Supreme Court of Canada Addresses Insurer's Duty to Defend In the Context of a Leaky Condo Case

Introduction

The decision of the Supreme Court of Canada in Progressive Homes Ltd. v. Lombard General Insurance Company of Canada, 2010 SCC 33 resolves a discrepancy between decisions of the Courts of Appeal of British Columbia and Ontario on an important point concerning the scope of Commercial General Liability insurance policies as they apply to construction projects. The Court preferred the broader view taken in the Ontario court, finding that the policies provided coverage for claims against the insured general contractor alleging errors arising from the work of subcontractors. Hence the insurer, Lombard, was obligated to defend the contractor. The decision takes a broad view of the availability of coverage for claims involving defective work, and rejects a number of arguments that some insurers have employed to resist providing coverage for claims in this area.

The Progressive Homes decision does not explicitly change the roster of interpretive principles that Canadian courts commonly employ in insurance coverage disputes; however, it exemplifies an objective application of those rules, and a healthy scepticism toward a number of limiting principles, not set out in the policy wording, that some insurers have tended to rely upon.

Some elements of the Court's reasoning may well apply to first party property insurance claims in which similar concepts come into play, including the question of whether damage flowing from one part of a structure to another part amounts to property damage and can be said to be a fortuitous (and hence insurable) loss.

This was a case in which a general contractor, Progressive Homes Ltd. ("Progressive"), named as a party in four 'leaky condo' actions, sought a declaration that its insurer under a commercial general liability ("CGL") policy, namely Lombard General Insurance Company of Canada ("Lombard"), had an obligation to provide defence costs for it in the actions. Progressive had lost this argument at the trial court and before the British Columbia Court of Appeal. However, in a unanimous judgment, the Supreme Court of Canada overturned the B.C. Court of Appeal and ruled in favour of Progressive, holding that Lombard had a duty to defend Progressive in the four actions.

Facts

The insured, Progressive, was hired as a general contractor by the B.C. Housing Management Commission ("B.C. Housing") to build several condominium complexes pursuant to a provincial government program for affordable housing. After completion, in late 2004 and early 2005, four actions were initiated by B.C. Housing against Progressive claiming breach of contract and negligence. Each action concerned a separate condominium complex that had been built by Progressive and its subcontractors. B.C. Housing alleged various construction defects, including defects in framing, stucco, windows, flashings, venting and roofs, which it alleged caused moisture penetration into and through the building envelope. Most of the allegations were related to work done by subcontractors to Progressive.

Lombard is a liability insurance company that had issued successive CGL policies to Progressive from 1987 to 2005. In the simplest of terms, these CGL policies required Lombard to defend and indemnify Progressive when Progressive was legally obligated to pay damages because of property damage caused by an occurrence or accident.

Lombard initially defended the underlying actions on behalf of Progressive but later withdrew on the basis that it did not owe a duty to defend because B.C. Housing's claims were not covered under the CGL policies. Progressive commenced its action by way of petition to the B.C. Supreme Court for a declaration that Lombard owed a duty to defend them in the four actions.

The Issue

The sole issue was whether, under the terms of the CGL policies, Lombard was obligated to defend Progressive with respect to the actions. Specifically, the question that came before the courts was whether the language of the Lombard CGL policies provided coverage in respect of damage to a project which resulted from the negligence of Progressive's subcontractors.

Supreme Court of British Columbia

Progressive...