The Supreme Court of Canada ordered Lombard General Insurance Company of Canada to defend its insured: Progressive Homes Ltd in a judgment rendered on Thursday, September 23, 2010. This matter originates from the construction of four condominium buildings awarded by British Columbia Housing Management Commission in 1993 to Progressive Homes. Apparently, the buildings were affected by numerous defects. BC Housing instituted four actions against Progressive Homes alleging significant damage caused by water leaking into each of the four buildings which rendered them unsafe and dangerous to the health of the occupants.
Progressive Homes petitioned the Court to issue orders compelling Lombard to take up its defense in the actions filed by BC Housing. Progressive Homes obtained five Commercial General Liability (“CGL”) insurance policies from Lombard between 1997 and 2005. Lombard took the position that the losses were not covered under the policies.
The Supreme Court of British Colombia agreed with Lombard and found that the claims as drafted did not fall within the grant of coverage under the policies and Lombard did not owe a duty to defend. The Court of Appeal, in a majority judgment, sided with the lower Court and dismissed the appeal.
The Supreme Court of Canada reversed the Court of Appeal judgment and found that Lombard owed a duty to defend the actions to Progressive Homes for the reasons more fully reviewed below.
Lombard issued, within the relevant period, five CGL policies to Progressive Homes. While the details of the individual policies may differ, the basic features remain the same: Progressive Homes was covered for property damage caused by an accident.
Property damage is defined in the policies as follows: (1) physical injury to or destruction of tangible property which occurs during the policy period, including the loss of use thereof at any time resulting therefrom, or (2) loss of use of tangible property which has not been physically injured provided such loss of use is caused by an accident occurring during the policy period.
The term “accident” was defined as follows in the first policy: includes continuous or repeated exposure to conditions which results in property damage neither expected nor intended from the standpoint of the Insured.
The Court stated that typically, CGL insurance policies contain several sections. Initially, the policy will set out the types of coverage contained in the agreement. Secondly, the contract will include specific exclusions to coverage. The exclusions do not create further types of coverage but should be read in light of the initial grant of coverage. Such a policy may also contain exceptions to the exclusion. However, we are reminded that it is advisable to interpret the policy in the order described above: coverage, exclusions and then the exceptions.
Progressive Homes had the onus of establishing that the loss was covered under the policy whereas Lombard had to demonstrate that the loss was not covered by its policies and in the alternative that the loss was excluded from coverage.
The main argument of Lombard was to the effect that “property damage” in CGL policies did not result from damage to one part of a building arising from another part of the same building. In other words, Lombard was stating that damage to other parts of the same building was pure economic loss, not property damage such that property damage was limited to third-party property and did not include damage to the insured’s own work.
The Court did not agree with Lombard and found that there was no such restriction in the definition. The plain meaning of “property damage” was not limited to damage to another person’s property. The clause was consistent of a reading of the policy as a whole and the Court stated it ought to construe the definition of “property damage” to include damage to any tangible property.
With respect to the definition of “accident”, Lombard was of the view that when a building is constructed in a defective manner, the end result is a defective building and not an accident as supported by case law.
The Court took another view. Its position is that one may not state that defective workmanship is never an accident under CGL policies. Rather one must consider the circumstance of the defective workmanship and the terms of the specific definition given to “accident”. The terms should be given the plain meaning prescribed to it in the policy and ought to apply to an event that causes property damage that is neither expected nor intended by the insured. Pursuant to the definition, this accident could have resulted from continuous or repeated exposure to conditions causing the damage. In light of the above, the Court found that the loss as alleged in the claims is covered under the policies.
Finally, the Court reviewed the policy exclusions and determined that they did not apply to the circumstances such that Lombard owed a duty to defend the actions to Progressives Homes.
It appears from this judgment that Courts will have to review policy definitions for “property damage” and “accident” carefully before concluding that defective workmanship is not covered under a CGL policy.