The Supreme Court of Canada’s decision in Progressive Homes v. Lombard General Insurance Company of Canada (September, 2010), now represents the leading decision on the issues of “property damage”, “occurrence” or “accident”, and the scope of work performed exclusions in commercial general liability (CGL) policies.
Progressive Homes (Progressive), a general contractor, was insured by Lombard under several CGL insurance policies. After the completion of several housing complexes, four actions were initiated against it for breach of contract and negligence. The pleadings contained allegations that the buildings were inadequately constructed, which resulted in significant damages caused by water.
After Lombard’s refusal to defend these actions, Progressive brought an application for a declaration that Lombard was under a duty to defend.
In response to the application, Lombard argued that it did not have such a duty since the damages claimed did not constitute “property damage” caused by an “occurrence” or “accident”. It further argued that the “work performed” exclusions contained in the policies precluded coverage.
The specific definitions of “property damage” and “occurrence” or “accident” contained in the policies were as follows:
“Property damage” was defined in the first policy as:
“(1) physical injur y to or destruction of tangible property which occurs during the policy period, including the loss of use thereof a t any time resulting therefrom, or (2) loss of use of tangible property which has not been physically injured or destro yed provided such loss of use is caused by an accident occurring during the policy period.”
In later versions of the policies, the reference to “destruction” was removed. “Accident” was defined as:
“Accident” includes continuous or repeated exposure to conditions which result in property damage neither expected nor intended from the standpoint of the Insured.
In subsequent policies, the term “occurrence” was defined as:
“Occurrence” means an accident, inc luding continuous or repeated exposure to substantially the same general harmful conditions.
Lombard’s principal argument was that the “property damage” covered by a CGL policy could not result from damage to one part of the building arising from another part of the same building and that the “property damage” covered by the policies was limited to third-party property, excluding damage to the insured’s own work.
Lombard further argued that the damages claimed did not result from an “accident” and, finally, that if covered, the work performed exclusions applied.
THE SUPREME COURT’S DECISION
As the Court could find no limitation to third-party property in the definitions of “property damage” nor anything in the policies that could lead to the conclusion that “property damage” was limited to damage to another person’s property, it concluded that damages to the insured’s own work could be covered.
The Court found that this conclusion was consistent with a reading of the policy as a whole, notably in light of the presence of the “work performed” exclusion in the policy. The Court stated that qualifying the meaning of “property damage” to mean only “third-party property” would potentially make the “work performed” exclusion redundant.
On the issue of whether defective workmanship was an “accident” or “occurrence”, the Court stressed that this determination is case specific and depends both on the circumstances of the defective workmanship alleged and the way in which “accident” is defined in the policy. The court found that defective workmanship, insofar as it was not expected or intended by the insured, could therefore be considered an “accident” within the meaning of the policies.
The Court considered the allegations in the pleadings and noted the absence of any allegation that the property damage was expected or intended. The allegations suggested that the damage was fortuitous and the result of “continuous or repeated exposure to the same harmful conditions”, which squarely fit into the definitions of the policies.
The court expressly rejected Lombard’s argument that interpreting “accident” to include defective workmanship would convert CGL policies into performance bonds. The Court noted that one could not be compared to the other with the CGL policy, unlike performance bonds, only coming into force once the project is completed.
THE “WORK PERFORMED” EXCLUSIONS
Concluding that the claims fell within the initial grant of coverage, the Court analyzed whether the “work performed” exclusions applied.
The Court noted that the standard version of the “work performed” exclusion precluded coverage for damage to the insured’s own work once completed. However, the text of this exclusion had been modified several times during Progressive’s coverage by Lombard. After analyzing the policy wording throughout the coverage period, it concluded that the wording used in various policies allowed for coverage of damages caused by the insured’s subcontractor’s work and in some instances, for damage resulting from that part of the insured’s work that was defective.
The Court therefore ordered Lombard to defend Progressive in all four actions.
The Progressive Homes v. Lombard case will require close review in any coverage analysis arising out of construction defect claims.