May 6, 2011
Progressive Homes Inc. v. Lombard General Insurance Company of Canada and Bulldog Bag Ltd. v. AXA Pacific Insurance Company
The recent decision by the Supreme Court of Canada (per: Rothstein, J.) in Progressive Homes Inc. v. Lombard General Insurance Company of Canada has given Commercial General Liability insurers pause to consider just how broad their liabilities really are. It was traditionally believed that such policies only extended to damage which was an unintended result of a CGL insured’s principal work. Recent pronouncements by the Courts have indicated, however, that CGL policies cover much more.
With apparently greater frequency, the Courts are effectively holding that a CGL insured’s own work is insured as well. CGL insurers are thus finding themselves liable for what appear to be contractual breaches as between their insureds and their insureds’ customers.
At issue in Progressive Homes was a claim brought by an owner against a general construction contractor for what was alleged to have been shoddy workmanship. The structures in question were public housing complexes, which the contractor had built for the British Columbia government. It was eventually discovered that eEach the complexes was eventually discovered to have suffered from significant water incursion around window flashings and through exterior claddings. The shoddy workmanship was alleged to have caused significant rot, infestation and other deterioration which that effectively rendered the complexes uninhabitable.
The owner commenced legal action against the contractor alleging both negligence and breach of contract in the construction of the complexes. A veritable litany of acts was pleaded against the contractor in both negligence and in breach of contract.
Rothstein, J. went on to consider the nature of the CGL insurance policies that the contractor held at the relevant times. The seminal finding with respect to all such policies is that they covered the contractor for damages which it “shall become legally obligated to pay… because of property damage caused by accident.”
Property damage was defined as physical injury to or the destruction of tangible property “caused by accident”. Accident was then in turn defined as “conditions which result in property damage neither expected nor intended [by the] Insured.”
Regardless of all these definitions, there was also a broad exclusionary clause thatwhich applied to all losses arising out of the contractor’s own work – sometimes referred to as the “work performed” exclusion.
In finding in favour of the contractor, Rothstein, J. appeared to rely on some of the more basic principles by which policies are interpreted. From there, the analysis undertaken by Rothstein, J. focussed on the meaning of “property damage” and “accident”.
Relying on prior Supreme Court of Canada decisions, the CGL insurer argued that the contractor’s claims were not covered by the subject policies because they all included or were related to components of the very structures which that were the contractor’s responsibility in the first place. In other words, the CGL insurer argued that the contractor had not insured itself against its own incompetence.
Rothstein, J. did not accept this argument and held that defective property could be property damage in an appropriate case.
In arriving at that conclusion, Rothstein, J. took a somewhat novel and, I dare say, strained view of what is normally considered to be “property damage”. Terms employed in the owner’s pleadings: “deterioration”, “poor installation practices”, “improper construction”, “inadequate ventilation” and others were all held by Rothstein, J. to be capable of falling into the broad concept of “property damage”.
Despite this wide view of what of might constitute property damage, the same would still have to be found as having resulted from “accident” – or “an accident” – in order to be covered by the applicable CGL policies. In that regard, the CGL insurer argued that it never intended that CGL policies would be akin to performance bonds and thus should not carry the same overall benefits from an owner’s perspective.
Rothstein, J. did not find this argument compelling either. Rather, it was heldmaintained that whether or not defective construction is an accident is dependent upon the evidence in any given case. Thus, it cannot be said that defective construction is never an accident. That is because of what was termed as the Court’s “core understanding” that an accident is “an unlooked-for mishap or an untoward event which is not expected or designed” .
Rothstein, J. went on to hold that the term “accident” need not be given any special meaning beyond that set out in the CGL policies in issue. The term “accident” could apply to any damage resulting from an “event” neither expected nor intended by an insured. Such an event need not be sudden to be unexpected or not intended. Rather, such an event could be the accumulation of circumstances arising from any continuous exposure to conditions resulting in damage (such as the chronic leaking thatwhich had so badly damaged the Housing Management Commission’s structures).
Rothstein, J. then turned to consider whether or not the CGL insurer could benefit from the so-called “work performed” exclusions in the subject policies. On the application of basic interpretive principles, the Learned Justice held that it was not clear and unambiguous that the “work performed” exclusion in the policies was broad enough to cover both the insured’s own work and the work which had been undertaken for it by its subcontractors. Additionally, Rothstein, J. held that the only reason for the insured to have purchased the policies it did was to have the benefit of extended or enhanced CGL insurance coverage, particularly for the work which was completed for it by its subcontractors. It was thus held that to apply the basic CGL policy as urged by the insurer would be at odds with the parties’ reasonable expectations at the time the policies were sold.
BULLDOG BAG LTD. V. AXA PACIFIC INSURANCE COMPANY
Progressive Homes has just been applied in Bulldog Bag Ltd. v. AXA Pacific Insurance Company , a decision of the British Columbia Court of Appeal (per: Newbury, J.A.) handed down on April 12, 2011. The issue in Bulldog Bag was the proper definition to be given to an event or incident to trigger a duty to indemnify under a CGL policy.
Bulldog Bag was a commercial packaging manufacturer that had manufactured a very large number of plastic bags for one of its customers, Sure-Gro Inc. Sure-Gro manufactured gardening products for consumer use including packaged topsoil and manure. Sure-Gro routinely supplied its products through large retail outlets such as Canadian Tire.
After Bulldog Bag supplied some 1.2 million bags to Sure-Gro, a significant defect was noted. The ink on the bags was fading, became illegible and was “bleeding” into the Sure-Gro products, which had already been bagged.
As a result of the defective bags, Sure-Gro had to undertake an extensive “salvage operation” costing $750,000. It included physically opening each bag that was filled prior to the defect appearing, discarding defective bags, loss of about 10 per cent of the bagged materials, and re-bagging the materials once proper replacement bags had been supplied by Bulldog Bag.
Bulldog Bag settled with Sure-Gro and presented a claim to AXA Pacific, its CGL insurer. AXA Pacific denied coverage essentially on the basis that Sure-Gro’s claim had not resulted from property damage but from Bulldog Bag’s own work, which had been defective.
A trial decision handed down before Progressive Homes was decided agreed with AXA Pacific, and Bulldog Bag’s claims were dismissed. On appeal, the British Columbia Court of Appeal held that Progressive Homes had completely undercut AXA Pacific’s defences and it was held to be liable to Bulldog Bag for the settlement with Sure-Gro.
Newbury, J.A. rejected AXA Pacific’s interpretation of the policy as too wide. AXA argued that Sure-Gro’s losses, stemming from the opening and emptying of Bulldog Bag’s defective bags and the sorting, re-packing and related loss of its products, were excluded damages. Rather, on the strength of Progressive Homes, the British Columbia Court of Appeal held that Bulldog Bag’s claim for indemnification was based solely on damage to Sure-Gro products caused by the defects in Bulldog Bag’s bags. The resulting damage was covered under the applicable CGL policy.
CONCLUSIONS AND COMMENTARY
Progressive Homes is a practical recognition by the Supreme Court of Canada that construction contractors and sellers of other goods and services purchase CGL insurance on the broad expectation that they will be covered for claims arising, in part, out of defective construction. Against that backdrop, the Supreme Court of Canada has now made it clear that CGL insurers will not be permitted to parse their coverage obligations into oblivion except in circumstances where their policy wordings lead to absolutely no other sustainable conclusion. Bulldog Bag appears to reinforce that high bar for insurers seeking to avoid indemnity obligations on similar grounds.
Given the decision in Progressive Homes, CGL insurers must pay careful attention to the framing of both coverage and related exclusions in their policies. As Rothstein, J. has noted, it really only takes the right wording of the claims alleged on the part of a claimant to trigger at least the duty to defend. Also, as Newbury, J.A. has made clear, the reasonable expectations of insured’s are sure to gain precedence except where coverage exclusions are stated in the clearest of terms.
* Gavin Giles, Q.C. is a litigation partner in McInnes Cooper’s Halifax, Nova Scotia office. His widely varied practice includes the prosecution and defence of corporate, commercial financial, construction, products liability, maritime installations, personal injury and motor vehicle claims. In addition, he has served as an Adjudicator of the Small Claims Court of Nova Scotia since 1994, as the Court’s first Chief Adjudicator (appointed in 2001) and as a mediator and arbitrator. He is grateful for the assistance of his partner, Charles J. Ford in the production of this article.Gavin Giles, Q.C. is a litigation partner in McInnes Cooper’s Halifax, Nova Scotia office. His widely varied practice includes the prosecution and defence of corporate, commercial financial, construction, products liability, personal injury and motor vehicle claims. In addition, he has served as an Adjudicator of the Small Claims Court of Nova Scotia since 1994 and was appointed as the Court’s first Chief Adjudicator in 2001. He is grateful for the assistance of his colleagues, Ian Dunbar and Wendy Johnston, Q.C., in the production of this article. For more information on this article, please contact Gavin Giles, Q.C. at [email protected]
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