On September 23, 2010, the Supreme Court of Canada released its decision in the matter of Progressive Homes Ltd. versus Lombard General Insurance Company of Canada. In its unanimous 9-0 reversal of the decision rendered by British Columbia Court of Appeal, the Supreme Court has potentially impacted the way Commercial General Liability policies ("CGL policies") will be interpreted and has reconciled disparate decisions at the provincial appellate levels on the issue of an insurer's duty to defend in cases of defective workmanship under CGL policies. Given the particular fact situation of the case, the Court was also called upon to rule on the issue of whether CGL policies are meant to or, in any case, whether they can, compel an insurer to defend an insured where the defective workmanship being claimed arises out of the insured's "own work". The state of the law in this area was thought to be settled in that it was widely understood that CGL policies were not intended to defend or provide coverage to an insured for defects in their own work but this decision casts some doubt upon that general proposition.
At the core of the Supreme Court's decision were two important pillars: the wording of the policy and whether the pleadings in the court action by Progressive Homes could trigger a possibility of coverage. The CGL policies in this case provided coverage for "Property Damage", specifically providing that Lombard was "to pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as damages because of property damage caused by accident." "Property Damage" was defined in the CGL policies as (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 or destroyed provided such loss of use is caused by an accident occurring during the policy period. By relying mainly on what it found to be the clear language of the Lombard policies (and thereby avoiding the need to consider any subsequent cascading principles of insurance policy interpretation), the Supreme Court found that "Property Damage" was not limited to third-party property given that, simply, its definition in the policies was not restricted to such property. The Court also opened the door to considering defective property to be "Property Damage".
Next in the determination of the issue of the duty to defend was the issue of "accident" or "occurrence" leading to "Property Damage". Distancing itself from the notion of insurance being meant to "provide for fortuitous contingent risk" as found by the B.C. Court of Appeal, the Supreme Court interpreted "Accident", again, according to the clear wording of the policy. "Accident" was defined as including "continuous or repeated exposure to conditions which result in property damage neither expected nor intended from the standpoint of the insured." The Court found that this did not necessarily exclude defective or faulty workmanship as this was contemplated within the definition of "Accident". Specifically, the damage resulting from the defective workmanship was not expected nor intended by the insured and Lombard's argument that faulty workmanship is never an accident was refused. Having found that defective workmanship could be considered "Property Damage" and also an "Accident" (or "Occurrence"), the door to coverage was open. Then came a look at the exclusions. As mentioned above, the interpretation of the provisions in the policy by the Supreme Court, with a particular emphasis on the definitions, was paramount. Of particular importance, the definitions of "property damage" and "accident" (or "occurrence") were scrutinized in the Court's determination of whether Lombard owed a duty to defend its insured. In order to trigger a duty to defend, there must be at least a mere possibility that the claim, if proven, will fall within the grant of coverage in the policy. The obligation to indemnify is not required; only the possibility of an obligation to indemnify. In its determination of the obligations, the Court also applied the principles commonly applied to insurance policies. The leading principle of insurance policy interpretation was adopted: when the language is unambiguous, the court should give effect to clear language, reading the contract as a whole.
The "Work Performed" exclusion was scrutinized by the Supreme Court. As the definition of this exclusion varied from one Lombard policy to the next, a very close look was given to this exclusion for each of the successive applicable Lombard CGL policies and the Court found that none of the exclusions applied. Therefore, there was a duty for Lombard to defend Progressive Homes. The principles of interpretation were applied to the exclusions and were, in every case, interpreted against Lombard.
It should be noted, however, that rather than opening the flood gates completely, the Supreme Court seems to have controlled the potential wide-ranging implications of its decision. For instance, it has given careful consideration to the specific allegations contained in the pleadings of the case. The Court also scrutinized the specific wording of the CGL policies, suggesting that a very different outcome might be reached in another case with other CGL policies.
That being said, since an insured's duty to defend is tied (even if only tenuously) to the duty to indemnify, one cannot help but wonder whether the scope of coverage under CGL policies has now effectively been broadened. A clear distinction has been drawn, however, between the duty to defend and the duty to indemnify by the Court's statement that the issue of whether there is "Property Damage" is still a matter to be determined on the evidence at trial. Insurers might, therefore, maintain their position that they are not responsible to indemnify but, with the Court's decision, they would be hard-pressed to argue they don't have an obligation to provide a defence.
There is no doubt that the decision of the Supreme Court will affect or has the potential to affect the landscape in commercial general liability. The Supreme Court found, in this case, that there is possibility of insurance coverage (under a CGL) for defects in an insured's own work. The Court also found there is clearly the possibility of coverage for resulting damage. If there are any conclusions to be drawn following the release of this decision, they are that the (1) the wording of the applicable CGL policy is key in determining the possibility of coverage and consequently, an insurer's duty to defend and (2) the nature and extent of the claims made in a court pleadings in an action against a contractor or subcontractor will be of utmost importance in triggering an insurer's duty to defend under a CGL policy. They will also be highly suggestive of the extent of an insurer's obligation to indemnify its insured.
These are extremely important considerations any time a condominium corporation contemplates a possible claim against a builder or contractor.