Supreme Court of Canada Confirms Duty to Defend on CGL Policies Case Note: Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33

Focus on Construction | Infrastructure - December 2010

Introduction

In the landmark decision of Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33, the Supreme Court of Canada settled the inconsistent case law concerning the interpretation of CGL insurance policies and whether a general contractor's CGL policy can cover damage arising from defective workmanship.

Background Facts

The facts of this case can be briefly outlined as follows. A general contractor contracted to build several housing complexes. After completion, four actions were commenced against the general contractor alleging defective workmanship which caused water leakage into the buildings resulting in further damage. The general contractor had a variety of CGL policies in place at different times. Initially, the insurer defended these actions but ultimately declined after the British Columbia Supreme Court in Swagger Construction Ltd. v. ING Insurance Co. of Canada1 held that claims based on defective workmanship were not covered under similar insurance policies and as such there is no duty to defend.

The general contractor brought an application for a declaration that the insurer was required to defend.

The Courts Below

The British Columbia Supreme Court followed its earlier decision in Swagger and held that the insurer did not have a duty to defend.2 This interpretation of the CGL policies applied a presumption held by the Court that CGL insurance policies are not intended to cover defective workmanship and clear language to the contrary would be required to overcome the presumption. This restrictive interpretation conflicted with the Ontario Court of Appeal's decision in Bridgewood Building Corp. (Riverfield) v. Lombard General Insurance Co. of Canada,3 which concluded that similar claims could fall within a CGL policy and a duty to defend is triggered. Nonetheless, the British Columbia Supreme Court still followed its earlier approach in Swagger.

The majority of the British Columbia Court of Appeal dismissed the insured's appeal stating:

In my view the policies of insurance in the case at bar do not cover losses to the insured caused by poor workmanship. The policies in question do not contain the clear language necessary to overcome the implied assumption that insurance is designed to transfer fortuitous contingent risk. I would dismiss the appeal.4

The law on the question of whether the CGL policies in this case could apply to defective workmanship was unclear as courts across Canada applied inconsistent approaches to the interpretation.

Supreme Court of Canada

a. Principles Governing the Duty to Defend

The Supreme Court of Canada concluded that the CGL policies in this case covered claims based on defective workmanship and the insurer owed a duty to defend.5

The Court began its analysis by outlining the well established principles governing an insurer's duty to defend. Justice Rothstein, writing for the Court, catalogued these basic principles:

1. an insurer will be required to defend a claim where the facts alleged in the pleadings, if proven to be true, would require the insurer to indemnify the insured for the claim;

2. it does not matter at this stage whether the allegations in the pleadings can be proven in evidence but what matters is that the pleadings allege facts which are within the scope of the policy;

3. no duty to defend will exist where it is clear that the claim falls outside the scope of the insurance policy, either because the claim does not fall within the initial grant of coverage or is excluded by an exclusion clause; and

4. in examining the pleadings to...