Law Times

Law Times • January 10, 2011 FOCUS PAGE 11 defend a claim in which prop- erty damage was the result of defective workmanship, a point on which judges in British Co- lumbia and Ontario had devel- oped two conflicting lines of precedent. The decision in Progressive Homes Ltd. v. Lombard Gen- eral Insurance Co. of Canada, delivered on Sept. 23 by Jus- tice Marshall Rothstein for a unanimous bench, arose out of the leaky condo crisis in British Columbia. Thousands of multi- family dwellings suffered build- ing envelope failure when new construction techniques re- sulted in walls that were sealed so well that no air was allowed into them. When water was sucked into the walls, it didn't evaporate and started to rot the wood-frame construction. In order to repair the problem, the walls had to be opened up, the rotten wood replaced, and the building reclad. The result was costs in the vicinity of $30,000 per household. Christopher Rhone of Branch MacMaster LLP in Vancouver says the plethora of badly con- structed buildings has generated a "staggering amount" of litiga- tion. "The residue is still with us for badly constructed cases. I go to mediation three times a month in respect to these strata corporations. As a result, the courts have dealt with these problems more extensively in B.C. than anywhere else." The Progressive Homes case in- volved a succession of occurrence policies that required Lombard to defend and indemnify Pro- gressive Homes when it was le- gally obligated to pay damages caused by an occurrence or acci- dent. The definition of accident included continuous or repeated exposure to conditions result- ing in property damage neither expected nor intended from the standpoint of the insured. Progressive Homes was hired as a general contractor to build several housing complexes. After completion, four actions were ini- tiated against it claiming breach of contract and negligence. Ac- cording to the allegations, signifi- cant water damage had caused rot, infestation, and deterioration to all four buildings. Lombard initially defended the claims but later withdrew while maintaining it had no duty to do so because the dam- ages weren't covered under the insurance policies. The with- drawal was largely a result of a prior B.C. Supreme Court decision, Swagger Construction Ltd. v. ING Insurance Co. of Canada, that found that defec- tive workmanship isn't consid- ered to be an accident and that property damage is limited to third-party damage. "Before the decision in Swag- ger, the insurers of developers Progressive Homes clarifies question of duty to defend T BY JUDY VAN RHIJN For Law Times he Supreme Court has recently scrutinized the duty of an insurer to and general contractors were all defending these claims," Rhone says. "They would take a denial position, and if that was suc- cessful, it was never appealed. After Swagger, they refused to defend." Progressive Homes then brought an application for a declaration that Lombard had a duty to defend the four ac- tions. That matter also opened up the issue of whether an ex- clusion for work performed by the insured and damage arising from it include work completed by subcontractors. Justice Bruce Cohen fol- lowed a line of authority, most recently the Swagger decision, that upheld the proposition that defective construction isn't an accident unless it causes dam- age to the property of a third party. Thomas Donnelly of Thomas Gold Pettingill LLP in Toronto calls this an "unwritten requirement" that courts have added to insurance policies. "For many years, the cases have added this requirement that it must be property damage to someone else's property." At that point, the decision of Bridgewood Building Corp. (Riverfield) v. Lombard General Insurance Co. of Canada was handed down involving the same insurance company and the same policy and wording as the Progressive Homes case. Un- like the B.C. cases in which the entire building envelope was defective, the Bridgewood mat- ter involved defective founda- tions that affected the rest of the building. Lombard submitted that it's settled in law that com- mercial general liability policies aren't intended to cover repair or replacement costs arising out of an insured's own defective work or product and that the words in the coverage clause "to which this insurance applies" incorpo- rate that general principle. Ontario Court of Appeal Justice Michael Moldaver re- sponded by saying that ap- proach was problematic because it defies basic principles of con- tract interpretation; it asks the court to construe ambiguities in an insurance policy against the insured; and it ignores the his- torical evolution of clauses that were included for the express purpose of bringing claims aris- ing out of faulty work by sub- contractors back into coverage and the reasonable expectation of the parties flowing from them. As a result, the appeal court said there was coverage. Don- nelly, who represented the re- spondent developers, notes that after that decision, the case law was then clearly divided. "B.C. was finding in favour of insur- ers. Ontario was finding in fa- vour of policyholders. There were different facts, but I don't think it makes a difference in the law. It turned on the clear wording of the policy." When the Progressive Homes case went to the B.C. Court of Appeal, it decided not to follow Bridgewood. Justice Catherine Untitled-3 1www.lawtimesnews.com 4/14/09 9:00:22 AM Anne Ryan, writing for the ma- jority, accepted that the duty to defend must be resolved on the wording of the policy. She accepted that the plain mean- ing of the insuring provisions could support the conclusion that the claims against Pro- gressive Homes 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 contin- gent risk." In her view, damage resulting from faulty workman- ship couldn't be considered for- tuitous. Ryan also examined the "work performed" exclusion contained in the contracts. She accepted that in some circum- stances, work done by a subcon- tractor could be covered by the policies but only if the damage was caused by a distinct item in- stalled by a subcontractor. The ruling left several issues for the Supreme Court to grap- ple with. Donnelly thinks the unique aspect of its decision is the finding that faulty work can be accidental according to the plain meaning prescribed to it in the policies that should apply 'Insurers will be looking at these cases more carefully and reconsidering prior refusals,' says Thomas Donnelly. when an event causes property damage neither expected nor intended by the insured. It also found that the plain and ordi- nary meaning of property dam- age in this case wasn't limited to damage to third-party prop- erty. "General principles of tort law are no substitute for the lan- guage of the policy," Rothstein wrote. "I see no limitation to third-party property in the defi- nition of 'property damage.'" As for the exclusion for damage from a builder's own workmanship, Rothstein said: "When an event is unlooked for, unexpected or not intended by the insured, it is fortuitous. . . . The plain language is un- ambiguous and only excludes damage caused by Progressive to its own completed work. It does not exclude property damage: that is caused by the subcontractor's work; to the subcontractor's work, regard- less of whether the damage is caused by the subcontractor it- self, another subcontractor, or the insured." Ultimately, the Supreme Court found that the duty to defend was triggered. The effect of the decision in B.C. is to take the law back to the position before Swagger. "It's fair to say it preferred the Ontario analysis over the B.C. analysis," Rhone concedes. "All of the general contractors' claims are now being defended." Donnelly considers the ruling to be significant in Ontario, too. "There were two competing lines of authority and uncertainty as to which way the Supreme Court would go. This decision settles the law. Insurers will be looking at these cases more carefully and reconsidering prior refusals." LT Unmasking the mystery. Medical malpractice litigation is one of the most difficult and challenging areas of law. At Thomson, Rogers we enjoy a reputation built on experience and skill in prosecuting these claims. Above all else, our greatest asset is a proven record of success. Contact our Medical Malpractice Litigation Group: Denny Dixon, Richard Halpern, Wendy Moore Johns, Sloan Mandel or Aleks Mladenovic. 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