In the recent decision of the B.C. Court of Appeal in Progressive Homes Limited v. Lombard General Insurance Co (March, 2009), the majority upheld a lower court ruling that declared that Lombard had no duty to defend Progressive under four successive CGL policies as a result of four separate actions brought against Progressive by the B.C. Housing Management Commission (“B.C. Housing”). The case considered the scope of CGL coverage to a construction deficiencies claim and the impact of the now common subcontractor exception to the “your work” exclusion and highlights an apparent divergence of appellate authority in Canada on this issue.
Over the years 1987 to 2005, Lombard issued four successive commercial or comprehensive general liability insurance policies (“CGL policies”) to Progressive. In late 2004 and early 2005, four actions involving four separate and similar projects built during the 1990’s were brought against Progressive by B.C. Housing. The actions alleged significant damage due to water penetration of the buildings’ envelopes. The actions were brought in breach of contract and in negligence and alleged that the claimant suffered damages because of building defects including water leaking through interior walls, improperly installed windows, insufficient venting and drainage, and deterioration of the building components as a result of water ingress.
Progressive asserted that it made use of subcontractors for most of the work. The pleadings referred to sub-trades including a ventilation and sheet metal company, a roofing contractor, and a deck installer.
The damages claimed included costs incurred to inspect and obtain professional advice concerning the construction defects, costs of remedial work, costs of relocating and providing for the alternate housing of tenants during the remediation work and other tenant expenses, diminution in value of the developments, and expenses, inconvenience and hardship caused by the construction and design deficiencies and their repair.
Lombard initially defended the four actions but later withdrew from the defence claiming it was under no duty to defend because Progressive was not covered under the liability insurance policies Lombard had issued. Progressive brought an application seeking a declaration that Lombard was obliged to defend.
Although the four CGL policies contained slightly different wordings, each essentially provided coverage for damages or compensatory damages because of “property damage” caused by an accident or “occurrence”.
All four policies contained “work performed” or “your work” exclusions.
In 1988, Progressive purchased a policy upgrade described as the Broad Form Property Damage Endorsement designed to deal with loss suffered after completion of the project. The work performed exclusion was modified to read that the policy did not apply:
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.
The second and third policy work exclusion provided that the policy did not apply to: “property damage” to that particular part of your work arising out of it or any part of it and included in the products completed operations hazard.
The “your work” exclusion contained in the fourth policy was modified to include what is referred to as the subcontractor exception, and provided that the policy did not apply to:
“property damage” to that particular part of “your work” arising out of it or any part of it and included in the products completed operations hazard. This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.
Lower Court Decision
Lombard took the position that the essence of the actions against Progressive was that it had breached its contract with B.C. Housing by delivering an entirely faulty product – from the exterior walls to the interior frames, from the roof to the walkways and that all of the damages alleged by B.C. Housing concerned the normal expected consequences of poor workmanship.
Progressive argued that the definitions of “accident” and “occurrence” in the policies negated any element of suddenness and that coverage may extend to property damage that took place over a long period of time. It relied upon the Ontario Court of Appeal decision in Bridgewood Building Corp. v. Lombard General Insurance Company of Canada (2006) (leave to appeal to the Supreme Court of Canada refused) where the court applied the subcontractor exception and held that the exception extended coverage to damage caused by subcontractors.
Justice Cohen rejected Progressive’s submissions and found that coverage had not been triggered and Lombard was not under any duty to defend. He applied the reasoning of Justice Smith in the B.C. decision in Swagger Construction v. ING Company of Canada (2005), holding the damages to other parts of the building constructed by the contractor that resulted from its faulty workmanship were not covered by the insurance policy. Justice Cohen also applied the decision of the B.C. Supreme Court in GCAN Insurance Company v. Concord Pacific Group (2007).
Two propositions distilled from these two B.C. cases, according to Justice Cohen, were as follows:
(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;
(2) defective construction is not an “accident” unless there is damage to the property of a third party.
Justice Cohen found that it was improper to look to the exclusions and exceptions to the exclusions to find coverage, where none existed in the first place.
Decision of the Majority in the British Columbia Court of Appeal
The majority (reasons delivered by Madam Justice Ryan) rejected Progressive’s appeal and declared that Lombard had no duty to defend because the policies did not cover losses caused by poor workmanship. The policies did not contain the clear language necessary to overcome the applied assumption that the insurance was designed to transfer fortuitous contingent risk only.
Progressive argued that the Court of Appeal should follow the Ontario Court of Appeal decision in Bridgewood v. Lombard. Lombard argued that the rules of interpretation of policies of insurance have been applied differently in British Columbia than in Ontario and that Bridgewood was wrongly decided.
Justice Ryan referred to a number of leading decisions and texts setting out the doctrines governing the interpretation of insurance contracts including: (1) an insurance contract should be read as a whole to understand each of its parts and there is a presumption that all sections of an agreement have meaning; (2) coverage provisions should be construed broadly and exclusion clauses narrowly; (3) any ambiguity is to be construed against the insurer (contra proferentem); and, (4) when the policy is ambiguous, effect should be given to the reasonable expectations of the parties. Justice Ryan said:
In determining “the reasonable expectations of the parties”, the court may take into account such things as “industry practice” … “industry practice” may be determined through industry bulletins if those bulletins are notorious. In determining the reasonable expectations of the parties the court may examine the context surrounding the contract, including such things as insurance industry practice.
Justice Ryan then embarked on a lengthy analysis of the Ontario Court of Appeal decision in Bridgewood v. Lombard in trying to distinguish it. In Bridgewood, Mr. Justice Moldaver discussed the historical evolution of the subcontractor exception in the CGL policy in these words:
The subcontractor exception dates to the 1986 revision of the standard CGL policy form. Prior to 1986 the CGL business risk exclusions operated collectively to preclude coverage for damage to construction projects caused by subcontractors. Many contractors were unhappy with this state of affairs, since more and more projects were being completed with the help of subcontractors. In response to this changing reality, insurers began to offer coverage for damage caused by subcontractors through an endorsement to the CGL known as the Broad Form Property Damage Endorsement or, BFPD. Introduced in 1976, the BFPD deleted several portions from the business risk exclusions and replaced them with more specific exclusions that effectively broadened coverage. Among other changes, the BFPD extended coverage to property damage caused by the work of subcontractors. In 1986 the insurance industry incorporated this aspect of the BFPD directly into the CGL itself by inserting the subcontractor exception to the “your work” exclusion.
Madam Justice Ryan distinguished Bridgewood on the basis that there was insufficient evidence to prove industry practice. She said:
In my view this last part of the Bridgewood analysis (by Mr. Justice Moldaver of the Ontario Court of Appeal quoted above) takes into account industry practice in determining the reasonable expectations of the parties. That analysis is not open to this court because the record does not support it. There was no evidence placed before the trial judge in the case at bar that the policy he was asked to examine was the standard CGL policy described in the American Family Mutual case relied upon by the (Ontario Court of Appeal) in Bridgewood. Nor was any evidence led of industry practice… We have none of that before us, and so the Bridgewood case is of limited assistance.
Dissent of Madam Justice Huddart
She agreed with Progressive’s submission that the policies provided coverage for the contingent risk that the negligence of a subcontractor might give rise to an “accident” or “occurrence” that could cause “property damage”. She said
I do not accept that such an interpretation “flies in the face of the underlying assumption that insurance is designed to provide for fortuitous contingent risk”. Rather, I take the view the wording of the insuring provisions permits this interpretation, and that of the exclusions supports it. My reading of the four policies in their entirety satisfies me that the coverage for property damage resulting from subcontractors’ negligence was an intended effect of the Broad Form Property Damage Endorsement as was comparable language in the policy interpreted by the Ontario Court of Appeal in Bridgewood v. Lombard… To read the polices otherwise would be to make them a “trap for the unwary”.
The majority decision of the B.C. Court of Appeal in Progressive Homes appears to conflict with the decisions of both the Ontario Court of Appeal in Bridgewood v. Lombard and the Saskatchewan Court of Appeal in Westridge Construction Limited v. Zurich Insurance Company (2006). This divergence in appellate authority across Canada cries out for clarification and we are pleased to report that the Supreme Court of Canada granted Progressive’s leave to appeal application on August 23, 2009. It is hoped that this significant issue of insurance interpretation will be clearly resolved for the benefit of the Canadian construction and insurance industries.
An earlier version of this article first appeared in the June, 2009 edition of “Nuts and Bolts”, the newsletter of the OBA Construction Law Section.