In February 2007, the British Columbia Supreme Court had the opportunity to reconsider the issues at the heart of Swagger Construction Ltd. v. ING, 2005 BCSC 1269 ("Swagger") on two separate occasions. In a recent Legal Update, we advised you of the Reasons for Judgment in the first petition, GCAN Insurance Company v. Concord Pacific Group Inc. et al, 2007 BCSC 241 ("GCAN"), released on February 22, 2007. The court considered itself bound by Swagger in this decision, but narrowed its application to general contractors only. The British Columbia Supreme Court has now issued its decision on the second petition, Progressive Homes Ltd. v. Lombard General Insurance Company of Canada, 2007 BCSC 439 ("Progressive Homes"), released on March 29, 2007. The court’s decision embeds the application of Swagger – at least in so far as general contractors are concerned.
In Progressive Homes, four separate actions ("Underlying Actions") had been brought against the petitioner, Progressive Homes Ltd. ("Progressive"), a general contractor, with respect to four "leaky condo" developments in which Progressive had been involved. The developments had been built almost entirely by subcontractors. The insurer had initially defended the Underlying Actions on behalf of Progressive under a reservation of rights, but later withdrew from the defence of the actions, on the basis that it had no duty to defend because the claims were not covered under the applicable insurance contracts. In its petition, Progressive sought an order declaring that the insurer was under a duty to defend it in the Underlying Actions.
In reliance on Swagger and GCAN, Mr. Justice Cohen dismissed Progressive’s application because the pleadings in the Underlying Actions did not allege "property damage" or an "accident," as stated in the covering language of the insurance policies. After quoting extensively from both Swagger and GCAN, the court concluded GCAN had confirmed that Swagger stood for two propositions which "govern[ed] the outcome of the application in the case at bar":
1. liability insurance policies governing physical injury to tangible property do not contemplate the artificial division of work of the party responsible for that work into component parts for the purpose of establishing resultant damage, unless that is the clear intention of the entirety of the policy; and
2. defective construction is not an "accident" unless there is damage to the property of a third party.
The court proceeded to make the following findings:
1. There were no allegations of "property damage"
Cohen J. cited Winnipeg Condominium Corporation No. 36 v. Bird Construction Co.,  1 S.C.R. 85, a tort law case on which the court relied in Swagger, involving a condominium tower found to contain a dangerous defect, and held that where a building represents one integrated whole, it was improper to look to artificially divide it and claim that one part had caused damage to some other part of the building. This proposition, otherwise known as the "complex structure theory," had been rejected in tort law and was equally inapplicable in an insurance context. Because the pleadings in the Underlying Actions made no such division and "simply allege[d] an underlying deficient structure," the court found that no "property damage," as defined in the insurance policies, had been alleged.
2. No "accident"
The court also placed reliance on another case cited by Swagger, Harbour Machine Ltd. v. Guardian Insurance Company of Canada (1985), 60 B.C.L.R. 360 (C.A.) ("Harbour Machine") where the Court of Appeal had stated that the improper installation and workmanship could not, in itself, be called either property damage or an accident or occurrence within the meaning of an insurance policy. As a result, Cohen J. held that because the claims in the Underlying Actions sought to recover costs to remediate allegedly faulty buildings that failed to keep out the elements, such allegations did not qualify as an "accident."
3. Reliance on exclusions and exceptions to exclusions in an insurance policy is improper unless the claim falls within the covering language
Finally, the court stated that it was improper to look to the exclusions and exceptions to exclusions to find coverage where none existed under the covering language of the policy. While such an approach may result in the redundancy of certain exclusions or exceptions in a policy, the court was doubtful whether redundancy was a sufficiently valid consideration in the determination of coverage
Like GCAN, the decision in Progressive Homes may be viewed as containing a number of inconsistencies.
First, the approach taken by the British Columbia Supreme Court in both cases is contrary to that taken by a number of appellate level courts (pre- and post-Swagger) who have held that coverage determinations must be made by reviewing the specific language of the policy itself. Other Canadian courts have continued to adopt this approach in cases decided as recently as last month (see, e.g., York Region Condominium Corp. No. 772 v. Lombard Canada Ltd.,  O.J. No. 534 (S.C.J.)).
When the proper approach to coverage determinations is applied, general principles regarding the purpose of a commercial general liability policy, as well as tort law principles, do not apply. As a result, what may be considered "property damage" is governed by the wording of the policy. Nothing in the definition of "property damage," as defined in most modern commercial general liability policies, limits what would be considered "property damage" to property of a third party or excludes property of the insured. Notably, the term "property damage" is also defined to include "loss of use" of property, the very definition of "economic loss" which, in tort law, is a form of loss from which damages are not recoverable. Furthermore, the case law has resoundingly rejected the application of tort law principles in an insurance context. There is no need to rely on tort principles since whether a building can be divided into component parts is dependent upon the wording in the policy.
Second, the decision in Progressive Homes is inconsistent with recent authority on the meaning of "accident" from both the British Columbia Supreme Court and the Supreme Court of Canada. These judgments have supported the proposition that damage arising from faulty workmanship, be it to third party property or not, can constitute an "occurrence" under the terms of a liability insurance policy.
In determining whether an "accident" exists, it is important to distinguish that which is a "defect" in the property, from the damage arising from the defect. While defective work, in and of itself, may not constitute an accident, the case law states that damage arising from the defect may. This distinction is significant because in Swagger and Progressive Homes, the courts placed reliance on Harbour Machine, a case involving a defective boat which did not itself sustain any physical injury or damage. However, in each of Swagger, GCAN and Progressive Homes, the plaintiff building owners alleged that the construction deficiencies have given rise to damage separate and apart from the deficiencies themselves.
Further, the court in Harbour Machine did not hold that faulty planning, design and workmanship could not constitute an accident. Instead, it commented that the cost of remedying the defect that arose out of the faulty planning and design, and the poor workmanship in carrying out such design, could not give rise to an accident.
Significantly, in Harbour Machine, the court also distinguished between recovering costs for remedying the defect and costs for repairing the damage arising from the defect, noting that the "minor matter" of replacing a lost propeller may have given rise to a finding of an "accident."
Reliance on Harbour Machine is also misplaced since the court decided the issue of coverage on the basis of the exclusions in the policy. Its comments on the issue of "accident" are therefore not binding.
Third, the decision in Progressive Homes not to consider the exclusions and exceptions to the exclusions unless the covering language of an insurance policy is engaged ignores the fundamental principle of insurance contract interpretation that a policy must be read in its entirety to give effect to all parts of the policy so as not to render any part of it superfluous or meaningless. As a result, whether the covering language is engaged depends, in part, on the rest of the provisions in the policy.
In Progressive Homes, the insurance policy stated that the insurance did not apply to:
- Property damage to work performed by or on behalf of the Named Insured arising out of the work or any portion thereof, or out of materials, parts or equipment furnished in connection therewith.
However, the policy also contained the following exclusion:
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.
By removing the words "or on behalf," known commonly as the "subcontractor exception," the insurance policy expressly provided coverage for a general contractor for property damage arising out of the work performed by a subcontractor during the "completed operations" phase of the construction project. The language of these exclusions confirms that the insurance policy intended to cover property damage to parts of defective buildings. After all, if there were no coverage to begin with, there would be no need to rely on exclusions to remove coverage or carve out an exception for the work of subcontractors.
Given the inconsistencies in Progressive Homes and the direction appellate courts in other Canadian jurisdictions have taken with respect to the interpretation of insurance policies – and specifically, the terms "property damage" and "accident," as defined – it appears inevitable that a definitive statement on the law in British Columbia will not emerge until these issues receive consideration by the Court of Appeal.