On September 23, 2010, the Supreme Court of Canada held that a Commercial General Liability (CGL) insurance policy must provide coverage for claims against a general contractor arising from construction defects in a “leaky building” lawsuit. This is a major insurance coverage decision which impacts all participants in the construction industry, and business generally, across Canada.
In this decision, the Supreme Court overruled recent British Columbia decisions denying coverage and clarified coverage obligations to be consistent with decisions in other jurisdictions in Canada. Since 2005, B.C. courts have consistently held that (under standard policy language) CGL policies do not cover claims against general contractors arising from construction defects, because the policies are usually worded to respond only to “property damage” caused by an “accident” or “occurrence”. The B.C. courts concluded that defective construction was not an “accident” or “occurrence”, and that “property damage” was limited to damage to the property of someone other than the insured. So, damage to one part of a building caused by a defect in another part was not “property damage”. The courts in Ontario and Saskatchewan had concluded there was coverage in those circumstances.
The B.C. Courts (and courts of several other jurisdictions) had previously held that faulty workmanship was not an “accident” and was therefore not covered, as that would convert CGL policies into performance bonds. The Supreme Court disagreed and held that in this case the alleged faulty workmanship was an “accident” as defined in the policy, because it was neither expected nor intended by the general contractor. The Court rejected the notion that equating faulty workmanship to an accident would convert CGL policies into performance bonds, as there is a significant difference between these two products.
The Supreme Court also concluded that “property damage” in the CGL policy is not limited to property of someone other than the insured, it includes damage to any tangible property. Damage to parts of a building arising from construction defects within the building itself is indeed “property damage”. The Court went on to say that construction defects themselves (rather than just the consequential damage from them) may also be property damage covered by CGL policies.
The Court having found that the alleged construction deficiencies fit within the initial grant of coverage, it was up to the insurer to show that the coverage was precluded by an exclusion in the policy. The only exclusion seriously raised in this case was for “work performed” by the contractor (own work). As the damage had occurred over a period of time, the Court considered three different CGL policies issued by the same insurer. The work performed exclusion was worded quite differently in each of them. The Court concluded that the specific language of the exclusions had to be considered carefully, in light of the damage alleged, to decide if coverage was provided. That being said, the Court interpreted the three clauses quite narrowly – that is to say, it was inclined to find that coverage existed, rather than not. In each case, the Court held that the insurer did not show that the exclusions clearly and unambiguously applied to all of the claims asserted against the general contractor. So the policies did provide coverage.
One of the practical issues in this case was whether the insurer was required to pay the costs of defending the general contractor against the underlying construction deficiency lawsuit. The Court found that, because there was a possibility that the allegations made by the owner fell within the CGL policy coverage, the insurer did have a duty to defend the contractor. The decision is also instructive in determining the insurer’s potential duty to indemnify against damages should a claim be settled or go to trial.
It is important to note that, as CGL policies are “occurrence” based (meaning that the applicable policies are those in effect when the property damage occurred, not when a lawsuit is filed), it is often insurance purchased several years ago that may provide protection to an insured when being sued.
This decision is relevant to all insureds under CGL policies because the “property damage” and “accident” or “occurrence” language it turns on is found in most such policies. It will require a re-evaluation of decisions by CGL insurers to deny coverage for claims. It provides a national standard for the interpretation of CGL policies, tending, in general, to support coverage. That being said, in each case the specific wording of the policy, both in terms of the coverage provisions and applicable exclusions, will have to be considered, within the whole context of the policy and the claims made, to determine whether coverage exists.