November 30, 2010

Supreme Court rules on commercial general liability

For years, the construction industry has struggled with what exactly is covered by commercial general liability policies on construction projects.

Since a general liability policy is the primary policy that protects construction participants from legal liability, the question is not just of academic interest to contractors and developers. If you do work on a construction project, this issue could mean the difference between referring the matter to your insurer and holding the bag yourself for legal liability and legal fees.

Many hoped that the Supreme Court of Canada would bring some clarity to this area in the recent case Progressive Homes v. Lombard General Insurance Company of Canada. Unfortunately, whether the Supreme Court succeeded in bringing that desired clarity is debatable.

You may recall from earlier articles of ours that the facts of this case involved four buildings constructed for BC Housing by Progressive Homes. After water leaks allegedly caused significant damage to all four buildings, BC Housing sued Progressive, who had a CGL policy from Lombard.

Lombard refused to cover Progressive on the grounds that the alleged damage was not covered by its policy. Progressive challenged Lombard’s coverage decision, eventually taking its case all the way to the Supreme Court of Canada. At the Supreme Court, Lombard had three arguments as to why the damage to the buildings was not covered by Progressive’s CGL policy.

First, Lombard argued that damage caused to one part of a building from another part of the same building does not meet the definition of “property damage” in their policy. Lombard said that “property damage” only applies to damage done to a third party’s property, not damage done to the insured’s own work.

Second, Lombard argued that the damage was not caused by an “accident” or “occurrence”. They said that where there are defects in the construction of a building, the result is a defective building, not accidental damage.

Finally, Lombard argued that the policy excluded the work of subcontractors who do work on behalf of general contractors.

The Supreme Court rejected all three arguments. In doing so, it confirmed once again that there only needs to be the “mere possibility” that damage alleged in a lawsuit is covered by a policy to trigger the insurer’s duty to defend the insured. Importantly, the Court emphasized that courts should approach the interpretation of insurance policies by giving the words in the policy their plain meaning.

With that in mind, the Court found that there was no reason to conclude that the words “property damage” in the Lombard policy could be narrowly interpreted as only meaning “damage to a third party’s property” as argued by Lombard. Since there was alleged damage to the buildings in question, that was sufficient to qualify as property damage under the policy.

Along the same lines, the Supreme Court rejected Lombard’s argument that faulty workmanship is never an accident.

The Supreme Court gave “accident” its plain meaning — that is, an event that the insured neither expects nor intends. Since Progressive did not intend or expect property damage, the damage was an accident for the purpose of the policy.

The Supreme Court also rejected the argument that the work of subcontractors was excluded by the “Work Performed” exclusion to the policy.

In its decision, the Supreme Court emphasized that each coverage case must be decided on its own facts and that there are no hard and fast rules about what the language in CGL policies means generally. Coverage will always depend on the exact words used in each insurance contract.

Since many insurers use similar policy language as the policy language analyzed in this decision, the finding by the Supreme Court that there was coverage may have significant repercussions for numerous other construction claims in Canada where insurers have, until now, denied coverage. Moving forward, we anticipate that this decision will likely provide a significant impetus for the insurance industry to tighten CGL policy language.

Norm Streu is the Chief Operating Officer of the LMS Reinforcing Steel Group and former chair of the Vancouver Regional Construction Association. Chris Hirst is a partner and the leader of the Construction & Engineering Group, Alexander Holburn Beaudin & Lang LLP. This article was prepared with the assistance of Eric Regehr, articled student.

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