In the landmark decision of Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33, the Supreme Court of Canada settled the inconsistent case law concerning the interpretation of CGL insurance policies and whether a general contractor’s CGL policy can cover damage arising from defective workmanship.
The facts of this case can be briefly outlined as follows. A general contractor contracted to build several housing complexes. After completion, four actions were commenced against the general contractor alleging defective workmanship which caused water leakage into the buildings resulting in further damage. The general contractor had a variety of CGL policies in place at different times.
Initially, the insurer defended these actions but ultimately declined after the British Columbia Supreme Court in Swagger Construction Ltd. v. ING Insurance Co. of Canada1 held that claims based on defective workmanship were not covered under similar insurance policies and as such there is no duty to defend.
The general contractor brought an application for a declaration that the insurer was required to defend.
The Courts Below
The British Columbia Supreme Court followed its earlier decision in Swagger and held that the insurer did not have a duty to defend. 2 This interpretation of the CGL policies applied a presumption held by the Court that CGL insurance policies are not intended to cover defective workmanship and clear language to the contrary would be required to overcome the presumption. This restrictive interpretation conflicted with the Ontario Court of Appeal’s decision in Bridgewood Building Corp. (Riverfield) v. Lombard General Insurance Co. of Canada,3 which concluded that similar claims could fall within a CGL policy and a duty to defend is triggered. Nonetheless, the British Columbia Supreme Court still followed its earlier approach in Swagger.
The majority of the British Columbia Court of Appeal dismissed the insured’s appeal stating:
In my view the policies of insurance in the case at bar do not cover losses to the insured caused by poor workmanship. The policies in question do not contain the clear language necessary to overcome the implied assumption that insurance is designed to transfer fortuitous contingent risk. I would dismiss the appeal.4
The law on the question of whether the CGL policies in this case could apply to defective workmanship was unclear as courts across Canada applied inconsistent approaches to the interpretation.
Supreme Court of Canada
a. Principles Governing the Duty to Defend
The Supreme Court of Canada concluded that the CGL policies in this case covered claims based on defective workmanship and the insurer owed a duty to defend.5
The Court began its analysis by outlining the well established principles governing an insurer’s duty to defend. Justice Rothstein, writing for the Court, catalogued these basic principles:
- an insurer will be required to defend a claim where the facts alleged in the pleadings, if proven to be true, would require the insurer to indemnify the insured for the claim;
- it does not matter at this stage whether the allegations in the pleadings can be proven in evidence but what matters is that the pleadings allege facts which are within the scope of the policy;
- no duty to defend will exist where it is clear that the claim falls outside the scope of the insurance policy, either because the claim does not fall within the initial grant of coverage or is excluded by an exclusion clause; and
- in examining the pleadings to determine whether a claim falls within the scope of coverage, the parties to the insurance contract are not bound by the labels 5 2010 SCC 33. selected by the plaintiff but rather the true nature of the claim.6
b. General Principles of Insurance Policy Interpretation
After setting out the basic principles governing the duty to defend, the Court outlined the principles of insurance policy interpretation. The Court stressed the importance of interpreting the insurance policy in accordance with the plain meaning of the language in the policy. The Supreme Court listed the following principles of insurance policy interpretation:
- the primary interpretive principle is that when the language of the policy is unambiguous, the court should give effect to clear language, reading the contract as a whole;
- where the language of the insurance policy is ambiguous, courts can rely on general rules of contract construction. For example, courts should prefer interpretations that are consistent with the reasonable expectations of the parties, so long as such an interpretation can be supported by the text of the insurance policy;
- courts should avoid interpretations that would give rise to an unrealistic result or that would not have been in the contemplation of the parties at the time the policy was concluded;
- courts should also strive to ensure that similar insurance policies are construed consistently;
- rules of interpretation are to be applied to resolve ambiguity not to create ambiguity where there is none in the first place;
- if the rules of interpretation fail to resolve any ambiguity, courts will construe the insurance policy contra proferentem against the insurer. A corollary of the contra proferentem rule is that coverage provisions are interpreted broadly, and exclusion clauses narrowly.
The onus is on the insured to establish that the claim falls within the scope of coverage. If this is established, the onus shifts to the insurer to show that an exception applies.7 In order to succeed, the insurer must establish that “an exclusion clearly and unambiguously excludes coverage”.8
The Court observed that the structure of a CGL policy typically consists of sections dealing with (1) coverage, (2) exclusions and (3) exceptions to any exclusions, and noted that it is generally advisable to interpret a CGL policy in this order.
c. Do the Claims fall within the Initial Scope of Coverage?
In this case, the insurance policies provided coverage for “property damage” caused by an “accident”. “Property damage” and “accident” were defined in the policies.
The first question was whether the pleadings alleged “property damage” as defined by the policies. The insurance policies defined property damage as physical injury to tangible property. As such, the underlying actions which alleged physical damage to the buildings fell within the plain meaning of the policies’ definition of property damage.
The Supreme Court accepted this plain meaning interpretation of the defined term. Against this interpretation, the insurer argued that it is a general principle, which has been recognized by the courts in other contexts,9 that property damage is not intended to mean damage to the building itself but rather ought to be limited to damage to property of a third party.
The Court rejected the insurer’s restrictive interpretation, emphasizing the plain meaning of the defined term. Justice Rothstein explained:
The focus of insurance policy interpretation should first and foremost be on the language of the policy at issue. General principles of tort law are no substitute for the language of the policy. I see no limitation to third‐party property in the definition of "property damage". Nor is the plain and ordinary meaning of the phrase "property damage" limited to damage to another person's property.10
Further, the Court pointed out that the interpretation proposed by the insurer restricting the initial scope of coverage to damage to third party property would render the “work performed” exclusion redundant. While exclusion clauses themselves do not create coverage, interpreting an insurance policy as a whole and in a manner which is internally consistent can be a further indicator of the intention of the parties. Consequently, the Court concluded that the pleadings did allege property damage which fell within the policy.
The second question was whether the pleadings alleged that the property damage was caused by an accident. The insurance policy defined “accident” as including “continuous or repeated exposure to conditions which result in property damage neither expected nor intended from the standpoint of the Insured.”11 Later versions of the policy replaced “accident” with the word “occurrence” but still used essentially the same definition.
The insurer argued that damage caused by faulty workmanship is not an “accident”. It relied upon the logic of the majority of the British Columbia Court of Appeal that such an interpretation would offend the assumption that insurance provides for fortuitous contingent risk. It further argued that such an interpretation would convert CGL policies into performance bonds.
The Supreme Court rejected the insurer’s arguments.
First, the Court explained that whether defective workmanship is an accident is a case specific determination that depends on the definition of “accident” in the policy and the nature of the claims in the pleadings.
Second, the Court rejected the argument that this interpretation offends the basic assumption that insurance provides for fortuitous contingent risk. As Justice Rothstein explained:
Fortuity is built into the definition of "accident" itself as the insured is required to show that the damage was "neither expected nor intended from the standpoint of the Insured". This definition is consistent with this Court's core understanding of "accident": "an unlooked‐for mishap or an untoward event which is not expected or designed" … When an event is unlooked for, unexpected or not intended by the insured, it is fortuitous. This is a requirement of coverage; therefore, it cannot be said that this offends any basic assumption of insurance law.12
Third, the Court rejected the argument that this interpretation would convert CGL policies into performance bonds. Justice Rothstein pointed out that performance bonds ensure that the work will be brought to completion while the CGL policies, in this case, purport to cover damage to the insured’s own work once completed.
The Court concluded that the pleadings in this case fell within the initial grant of coverage since they allege property damage which was caused by an accident as defined by the plain language of the policies. Consequently, the onus shifted to the insurer to show that coverage is ultimately precluded by an exclusion clause; otherwise a duty to defend would arise.
d. Are the Claims Excluded by any Exclusion Clause?
The insurer argued that the “work performed” exclusion clause excludes coverage for all of the general contractor’s work, including the housing complexes in their entirety. The Court disagreed.
The Court examined the various successive versions of the exclusion clause. The original version of the work exclusion clause stated: This insurance does not apply to:
I. 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 therewith13
This standard form exclusion clause on its face purports to exclude coverage for property damage to work performed by or on behalf of the named insured.
However, in this case, this particular exclusion clause was modified numerous times by the parties. The first version of the policy had a General Liability Broad Form Extension Endorsement which the insured purchased which replaced clause (i) with clause (Z) which stated:
z. 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.14
This modified version of the exclusion is narrower than the original as it does not purport to exclude damage to work performed on behalf of the named insured. This is often known as the “subcontractors exception” through which an insured can maintain coverage in relation to a subcontractor’s work. Justice Rothstein referred to clause (Z) stating:
The plain language is unambiguous and only excludes damage caused by Progressive to its own completed work. It does not exclude property damage:
- that is caused by the subcontractor's work;
- to the subcontractor's work, regardless of whether the damage is caused by the subcontractor itself, another subcontractor, or the insured.15
The Court noted that even if there had been any ambiguity in clause (Z), the principle of contra proferentem would lead to the “work performed” exclusion being interpreted narrowly which itself favours limiting the exclusion to only damage caused by the named insured’s own work.
The Court added that this interpretation also supports the reasonable expectations of the parties. Justice Rothstein explained:
Further, this result appears to support the reasonable expectations of the parties. In purchasing the Broad Form Extension Endorsement, Progressive would have expected to receive something different from the standard CGL form. To give clause (Z) the same meaning as the standard form clause would deprive the replacement of any meaning. Indeed, coverage for work completed by subcontractors seems to be the purpose of upgrading to the Broad Form Extension . . . 16
The second version of the work performed exclusion only purported to exclude coverage for the defect itself but not damages to the building arising from the defect. Consequently, this exclusion would not apply to claims based on alleged damage to the building which was caused by other defective work.
The third version of the exclusion was described by the Supreme Court as being a hybrid of the first and second versions. It excluded coverage for defective property itself but not any resulting damage, and expressly added:
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.17
Consequently, the Court concluded that there is a possibility of coverage under the CGL policies and therefore the duty to defend is triggered.
This is an important case on the interpretation of CGL policies. It illustrates the importance of the wording of the CGL policy itself and confirms that CGL policies can be interpreted as providing coverage for damage arising from defective work. It rejects any categorical suggestion that “property damage” covered by a CGL policy is limited to damage caused to a third party’s property and restores the wording of the actual policy to the centre stage of the debate.