KBK No. 11 Ventures Ltd. v. XL Insurance Company Ltd, 2022 BCSC 1652 re-affirms that the threshold for triggering the duty to defend is low, requiring only a mere possibility of coverage based on the allegations in the pleadings. KBK also reminds insurers that where it is impossible at the pleadings stage to determine what is or is not covered, the duty to defend will apply in respect of all claims against an insured.
KBK involves five underlying lawsuits regarding alleged deficiencies with Vancouver’s tallest building – the Shangri-La hotel. Various unit owners in the building sued the developers and contractors who constructed the building, alleging deficiencies in the curtain-wall system covering its exterior. The deficiencies were alleged to result in glass fogging, cracking, and spontaneously shattering. The deficiency claims sought damages for, among other things, the cost of repairing and replacing the defective items, and consequential damages to the building’s units and the property of individual owners.
The defendant developers and contractors sought coverage under a wrap-up liability insurance policy. The insurer, XL Insurance, denied it was under a duty to defend the deficiency claims based on a modified “your work” exclusion, which excluded “Property damage” to that particular part of “your work” out of which the “occurrence” arises and included in the “completed operations hazard”.
“Your Work” was defined as “Work or operations performed by you or on your behalf”; and “Materials, parts or equipment furnished in connection with such work or operations”, including “warranties or representations made at any time with respect to the fitness, quality, durability or performance of any of the items included”. XL argued that because the insureds were developers or general contractors, their “work” applied to the entire building construction and was therefore entirely captured under the “your work” exclusion. In other words, nothing could be covered given the broad scope of the insureds’ role in the construction.
The Court rejected XL’s position and agreed with the developers and contractors that the governing law from the Supreme Court of Canada (for example, in Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33 and Lombard General Insurance v. The Canadian Surety Company, 2012 BCSC 526) required the “that particular part of “your work” wording in the exclusion to be given meaning. These words reflect an intention to divide the insured’s work into its component parts: coverage for repairing defective components would be excluded, while coverage for resulting damage would not.
In the deficiency claims, the pleadings alleged the fogging and cracking were “manifestations” of the defective work. The claims also asserted damage to individual property within strata units. These allegations asserted claims for resulting damage and were broad enough to trigger XL’s duty to defend. Further, the duty to defend applied to all of the claims because it was impossible at the pleadings stage to disentangle the covered from excluded claims. The eventual trial of the underlying actions may determine what is or is not covered under the policy. But in the meantime, the pleadings triggered a duty to defend all of the claims. XL was ordered to defend the insureds and reimburse them for defence costs incurred to date.
KBK reaffirms that the threshold to trigger a duty to defend is low. It is irrelevant whether the allegations in the pleadings can be proven in evidence. The duty to defend is not dependent on the insured actually being liable and the insurer actually being required to indemnify. A mere possibility that a claim falls within coverage is enough.
Further, only where it is clear that a claim falls outside of coverage or is otherwise excluded, can an insurer deny a duty to defend those claims. But as the Court found in KBK, it may be impossible to delineate between what is or is not covered at the pleadings stage. Short of a trial or further evidentiary discovery, insurers should give careful consideration to the allegations in the pleadings and the policy wording in issue before denying their duty to defend.