In Progressive Homes Ltd. v. Lombard General Insurance Company of Canada 2010 SCC 33, the Supreme Court of Canada (“SCC”) held that a general contractor’s defective workmanship could constitute an “accident” for which coverage was available under its commercial general liability (“CGL”) insurance policies. The decision reverses a previous decision of B.C.’s Court of Appeal and resolves inconsistent case law amongst the Provinces. It clarifies when an insurer’s duty to defend arises, interprets CGL policy definitions of “property damage” and “accident”, and discusses when “work performed” exclusions apply.
Background
The case arose from a “leaky condo” litigation. Progressive General Homes Ltd. (“Progressive”) was hired by British Columbia Housing Management Commission (“BC Housing”) as a general contractor to build several housing complexes, the construction of which was almost entirely subcontracted. After completion, BC Housing sued Progressive in four separate actions (the “Actions”) alleging construction defects led to water leakage resulting and rot, infestation, and deterioration of the buildings.
Progressive had obtained several CGL policies (the “Policies”) from Lombard General Insurance Company of Canada (“Lombard”). The Policies required Lombard to defend and indemnify Progressive when Progressive was legally required to pay damages caused by “occurrence” or “accident”, depending on the wording of the individual Policies.
Lombard initially defended Progressive but withdrew following a decision of B.C.’s Supreme Court that found a general contractor’s CGL policy did not cover the cost of repairing construction defects in a building it had built. Consequently, Progressive sought an order declaring that Lombard was required to defend it in the Actions.
The application judge held that Lombard did not owe a duty to defend Progressive, finding that defective construction was not an “accident” unless it caused damage to third-party property and that complex structures such as buildings cannot be “artificially divided” into their component parts to establish “property damage”. A majority of the Court of Appeal agreed, finding that insurance was “designed to provide for fortuitous contingent risk” and that damage resulting from faulty workmanship was not “fortuituous”, but simply a job poorly done.
The SCC’s Decision
The SCC affirmed the principle that the duty to defend requires only the possibility coverage – an insurer must defend a claim where the facts alleged in the pleadings, if proven, would require the insurer to defend the claim. It also stated the focus of insurance policy interpretation should be the language of the individual policies.
The SCC rejected the Court of Appeal’s conclusion that “property damage” excluded damage to the insured’s own work, noting that the definitions of “property damage” in the Policies included damage to “any tangible property” and that the plain and ordinary meaning of the phrase “property damage” did not limit damage to third-party property.
Further, the SCC rejected the Court of Appeal’s conclusion that defective construction cannot constitute an “accident” and held that the question of whether defective workmanship constitutes an “accident” depends on the allegations in the pleadings and how “accident” is defined in the individual policy.
Finally, the SCC examined the “work performed” exclusions that Lombard argued precluded coverage for damage occurring to Progressive’s work after completion. Frequently, a “work performed” exception is complemented by a “subcontractor exception” which brings work excluded by a “work performed” exclusion back within the scope of coverage when performed by subcontractors. Lombard argued that some versions of the Policies did not contain a subcontractor exception and that the pleadings did not allege that subcontractors caused the damage.
The SCC pointed to the different wording of the “work performed” exclusion amongst the Policies and held that Lombard had not demonstrated the exclusions clearly applied to all of Progressive’s claims and that the possibility of coverage existed under the Policies.
As a result of the SCC’s decision, it is expected that insurers will more readily defend claims against general contractors with similar CGL policies but will adopt more restrictive policy wordings in the future.
