The Supreme Court of Canada has just issued a significant and comprehensive judgment on CGL coverage for construction deficiencies and resulting damage. In Progressive Homes Ltd. v. Lombard General Insurance Company of Canada, the SCC reversed the BC Court of Appeal and ruled that claims for physical damage to a building resulting from construction deficiencies in the project were covered by a typical CGL policy to the extent that the insurer’s duty to defend such claims was triggered. The key rulings in the decision are:
- the plain language of the “property damage” definition includes any tangible property (including the insured’s own work) and is not restricted to the property of third parties;
- the complex structure theory has been revived for coverage purposes, meaning a building (or other structure) can be divided into different components and one defective component can cause (insured) “property damage” to other components of the same building;
- construction deficiencies themselves – even aside from any resulting damage – may fall within the meaning of “property damage”;
- it is simply not correct to say defective workmanship is not an “accident” within the meaning of the CGL insuring agreement;
- treating defective workmanship as an accident does not offend any principle that liability insurance covers only fortuitous risks and it does not turn the CGL policy into a performance bond;
- an exclusion that removes coverage only for damage to “work performed by the Named Insured” does not eliminate coverage for the work of subcontractors;
- an exclusion for “work performed by or on behalf of the Named Insured” eliminates coverage for the work of subcontractors but that coverage can be returned by any subcontractor exception in the exclusion; and
- an exclusion for “property damage to that particular part of your work” expressly contemplates the division of the insured’s work into its component parts and removes coverage only for the defective item and not any resulting damage.
The Progressive decision is the last in a six-year long string of cases on this subject beginning with the 2004 Ontario High Court of Justice decision in ARG Construction Corp. v. Allstate and the BC Supreme Court ruling the following year in Swagger Construction Ltd. v. ING. Until ARG and Swagger, it was generally accepted by Canadian courts that liability for construction defects and resulting project damage was covered by the CGL insuring agreement and the real task lay in determining how much coverage survived the exclusions. The lower courts in ARG and Swagger changed all that, ruling that damage to an insured’s construction project resulting from defects in the project did not constitute “property damage” or an “occurrence” (i.e. an accident) within the meaning of the CGL insuring agreement. There was no need to consider the “work” exclusion or the “subcontractor” exception to that exclusion.
The Ontario courts subsequently returned to the pre-ARG approach while Saskatchewan and Nova Scotia also issued decisions confirming the pre-ARG approach. The BC courts, however, continued to support the ARG and Swagger view with the 2007 BCSC decision in GCAN Insurance v. Concord Pacific Group and the 2009 BCCA decision in Progressive Homes Ltd. v. Lombard.
The BC Housing Management Commission (“BC Housing”) hired Progressive as a general contractor to build four housing complexes. Some time after completion, BC Housing sued Progressive, alleging that construction deficiencies had caused water ingress resulting in significant rot, infestation, and deterioration. During and after construction, Lombard issued a series of five CGL policies to Progressive. Lombard initially defended Progressive but withdrew following the Swagger decision. Progressive sued Lombard but both the BCSC and the BCCA found there was no coverage for the BC Housing allegations.
Progressive Homes appealed the BCCA decision, asking the SCC to settle the question once and for all. In reversing the BCCA, the SCC affirmed and clarified the pre-ARG approach and perhaps went further. The SCC was treading pre-ARG ground when it ruled that “property damage” was not restricted to third party property and that construction defects and resulting damage are fortuitous and therefore an “accident”. The SCC broke new ground, or at least clarified some previously muddy subjects, in ruling that the complex structure theory could be used to determine coverage and in breathing new life into the “particular part” wording of the typical “work” exclusion. The result is that CGL insurers have a duty to defend these types of building deficiency claims and, very probably, a duty to indemnify against (i.e. pay for) at least some and possibly all of the insured’s liability on that account.
For now, it appears Canada has universal clarity on the application of the CGL insuring agreement to claims for construction deficiencies and resulting damage. Whether insurers will be content with the ruling or change their policy wordings remains to be seen.