Construction Deficiency Claims & The CGL Policy: Life Before and After A.R.G & Swagger

By Glen Boswall

Published May 2007

Commercial general liability policy ("CGL") coverage for construction deficiency claims is an issue that has long troubled the construction and insurance industries and the judges who decide their disputes. Critics blame the insurers,

For the past fifty years, the insurance industry has endeavoured to eliminate property damage coverage for defective construction from its commercial general liability (CGL) policies. … One would think that after fifty years, the insurance industry would figure out how to "write out" property damage coverage for defective construction – if it were serious about the matter. The problem is the industry has chosen to demonstrate its seriousness by selectively litigating the issue instead of dramatically and unequivocally altering the scope of the CGL policy. The demand in the construction industry for broad property damage coverages – and the premiums collected as a consequence of that demand – drives the insurance industry to offer with one hand what it tries to take away with the other. The mechanism of the CGL policy, however, does not allow for a graceful slight of hand.

and the courts,

[J]udicial decisions in certain jurisdictions continue to fail to recognize the intended scope of the CGL insurance policy in the construction defect context. Even in jurisdictions that correctly acknowledge the existence of insurance coverage for damage caused by inadvertent construction defects, properly drawing the coverage distinctions intended by the policy exclusions is often problematic and leads to divergent outcomes.

Questions concerning the CGL initial coverage grant clauses arose occasionally in the past but until recently the construction deficiency cases have mainly centered on the "work" and "product" exclusions. Judges assumed or found, often without much analysis, that an insured's liability for its own construction deficiencies and resulting damage fell within the grant and the real task lay in determining how much coverage survived the exclusions.

More recently, the focus has shifted back to the initial coverage grant. In the 2004 Ontario case of A.R.G. Construction Corp. v. Allstate Insurance Co. of Canada and three Brirish Columbia cases beginning with the 2005 British Columbia decision in Swagger Construction Ltd. v. ING Insurance Company of Canada et al., several lower court judges ruled the grant provided no coverage to general contractors and developers for construction deficiencies and resulting damage to their projects. However, in the 2005 Saskatchewan case of Westridge Construction Ltd. v. Zurich Insurance Co. and the jointly decided 2006 Ontario cases of Bridgewood Building Corp. (Riverfield) v. Lombard General Insurance Company of Canada and Beige Valley Developments Ltd. v. Lombard General Insurance Company of Canada, the appeal courts have gone the other way, finding coverage under the grant and looking to the exclusions and exceptions to determine the ultimate result.

This paper will address the decisions and the rationale that led us to this point. We begin with a crash course on the purpose of the CGL and its structure followed by a quick review of judge made rules for interpreting insurance policies and proving coverage. We next examine the evolution of the CGL and look at the state of the law before and after the A.R.G., Swagger, Westridge, and Bridgewood/Beige Valley cases. Finally, we try to predict what lays ahead.

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