemay Nadon inc. had supplied the clay bricks incorporated into the outside walls of the building. The judgment was further to a motion by Placements Lemay Nadon inc. to compel its insurer, Intact Insurance Company, to take up its defence. Intact had issued a primary CGL policy to Placements Lemay Nadon inc. from 1996 to 2008 and excess policies from 2003 to 2005, and had chosen to deny coverage, alleging that there had been no property damage or accident.
In his decision, Justice Payette reviews the passages of Progressive Homes summarizing the principles governing an insurer’s duty to defend, confirming their relevance to Quebec. He stresses the importance of analyzing CGL policies methodically by first determining the coverage offered, then looking at the applicable exclusions and, finally, considering the relevant exceptions.
Definitions of “property damage” and “loss”
Justice Payette begins by discussing the initial coverage offered. The discussion focuses on the way the terms “property damage” and “loss” are defined in the policies in dispute. First, Justice Payette considers the argument that a pure economic loss is not property damage as the term is commonly understood in CGL policies. Intact drew on the Manitoba Court of Appeal’s ruling in Bird Construction Co. v Allstate Insurance Co. of Canada3 to plead that the replacement cost of the defective bricks was not the result of property damage, but instead was a pure economic loss. The court rejects this argument and insists on the importance of adhering to the text of the applicable insurance policy, pointing out that this was the approach used in Progressive Homes. In this instance, since the University alleged that the bricks had damaged the walls they were incorporated into and had therefore been a factor in their deterioration, it was a case of property damage. The fact that the University alleges perceptible damage to the building that renders it defective therefore meets the Progressive Homes test whereby it is sufficient for pleadings to allege a possibility of property damage for the insurer to have a duty to defend.
The court then looks at the notion of an accident because Intact pleaded that the damage alleged by the University did not result from a loss, but from the inadequate performance of the bricks supplied by Placements Lemay Nadon inc. Again, citing Progressive Homes, Justice Payette rejected Intact’s arguments and found that in the case at issue, the term “accident” used in the definition of “loss” must include events causing property damage that are unexpected or unwanted, whether sudden or not.
Intact invoked the application of the “Your Products” exclusion clauses, but failed to satisfy the court that the exclusion in question applied clearly and unequivocally since the University was claiming not just the replacement cost of the bricks, but all costs involved in demolishing and rebuilding the damaged walls. While such clauses usually allow the exclusion of the replacement cost of the insured’s product, they do not necessarily exclude coverage for consequential damage to other property.
Allocation of defence costs
In his findings, Justice Payette states that there are no grounds for allocating defence costs, although a portion of the claim against Placements Lemay Nadon inc. may be excluded. In keeping with applicable doctrine and case law on the matter, the court points out that even if a claim contains allegations covered by the policy and others that are not, there is no automatic allocation of defence costs. Allocating defence costs is only appropriate when the insurer successfully demonstrates that the defence of uncovered allegations results in separate, quantifiable costs, failing which the insurer is required to assume all the defence costs.