It is the occurrence of damage, and not the initial precipitating event of negligence, which triggers coverage under occurrence-based CGL policies. In cases of progressive or continuous damage over many years, this means multiple consecutive CGL policies can be triggered, which in turn raises questions as to how each insurer “on risk” during the relevant years is obliged to contribute to both defence costs and any settlement or judgment that may ensue.
When there are multiple insurers on risk for the same insured over the years, they will often forge a “time on risk” protocol which sees each insurer contribute to defence costs or settlement payments pro rata to their respective years on risk. But what if only one insurer or one insurance policy can be found in a case involving ten or more years of progressive damage? Must that insurer pay 100% of the insured’s defence costs? Or can it limit its contribution to only that percentage of time that it was on risk?
This rather unique question recently arose in Lombard General Insurance Company of Canada v. 328354 B.C. Ltd., 2012 BCSC 431, a classic “leaky condo” case in Squamish, BC. The strata corporation sued the developer (and others), alleging design and construction deficiencies leading to water ingress and structural deterioration over a period of 13 years from the date of substantial completion to the date of repairs. However, the developer was a “single project” developer and the only insurance available to it was the project’s 24-month wrap-up liability policy issued by Lombard.
Lombard was obliged to acknowledge its “duty to defend” coverage under its wrap-up policy (because of its spectacular loss on that very point in Progressive Homes Ltd. v. Lombard Insurance, 2010 SCC), but refused to fund 100% of the developer’s defence costs and took the position it was only responsible for approximately 16% of those costs, given its “time on risk” during the years of progressive damage.
Once again, Lombard lost. The BC Supreme Court ruled:
- “There is no principle of law or equity that requires CGL defence costs to be apportioned between an insurer and an insured on a basis of time on risk in cases of continuous or progressive damage”;
- Apportionment of defence costs cannot generally be fairly or reasonably allocated in pre-trial situations, but usually will have to be determined retrospectively after findings of fact made in the underlying action;
- Apportionment of defence costs between an insurer and an insured is determined by the operative language of the policy; in a CGL policy where there is an unqualified obligation to pay for the defence of claims falling within coverage, the insurer will be required to pay all reasonable costs associated with the defence of those claims, even if those costs also further the defence of claims outside of coverage;
- There is a decided preference on the part of the Courts to make the apportionment assessment only after there is a solid basis in fact for doing so. Circumstances relevant to the apportionment of defence costs before trial can be very different from those arising at the conclusion of the trial;
- The “time on risk” proposition for allocating pre-trial defence costs is “without merit” in any event: all of the property damage claims have their genesis in the same allegations of water ingress due to construction deficiencies and the fact that some of the damage is alleged to have occurred outside the period of coverage does not necessarily lead to separate and discretely ascertainable costs of defence on that account;
- Rather, “it is likely that a substantial amount of the defence costs that will be incurred would have been incurred even if the period of continuous or progressive damage ended when the insurance coverage terminated”;
- “As the express wording of the Policies provides that Lombard has a duty to defend any action seeking compensatory damages because of property damage occurring within the policy period, it follows that Lombard must pay all reasonable costs of defending such claims, regardless of whether they also assist in the defence of claims in respect of damage falling outside the policy period”;
- “This conclusion does not amount to providing the Developers with a “free defence” for the claims in respect of damage falling outside the period of coverage. To the extent that the defence of those claims results in separate and readily ascertainable costs of defence, it will be open to Lombard to seek reimbursement for such costs at a later stage in the proceedings. Accordingly, there is no unfairness to Lombard in requiring it to provide a full defence at this time.”
In the result, Lombard was ordered to fund 100% of the costs of defence and to reimburse the insured for defence costs reasonably incurred to date. The door was left open for a retrospective allocation of costs following trial of the underlying action, but it was made clear that Lombard would only be reimbursed for likely limited “separate and readily ascertainable costs of defending claims outside coverage”.
If there are multiple insurers on risk over the years that damage occurred, a time-on-risk formula for dividing costs between the insurers may very well be agreed on by the parties. If, however, the situation involves lost policies or gaps in coverage, any hapless insurer who finds itself on risk only for a small portion of the time, may find itself funding 100% of the defence. In such cases, that insurer can (and should) still “reserve rights” to seek a retrospective reallocation with its own insured, but that may afford little practical relief at the end of the day.
In recent years the standard CGL policy has been amended to remove coverage under subsequent policies for damage known to the insured before inception. The idea of such amendments was to restrict indemnity exposure in progressive damage cases to a single policy and, therefore, a single policy limit. If CGL insurers now also want to proportionally reduce defence cost exposure in such cases to any “time on risk” formula, this case makes it clear some additional redrafting is required.
The Lombard General Insurance Company of Canada v. 328354 B.C. Ltd. decision can be accessed at courts.gov.bc.ca/jdb-txt/SC/12/04/2012BCSC0431.htm.