PROGRESSIVE HOMES LTD. v. LOMBARD GENERAL INSURANCE CO. OF CANADA
Progressive Homes Ltd. ("Progressive") was hired as a general contractor to build four housing complexes for the British Columbia Housing Management Commission (“BC Housing”). The complexes leaked and, as a result, suffered significant rot, infestation and deterioration. BC Housing sued Progressive for breach of contract and negligence.
Progressive submitted the claim to its CGL carrier, Lombard General Insurance Co. of Canada, who ultimately denied coverage on the basis that the claim did not trigger its duty to defend. Lombard argued that the damages were the expected consequence of faulty workmanship and did not constitute "property damage" caused by "accident". The British Columbia Supreme Court and Court of Appeal agreed, following a line of reasoning adopted in B.C. in Swagger Construction Ltd. v. ING Insurance Company of Canada and GCAN Insurance Company v. Concord Pacific Group Inc. The Courts relied on general principles such as, "property damage" refers to damage to the property of a third party and that defective construction is not fortuitous. To find otherwise, held the majority of the Court of Appeal, "flies in the face of the underlying assumption that insurance is assigned to provide for a fortuitous contingent risk".
The Supreme Court of Canada disagreed and overruled the decision. In doing so, it reconciled B.C.'s jurisprudence with a divergent line of cases from Ontario and Saskatchewan, Bridgewood Building Corp. v. Lombard General Insurance Co. of Canada and Westridge Construction Ltd. v. Zurich Insurance Co., which favoured a broader reading of the coverage grant in similar liability policies.
While several different policy wordings were at issue, the basic features of the coverage grants were the same. Lombard owed Progressive a duty to defend for property damage caused by an accident.
(i) Property Damage
Lombard relied on prior jurisprudence for the proposition that "property damage" in a CGL policy cannot mean damage to one part of a building caused by the failure of another part of a building and, therefore, must mean damage to the property of a third party. Justice Rothstein, speaking for a unanimous court, roundly rejected this interpretation holding:
I would construe the definition of "property damage" according to the plain language of the definition, to include damage to any tangible property. I do not agree ... that the damage must be to third-party property. There is no such restriction in the definition.
The pleadings described water leaking in through windows and a deterioration of the building components resulting from water ingress and infiltration. The Supreme Court held that this met the low threshold in a duty to defend analysis of showing that the pleadings reveal a possibility of coverage.
In this case, the definition of "accident" being considered was, generally:
“Accident” includes continuous or repeated exposure to conditions which result in property damage neither expected not intended from the standpoint of the Insured.
Lombard argued that a defective building is the result of defective workmanship and cannot be an "accident". The Supreme Court held that absent policy language to the contrary, it could not be said that defective workmanship was never an accident. Whether defective workmanship will be seen as accidental will depend on the alleged circumstances and the definition of "accident" in the policy.
The Supreme Court also rejected the suggestion that allowing for the possibility that defective workmanship could be accidental offended the concept of fortuity. Where the pleadings do not make reference to intentional conduct, which would suggest that the damage was expected or intended, then there remains a possibility that the damage was fortuitous.
Though the decision in this case is not groundbreaking, it is a strong reminder of the primacy of the policy and the pleadings in a duty to defend analysis. In that regard the decision serves as a signal to the industry to (a) ensure that its wording is in line with its underwriting intent; and (b) ensure that a claim is evaluated based on the pleadings and not principles.