Construction Deficiency Denial Upheld: A Win for the Insurance Industry

On November 3, 2004, the Ontario Superior Court came out with a decision which will gladden the hearts of insurers (particularly in British Columbia) who insure contractors of the type generally named as defendant s in leaky condo actions.

In ARG. Construction Corp. v. Allstate Insurance Co. of Canada, a contractor known as ARG Group was sued in a construction deficiency action. Its insurer denied the claim outright, and the insured third partied them into the main action, claiming a duty to defend.

The Court began by setting out some general principles governing the onus of proof in a coverage case, and discussed the factors giving rise to a duty to defend, as established by several cases from the Supreme Court of Canada over the last several years. In summary, if the pleadings allege facts which, if true, might require the insurer to indemnify the insured for the claim, then the insurer is obliged to provide a defence. The actual truth of the allegations is of no consequence, and the widest latitude must be given to the allegations in the pleadings in determining whether or not they raise a claim within the policy. The insured asked that its Statement of Defence be considered, but the Court rejected this suggestion, holding that to do so would invite a consideration of the merits of the claim, which is precluded in an inquiry of this nature.

The Statement of Claim in ARG contained the usual allegations of defects and deficiencies, which were alleged to have arisen as a result of the insured’s negligence or breach of contract. As noted, ARG’s insurer denied the claim at the outset, but the insured had convinced the Plaintiff to amend the Statement of Claim to specifically allege “property… damaged as a result of … accidents” (language which tracked the wording of the insurance contract). The insurers alleged that this manipulation of the pleadings was done to trigger the coverage contained in it’s policy, which covered “compensatory damages because of property damage caused by accident.” On this issue, the Court held that although the conduct of the Plaintiff was manipulative, the manipulation was of no consequence, as the Court is required to determine the true nature of the claim regardless of the language used.

The Court reviewed the various policy provisions, all of which were standard form wordings, and noted that a liability policy is not a performance bond, and that to allow an insured to be indemnified for the cost of remediation of its own flawed work is contrary to public policy. They considered the Ontario Court of Appeal’s 2003 decision in Celestica Inc. v. ACE INA Insurance, where and insured’s defective workmanship had resulted in notional damage to a third party, and the Court of Appeal held that the event that triggered the notional damage, namely faulty workmanship, did not constitute an occurrence or accident within the meaning of the insurance policy at issue in that case.

In the ARG case, the Court held that the true nature of the bulk of the claim was in the repair of various elements of the building because of faulty workmanship by the insured or its contractors. According to the insurance policy, such claims were not accidents and were therefore not covered, and consequently, there was no duty to defend. The insured also raised the issue of damage to third parties for the loss of use of tangible property, leakage in tenant premises and vehicles belonging to occupants of the parking garage, but the Court held that the first two items were caused not by an accident but by faulty workmanship, and thus no coverage existed. With respect to the vehicles, the Court stated that there would have been coverage if particulars had been provided.

Finally, the Court set out several other exclusions that would operate to deny the insured coverage in the event that the decision was wrong in respect of the coverage provisions.

The ARG decision is one which could have a profound effect on leaky condominium litigation presently underway in British Columbia. Many of the arguments considered in that case are routinely raised by coverage counsel in leaky condo claims, but to date, none have been tested by the BC Courts. Naturally each policy will have to be considered on a case by case basis. However, the language contained in the Citadel policy is fairly standard, and as a result, this case might be used in the future by BC insurers to deny claims, with minimal risk in terms of bad faith allegations on the part of the insured.

A copy of the ARG decision can be found on the Ontario Superior Court’s database.

Readers with any questions about the ARG case, or about coverage issues generally, are invited to contact Jonathan Hodes at jlh@cwilson.com or 604-643-3168 (direct dial) or Nigel Kent at npk@cwilson.com or 604-643-3135 (direct dial).