The British Columbia Court of Appeal has delivered the long awaited reasons from the appeal of Progressive Homes Limited v. Lombard General Insurance Company of Canada to determine whether the general contractor should be afforded coverage for damage to a leaky building. The three member bench was split two to one in favour of the insurer, and held that the general contractor, in the circumstances, should not be covered for the defence of the claims in a leaky condo action. The following is a brief summary of that decision.
The central issue in the Progressive case was the effect of the exclusion clause language in the CGL policy. The policy included an exception clause that specified that the policy should not cover work performed by or on behalf of the Named Insured. This has been interpreted to mean that a general contractor was not only excluded for coverage for its own “work performed” but was also excluded for coverage for “work performed” by its subcontractors.
However, Progressive had also purchased a Broad Form Property damage endorsement, to expand coverage after completion of the project. This Broad Form Property damage endorsement modified the previous exclusion language to say only that the policy would not cover work performed by the Named Insured.
In other words, it would appear (as argued) that the Broad Form Property damage endorsement sought to limit the exclusion in order to permit coverage for work completed by subcontractors.
The Court was split on how to interpret this language. Madam Justice Ryan writing for the majority held that the exception language was not sufficiently clear to overcome the implied assumption that insurance is designed to transfer fortuitous contingent risk.
Madam Justice Ryan interpreted the policy by considering the intentions of the parties when entering into the insurance agreement. She explained that for interpretation purposes it is important to keep in mind the underlying economic rationale for insurance. She goes on to find that there is an underlying assumption that insurance is designed to provide for fortuitous underlying risk. Although she does not specify what constitutes a fortuitous risk, she says that the expected consequence of poor workmanship can hardly be classified as fortuitous. She then reviewed the pleadings and determined that water damage caused by defective workmanship does not constitute a fortuitous risk. The claim as pleaded was that the building components had not functioned properly. She therefore finds that the policy does not cover the claim, as pleaded, without relying on the exception clauses.
Madam Justice Ryan then deals with the apparent ambiguity in the exception clause language. She finds that the first exclusion clause operates to exclude coverage for damage to other parts of the building caused by a true fortuitous risk, such as a faulty boiler that explodes, if it was installed by the insured or a subcontractor and the explosion occurs during construction. The Broad Form Property endorsement, on the other hand, is designed to cover the project once the project is complete. So the exclusion would not exclude fortuitous risks, such as a post completion boiler explosion, installed by a subtrade. She says that this makes some commercial sense, because the general contractor has the ability to observe the work of the subcontractor and to check for obvious problems during construction, but the general contractor cannot be expected to find latent defects which can cause damage after the work is completed. She was therefore satisfied that the exclusion clauses did not conflict with the proper interpretation of the policy. One might question the rationale of this interpretation. Does it make sense that a general contractor is in a better position to prevent a boiler explosion caused by the defective workmanship of its subcontractor simply because the explosion occurred during construction?
In a dissenting opinion, Madam Justice Huddard determined that defence coverage should be afforded. Madam Justice Huddard first began with the principle that the insurance policy must be interpreted in reference to the entire agreement. The exclusion clause therefore must be interpreted in a way that gives meaning to the entire policy. If the policy specifically excludes coverage to work performed “on behalf of the insured” and then that language is modified to delete the words “on behalf of the insured”, the only reasonable meaning that can be attributed to that modification is that the parties intended there to be coverage for subcontractors (work performed “on behalf of the insured”). In this respect, the Court was persuaded by the Ontario Court of Appeal decision of Bridgewood Building Corp (Roverfield) v. Lombard General Insurance Company of Canada (2006), 266 D.L.R. (4th) 182 79 O.R. 93d) 494 (CA), which came to the same interpretation when interpreting a policy with similar wording that included a Broad Form modification of the exclusion cause.
In dissent, Madam Justice Huddard held that in reading the policy as a whole, one had to find that the intentions of the parties were to insure for property damage resulting from the work product of subcontractors and the insurer should defend the claim until it can be determined what work was performed by Progressive and what work was performed by its subcontractors.
What we now have is a non-unanimous Court of Appeal decision in British Columbia where a three member panel of the Court of Appeal held two to one in favour of there being no defence coverage to a general contractor for a subcontractor’s work, whereas in Ontario, the Court of Appeal came to the exact opposite result. This makes the decision a reasonable candidate for an appeal to the Supreme Court of Canada to ensure uniformity of insurance coverage across Canada. It remains to be seen whether Progressive Homes will in fact pursue an appeal to the Supreme Court of Canada.
Written by former associate, David Plunkett.
