In the recent insurance decision in Lombard Insurance Company v. 328354 B.C. Ltd. (2012), the British Columbia Supreme Court determined that a liability insurer was required to cover all defence costs of an insured, even though the time period in which the damage was alleged to have occurred extended for a long period after the expiry of coverage. In particular, the court rejected the insurer’s argument that its contribution to defence costs should be limited to a pro‑rata share of those costs, based on its “time on risk”.
This was a “leaky condo” case and the insured was the developer. Like most leaky condo cases, the alleged property damage was continuous and progressive, from substantial completion until a later date when it was identified and repaired. Lombard’s coverage under its CGL wrap‑up policy for the completed operations hazard extended for two years after completion of the work, whereas the damage apparently continued for approximately 10 years after that. The insurer calculated that it was only on risk for 16.3% of the time during which the damage occurred and therefore sought a declaration that it was only required to pay 16.3% of the defence costs, on an interim basis, without prejudice to its or the insured’s right to seek a reallocation at a later date (for instance, after trial). The developer had not purchased any other insurance and as such, there was no further insurance coverage after the Lombard policy.
Although the allocation of defence costs on the basis of time on risk had not been the subject of judicial comment in British Columbia before this case, allocation of defence costs on that basis is often done by agreement among insurers in cases where different policies cover the alleged time of property damage. The time on risk allocation is routinely relied on where there are multiple insurers involved in resolving defence coverage or indemnity obligations for a particular insured. In this case, Lombard conceded that at least some of the allegations fell within the definition of “property damage” in the policy sufficient to trigger its duty to defend. Having concluded that there was a prima facie duty to defend, the court held there was no basis on the policy language or at law to apportion defence costs based on time on risk and that it was premature to allocate between covered and uncovered claims prior to trial. Defence costs may be apportioned between an insurer and an insured if there is a reasonable or logical basis on which to do so, but this is difficult to do at an early stage in proceedings. Moreover, while apportionment of defence costs among insurers may be done on an equitable basis, apportionment as between the insurer and the insured is governed by the language of the policy. Where there is an unqualified obligation to pay defence costs, the insurer must fulfil that obligation, even if doing so also furthers the defence of uncovered claims. Here, the allegation of damage outside the coverage period did not lead to separate and readily ascertainable costs of defence.
The court did find that Lombard was entitled to a declaration that the developer was required to pay the costs of defence solely related to damage claims falling outside the coverage period and that it could subsequently apply to the court for an order for reimbursement, if ascertainable costs of that kind were incurred.
This case increases the likelihood that CGL or occurrence based insurers will be required to pay all defence costs before trial even though there are gaps in coverage. It is also another extension of the Supreme Court of Canada’s unanimous decision in Progressive Homes v. Lombard and a tough decision for liability insurers in the context of leaky condo cases specifically, and construction defects generally.