June 27, 2009
Insurer victorious in latest liability coverage battle
Do you find the scope of coverage under your general liability policy confusing?
If you do, you’re not alone.
Courts in Canada have struggled for years to pin down exactly what coverage is provided by these policies on construction projects.
Most recently, the courts again addressed the tricky issue of what coverage general liability policies provide for defects in construction that cause damage to the completed project.
In Progressive Homes v. Lombard General Insurance Company of Canada, Progressive was the target of BC Housing in several actions involving social housing projects which had been built by Progressive and financed by BC Housing.
It was alleged in these actions that the projects contained numerous defects with respect to the roof and walls, which had led to severe water ingress damage.
Lombard, Progressive’s insurer, denied Progressive’s claim for coverage for these actions pursuant to its general liability policy with Lombard.
At trial, and then in the Court of Appeal, Progressive argued that the defects alleged in the action constituted “property damage” within the meaning of that term in the policy and that as they were caused by an “occurrence” they should trigger coverage under the Lombard policy.
The Court of Appeal disagreed, finding that the general liability policy only protects against “fortuitous risk” and the inevitable result of alleged poor workmanship does not fall within that category.
In addition, the court found that there was no coverage for the faulty work of a subcontractor, which occurred during construction, on the theory that the general contractor had an opportunity to check and ensure such faulty work was rectified during construction.
The only occurrence that would be covered were latent defects, which could not have reasonably been discovered during construction and which caused damage after the project was completed. That latter finding was of no assistance to Progressive, because the court also determined that the alleged problem with the projects was that they were defective “as built”, and so there was no applicable “after completion” coverage.
The finding of the court in this decision is not particularly surprising – courts have traditionally determined that contractors’ liability policies do not cover workmanship-related defects in structures or other projects constructed by a contractor and its trades.
However, courts had been reluctant to rule out coverage completely until such time as a matter had gone to trial and factual findings had been made by a judge, as to the nature and type of damage that had occurred.
Courts therefore would order the insurer to pay the legal and other defence costs of the insured until the precise nature of the damage was determined at trial.
Since most cases settle, this approach had left insurers carrying the brunt of the cost of lawsuits that are very likely not within the coverage of the policies.
The Progressive decision suggests that courts may be adjusting their approach and will be less inclined to order that an insurer pay for defence costs in circumstances where it is reasonably clear that the facts do not support coverage.
Norm Streu is chief operating officer of the LMS Reinforcing Steel Group and former chair of the Vancouver Regional Construction Association. Chris Hirst is a partner and the leader of the Construction & Engineering Group, Alexander Holburn Beaudin & Lang LLP. This article was prepared with the assistance of Thea Hoogstraten, articled student.
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