By Simon Fenn
In November 12, 2010
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This Supreme Court of Canada decision issued on September 23, 2010 can be read in full by following the link at the end of this summary. This is a decision that is demonstrative of why it is important to report any situation you feel may give rise to a claim against you, even if on reading your policy it may appear that coverage is excluded. Like all contracts, insurance policies are open to interpretation and this case shows how even in Canada’s very highest court, one Judge can rule quite differently from another. As this is a Supreme Court of Canada decision all future decisions in determining what constitutes Property Damage and Duty to Defend will be guided by this decision.

“Progressive Homes was hired as a general contractor to build several housing complexes. After completion, four actions were initiated against Progressive claiming breach of contract and negligence. It was alleged that significant water damage caused rot, infestation and deterioration to all four buildings.” More details of the damages are included very clearly in the actual Supreme Court decision.

Under General Liability Insurance an Insurer is required to defend and indemnify an Insured because of property damage caused by an occurrence or accident unless coverage is specifically excluded.

“Lombard claimed it did not have a duty to defend because the claims were not covered under the insurance policies.” This was due to specific exclusionary language it was depending upon in respect to defective workmanship which has traditionally been upheld.

“The applications judge found that the claims did not fall within the initial grant of coverage…..and therefore Lombard did not owe a duty to defend.” It therefore agreed with Lombard.

It only takes a possibility that a claim falls within the insurance policy to trigger a duty to defend. Policy interpretation typically follows the logical flow of “coverage – exclusions – exceptions (to exclusions)”. Exclusions did exist in respect to defective workmanship but there were some ambiguities.

The Supreme Court of British Columbia, 2007 Justice Cohen had concluded the claim did not fall within the grant of coverage and Lombard did not owe a duty to defend. The Court of Appeal of British Columbia, 2009 Justice of Appeal Ryan for herself and Justice of Appeal Kirkpatrick “accepted that the plain meaning of the insuring provisions could support the conclusion that the claims against Progressive fell within the insurance coverage.” However, she concluded that “such an interpretation flies in the face of the underlying assumption that insurance is designed to provide for fortuitous contingent risk”. On the contrary Justice Huddart concluded that Lombard owed a duty to defend.

Let’s be clear that the primary focus of the Supreme Court was not a decision as to whether coverage applied but a decision as to whether Lombard had a duty to defend Progressive. It appears the Supreme Court’s view of what constitutes an accident now goes against what the insurance industry’s real intention is and could indeed include defective workmanship depending on the specific circumstances in each case; also, that Property Damage as defined within the specific General Liability policies reviewed in this case, was not restricted to third party property damage. As the Lombard wordings are similar to other insurers’ wordings and those suggested by the Insurance Bureau of Canada: this could apply in many future cases.

Having determined that Lombard indeed has a duty to defend Progressive Homes, this case will return to trial to determine what is actually covered or excluded in respect to damages. Coverage itself may or may not apply; the key point to this article is that now there is an opening for defective workmanship to trigger a defense under general liability insurance, where it has not done so before.

It was never really the intent of the insurance industry that defective work would ever be considered an “accident” or “accidental” and it was also never intended that defective work would trigger a duty to defend under a general liability policy. The insurance industry has also traditionally intended that the definition of Property Damage was meant to include Third Party property damage only, not the insured’s own property. Now there is an opening depending on the outcome in trial court, that coverage for the insured’s own defective work, might also be covered by general liability insurance depending on the circumstances.

I assume that those in the Canadian insurance industry that draft insurance policy language are now busily reviewing this case and will eventually issue policy language that attempts to clarify the intention of the insurance industry once again. The specific article can be located for review at:

Blaney McMurtry LLP
Lloyd Burns LLP
Supreme Court of Canada
Simon Fenn, CIP
Fenn & Fenn Insurance Practice Inc.

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