CGL Policies: Contractor Entitlement to Defence Costs Expands

This post was written prior to our January 2017 merger, under our previous firm name, Aikins, MacAulay & Thorvaldson LLP.

Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada is a 2010 decision of the Supreme Court of Canada that may be of interest if you are a contractor.

Several buildings constructed by Progressive sustained significant water damage resulting in rot, infestation and deterioration. Progressive was sued for alleged construction deficiencies. Over the relevant period Progressive had a series of Comprehensive General Liability (CGL) policies in place with Lombard that obliged Lombard to defend and indemnify Progressive against liability arising out of property damage caused by accident. Progressive presented the claims for defence. Lombard took the position the claims were not covered and refused. Progressive applied for an order requiring Lombard to defend the claims.  At trial and on appeal, the lower courts agreed with Lombard that the claims were not covered. On further appeal, the SCC overturned the decisions of the lower courts and held that Lombard was obliged to defend the claims against Progressive.

The issue at hand was whether the language of the CGL insuring agreement and “work performed” exclusion had effectively removed from coverage an area of business risk represented in this series of claims against Progressive.

Lombard advanced four (4) arguments:

1. That “property damage” under the CGL did not include damage to the work done by the insured, Progressive. Covering only damage to property owned by a third party served the general principle that poor workmanship by the insured that impaired the value of the project was a business risk to be absorbed by the general contractor and not a fortuitous loss to be responded to by its CGL insurer.

The Court rejected Lombard’s position on the basis that it required reading into the policy definition of “property damage” an unexpressed special limitation that “property damage” included only third party property.

2. That a claim alleging the insured’s product is defective by reason of poor workmanship or substandard materials is not a claim alleging “property damage” in the sense intended by the CGL insuring agreement.

The Court expressed doubt as to the correctness of earlier decisions to this effect and held that whether a claim alleging construction deficiencies is a claim of “property damage” for purposes of a CGL policy is a fact sensitive question to be resolved in each case based on evidence at a trial. It was therefore possible the policy might be required to indemnify Progressive and, accordingly, the duty to defend was triggered.

3. That the CGL coverage requires an “accident” and the construction of a building in a defective manner produces a defective building, not an “accident”.   Lombard argued that equating a defective product with an accident would have the effect of converting the CGL into a performance bond.

The Court disagreed. The policies defined an “accident” as the result of an event neither expected nor intended from the standpoint of the insured – nothing more. The Court held that whether defective workmanship might be an accident was another fact specific determination to be made based on evidence at a trial. It was therefore possible the policy might be required to indemnify Progressive and the duty to defend the claims was triggered.

4. That the “work performed” exclusion in each policy applied to the facts of the construction deficiency claims against Progressive.

The Court rejected Lombard’s argument. The CGL policies included three different versions of the “work performed” exclusion relevant to the time periods over which the losses had occurred. In each case the Court held that giving effect to the clear language of each version of the “work performed” exclusion it was possible that the policy might be required to indemnify the insured. Accordingly, the duty to defend Progressive against each of the claims was triggered.

The result in the Progressive Homes SCC decision is significant for at least three reasons.

  1. It is the latest in a line of decisions that emphasize the importance of giving effect to the words used in the policy, and to avoid the temptation to read into the language words that are not there – whether to the benefit of the insured or the insurer.
  2. It is the most recent expression of a now well accepted principle that an insured is entitled to a defence if on a reasonable construction of the allegations it is possible the policy may be required to indemnify the insured.
  3. Finally, and perhaps most interestingly, it is a decision that may assist a general contractor sued for deficient construction to convince its CGL insurer to commit to the payment of investigation and defence costs, at minimum, in circumstances where CGL insurers have historically declined participation on the basis that such claims represented an area of uninsured business risk.

This article was originally published in Upword,  Quarter 3 Edition 2012 issue.

Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.

Daryl J. Rosin practises in the areas of  insurance litigation including policy interpretation in both first party and casualty claims. Reach him at (204) 957.4665.