In a very recent judgment[i] pertaining to a commercial general liability (CGL) policy, the Supreme Court of Canada has reiterated that the duty to defend is triggered by the mere possibility that a claim is covered by the insurance policy and does not depend on actual liability or on an actual duty to indemnify. Conversely, there is no duty to defend if the claim is clearly not covered by the policy, either because it falls outside the initial grant of coverage or because an exclusion applies. Additionally, the definitions of "property damage", "accident" and "work performed" used in the policy were key to determining coverage in this case.
The Facts and The Lower Courts' Judgments
BC Housing had retained Progressive as a general contractor to build several housing units. Shortly after completion of the work, BC Housing sued Progressive, alleging serious damage, including moisture penetration, rot and infestation caused by water infiltration, due in part to negligence.
Progressive had purchased five successive CGL policies from Lombard. All the policies were occurrence-based and required Lombard to defend and indemnify Progressive in respect of claims for property damage caused by an accident or occurrence during the policy period; however, the policies contained an exclusion clause for work performed by the insured.
Lombard initially agreed to defend Progressive, but then withdrew after the Supreme Court of British Columbia ruled in another case[ii] that a CGL policy did not cover a general contractor for the cost of repairing construction defects in a building it had built.
Progressive applied for a declaratory order to force Lombard to assume its defence, arguing that the defective work had been completed by subcontractors, thus triggering an exception to the "work performed" exclusion. Progressive's application was dismissed by the applications judge.[iii] Relying on Swagger,[iv] he held that a construction defect is not an "accident" unless it causes damage to third-party property and that a complex structure such as a building cannot be artificially divided into its component parts in order to make a finding of "property damage," but rather forms an integrated whole.
The Court of Appeal for British Columbia in turn dismissed Progressive's appeal.[v] Upon examining the "work performed" exclusion, the Court agreed that in certain circumstances work done by a subcontractor could be covered, but only if the damage was caused by a distinct component installed by a subcontractor. This was not the case here since the proceedings alleged that integral parts of the structure did not function properly and they were not distinct items.
The Judgment of The Supreme Court of Canada
The Duty to Defend
The Supreme Court agreed with the established principle governing the duty to defend: an insurer must defend a claim if the facts in the pleadings, if proven, would require the insurer to indemnify the insured. It does not matter whether the allegations are ultimately proved, as the duty to defend is triggered by the mere possibility that the claim is covered by the insurance policy. No duty to defend exists if the claim is clearly not covered by the policy, either because it falls outside the initial grant of coverage or because an exclusion applies.
The Court also pointed out that the parties are not bound by the labels used in the pleadings of the plaintiff to the underlying actions; rather, coverage under the duty to defend depends on the true nature or substance of the claim.
What constitutes property damage
Lombard consistently maintained that property damage excludes damage caused to one part of a property by another part and should be limited to damage caused to third parties and not cover work for which the insured is responsible, citing an earlier Supreme Court decision[vi] in which the Court had held that because a loss was caused by a part of the cladding which became detached from the building without causing physical injury or a loss to another property, it was not property damage but an economic loss.
The Supreme Court rejected this restrictive approach inspired by tort law as a substitute for the language of the policy and said it saw no reason not to interpret property damage in accordance with the ordinary meaning of the words, which would include damage to any tangible property. In so doing, the Court is upholding the so-called "complex structure approach" according to which complex structures can be split into their component parts. Thus, property damage could cover damage to parts of the building on which the insured had performed work. The Court found that the pleadings contain allegations of property damage, adding that the question whether specific property actually falls within the definition of "property damage" is a matter to be determined on the evidence at trial. This meets the low threshold of showing that the pleadings reveal a possibility of property damage for the purpose of deciding whether Lombard owes a duty to defend. Meanwhile, the Court did not express an opinion on the duty to indemnify and this issue will have to be resolved in the decision on the merits.
What constitutes an accident
In order to prove that the property damage was caused by an accident, Progressive relied on the ordinary meaning of accident, arguing that "accident" covers negligence causing damage which was neither expected nor intended by Progressive. Lombard responded that when a building is constructed in a defective manner, the end result is a defective building, not an accident and that interpreting "accident" to include poor workmanship would turn the insurance policies into a performance bond.
The Court took a broad approach to the concept of accident. It noted that determining whether poor workmanship is an accident is case specific. The Court also dismissed Lombard's argument that interpreting poor workmanship as an accident would convert the CGL policies into performance bonds, as a performance bond guarantees the completion of the work, whereas an insurance policy picks up where the performance bond leaves off, by providing coverage once the work is completed. The Court thus found that the pleadings contained sufficient allegations of an accident to compel Lombard to defend the insured.
It is to be expected that this judgment will be subject to close scrutiny by our courts in years to come given the number of similar cases involving insurance coverage that routinely arise.