BC Supreme Court Again Considers Liability Coverage for Construction Defects: Swagger Staggers But Does Not Fall

It is generally accepted by Canadian and U.S. courts that construction liability insurance does not cover an insured for the cost of correcting deficiencies in its own work. However, the question of coverage for resulting damage to other parts of the insured's work has produced many conflicting judgments. Most of the debate has been over the policy exclusions but recent cases have focused on the initial coverage grant. In 2005, the BC Supreme Court followed this trend in the case of Swagger Construction Ltd. v. ING Insurance. Now, the Court has revisited the issue in its just released judgment in GCAN Insurance Company v. Concord Pacific Group Inc. et al.

The GCAN decision is the latest in a recent string of Canadian judgements on this subject. The history and our previous bulletins on each case are as follows:

• ARG Construction Corp. v. Allstate Insurance Co. of Canada (Ontario High Court of Justice - November, 2004)

  Result: no coverage
  e-bulletin:
  http://www.cwilson.com/insurance/reviews/insrev93.shtml

• Westridge Construction Ltd. v. Zurich Insurance (Saskatchewan Court of Appeal - June, 2005)

  Result: coverage
  e-bulletin:
  http://www.cwilson.com/insurance/reviews/insrev102.shtml

• Swagger Construction Ltd. v. ING Insurance (British Columbia Supreme Court - September, 2005)

  Result: no coverage
  e-bulletin:
  http://www.cwilson.com/insurance/reviews/insrev104.shtml

• Bridgewood Building Corp. v. Lombard General Insurance (Ontario Court of Appeal – April, 2006) (Supreme Court of Canada denies leave to appeal – November, 2006)

  Result: coverage
  e-bulletins:
  http://www.cwilson.com/insurance/reviews/insrev113.shtml
  http://www.cwilson.com/insurance/reviews/insrev123.shtml

• ING Insurance Co. of Canada v. A.M.L. Painting Ltd. (Nova Scotia Court of Appeal – June, 2006)

  Result: coverage

The GCAN judge, Madam Justice Garson, looked at each of these cases but naturally focused on the Swagger judgment, a precedent from her own court. She provided two basic interpretations of the Swagger decision, each a variation on the same theme,

The GCAN case began with two petitions in which a wrap up liability policy insurer sought declarations regarding its obligation to defend the developer, general partner of the developer, a construction manager, land owner and a general contractor in two leaky condo building lawsuits. The insurer relied on the Swagger case, arguing that for insureds whose “work” is the production of an entire project, any construction defects and resulting damage to the project are not accidents within the meaning of the policy coverage grant. The respondents argued the judge should not follow Swagger because it was wrongly decided and, in any event, the facts of that case were different. The respondents said that if she did follow Swagger, the case should apply only to the respondent general contractor and not the others.

Madam Justice Garson noted the law compelled her to follow Swagger unless (a) the Swagger judge failed to consider some binding legal authority, (b) subsequent cases affected the validity of the Swagger judgment, (c) the Swagger judge had not properly analyzed the facts and law due to haste, etc. or (d) the Swagger judgment was clearly wrong. Justice Garson determined that only points (a) and (b) merited detailed analysis.

Justice Garson concluded the Swagger judge had considered all relevant legal authorities and it was irrelevant whether she – Justice Garson - might interpret the authorities differently. She did not admit to having a different interpretation but said it was up to the Court of Appeal to overrule Swagger if that case was wrong.

Regarding subsequent cases, Justice Garson made quick work of the Bridgewood and A.M.L. Painting judgments. In both of those cases, the court found that proper interpretation of the initial coverage grant requires consideration of the policy exclusions. The grant should not be given an interpretation that renders an exclusion redundant or meaningless. This approach undermined the reasoning behind Swagger, where the judge determined he need look no further than the coverage grant itself and then decided the grant precluded a general contractor’s coverage for deficiencies and resulting damage to its project.

Justice Garson did not consider the approach taken in Bridgewood or A.M.L. Painting.. She concluded she need not follow Bridgewood because the policy wording in that case was different and the judges involved did not consider the Swagger case. She did not point out the differences in policy wording or explain their significance. Neither did she say why a case contradicting the reasoning behind Swagger was less influential than one that expressly mentioned Swagger. Regarding A.M.L. Painting, she said only that the case was not binding on her and it was not on point because it concerned a CGL policy rather than a wrap up policy. Again, she did not point out the difference in policy wording or explain its significance.

Justice Garson next considered whether the facts in her case were different from those in Swagger. The respondents said their exclusions were different because they allowed coverage for some resulting damage to the project. These exclusions would be redundant if the coverage grant precluded coverage for any resulting project damage. The judge accepted that finding preliminary coverage under the grant and leaving the ultimate determination to the exclusions would result in a less tortuous interpretation of the policy. However, she ruled that exclusion clause redundancy was not enough to change the clear meaning of words in the coverage grant. Although she did not say so, it appears she found that clarity in the decisions of other judges rather than in her own interpretation of the words. She finished the point by saying she was bound by the Swagger interpretation of the coverage grant.

The respondents had more success in restricting Swagger’s application. The judge concluded the Swagger interpretation of the grant precluded coverage for the general contractor but there was a possibility of coverage for the land owner, developer, the developer’s general partner and the construction manager. The judge saw the logic behind denying coverage to a general contractor as being different and this affected interpretation of the grant. She observed that covering a general contractor for resulting damage to its own work would turn the liability policy into a performance bond. A contractor would have less incentive to do good work if it knew the liability policy would cover defects and resulting damage to the project. However, that rationale was not justified when applied to the others, depending upon their role. Justice Garson reasoned that an owner or developer would desire to have a project completed in a skilful and timely manner and had nothing to gain from a general contractor performing poor work. The judge does not appear to have considered that an owner or developer might benefit from an artificially low contract price backed up by the "repair guarantee" provided by a liability policy.

Also, according to Justice Garson, it could not necessarily be said that the work of the general contractor is the owner or developer’s "own work". The owner or developer many not have actually performed work on the project, an issue that would be determined at trial. Justice Garson said that to deny coverage to the owner/developer when they took no part in the construction of the project is essentially akin to saying the general contractor and the owner/developer are the same parties. Without saying so, Justice Garson implied there should be different liability policy coverage for direct and indirect involvement in producing a construction project. If a party builds or guides construction of a project, the project is the party’s work and the policy grant precludes coverage for defects and resultant damage to the project. However, if a party only contracts to have others build and guide, the project is not the party’s work and the grant does not preclude coverage. With respect, this seems like a distinction without a difference. A general contractor may contract the job of building and guiding to others so why should the general contractor face different coverage considerations than a developer?

In explaining her analysis, Justice Garson used a puzzling analogy. She said the relationship between a general contractor and owner/developer might be analogous to the relationship between a general contractor and subcontractors. She wrote,

The problem with this analogy is that under Swagger and Justice Garson’s ruling in the GCAN case, the general contractor has no coverage for damage caused by a subcontractor although the general contractor maybe liable for it in tort and is certainly liable in contract. The subcontractor may itself be covered by liability insurance but there is no protection for the general contractor. Why, then, is it fair to give coverage to an owner/developer while denying it to a general contractor? Furthermore, Justice Garson does not explain the difference between the work of a construction manager and a general contractor or why different coverage considerations should apply.

In the end result, the Swagger interpretation of the coverage grant remains the law in British Columbia but its application has been restricted to general contractors – at least for the insurer’s duty to defend. Just like the Westridge and Bridgewood judgments, the new restrictions placed on Swagger by the GCAN decision undermine Swagger’s logical underpinnings.

Swagger is weaker but still stands. Parties involved in a similar coverage case are just finishing their arguments in the BC Supreme Court and it will be surprising if that judge does not feel bound by the GCAN result. It seems increasingly likely that the BC Court of Appeal will be addressing these issues in the near future.

If you have any questions about this article or other insurance matters, please contact Glen Boswall (tel: 604-643-3125 e-mail: rgb@cwilson.com) or any other member of the Clark Wilson LLP Insurance Group.