In Progressive Homes Ltd. v. Lombard General Insurance Company of Canada 2010 SCC 33, the Supreme Court of Canada rendered its ruling on an insurer's duty to defend a general contractor in the context of a construction deficiency claim.  A full panel of nine Supreme Court Justices unanimously held that the insured contractor's commercial general liability insurer had a duty to defend.  In making this ruling the SCC allowed the insured's appeal from the British Columbia Court of Appeal's split decision that the insurer had no duty to defend.  The SCC ruling effectively settles the divergence of appellate court jurisprudence between British Columbia on one hand and Saskatchewan and Ontario on the other regarding a CGL insurer's duty to defend a general contractor in construction deficiency claims.  The SCC also provides guidance on the interpretation of CGL policy definitions of "property damage" and "accident" (including the definition of "occurrence") and the "work performed" exclusion.

Within the context of well structured reasons, the Supreme Court of Canada underlined the general advisability of interpreting policy coverages (the insuring agreement) first followed thereafter by exclusions and then exceptions to exclusions.  In this context the definitions of "property damage" and "accident" were considered.

 

The insurer argued that "property damage" was limited to third-party property and did not include damage to the insured's own work.  This argument was based on the distinction between property damage and pure economic loss tort claims and the Supreme Court's prior rejection of the complex structure theory which proposed that buildings are divisible into distinct elements as opposed to standing as a whole.  The court disagreed with the insurer's interpretation of "property damage" and based its ruling on the notion that principles of tort law are no substitute for simply interpreting the policy language which did not distinguish between third-party property damage and damage to any tangible property in the definition.  Interestingly, the court noted that the definition of property damage may include a claim to repair a defect even though this point was conceded by the insured.  The court found support for this potential given the terms "physical injury" and "loss of use" and an exclusion for defects contained in one of the versions of the "work performed" exclusion.

 

The definition of "accident" was held to be essentially the same as the definition of "occurrence" used in other versions of the policy.  The insurer argued that faulty workmanship is not an accident.  The court held that whether defective workmanship is an accident is necessarily a case-specific determination depending on the circumstances of the defective workmanship and the way "accident" is defined in the policy.  Accordingly, faulty workmanship may be an accident based on the specific facts of a case.  The court pointed to precedents in this regard.  The court also rejected the insurer's argument that equating faulty workmanship to an accident converts a CGL insurance policy into a performance bond.  In rejecting this argument the court outlined the distinction between the bond and the policy highlighting the fact that the bond only ensured that the work be brought to completion whereas the CGL policy provides coverage once the work is completed.

 

Having found that the claims in the pleadings fell within the grant of coverage the court dealt extensively with the various versions of the "work performed" exclusions contained in the policy, including the commonly found Broad Form Extension Endorsement, and whether the insurer had met the burden of clearly and unambiguously showing the application of such exclusions.  The insurer, though it focused its arguments on the definitions of "property damage" and "occurrence", argued that this exclusion applies to deny coverage  since the work performed by the general contractor was the entirety of the four subject housing units.  The court found that the Broad Form Extension Endorsement operates to except the work of subcontractors from the "work performed" exclusion.  Since the pleadings indicated subcontractor involvement in the construction a duty to defend was triggered.  Versions of the policy that included the phrase "that particular part of your work" in the exclusion meant that coverage for repairing defective components would be excluded while coverage for resulting damage would not.  A determination of which particular part of the work caused the damage would have to be made at trial.  Repairs to those defective parts will not be visited upon the insurer but, when allegations are made that the defects lead to resulting damage, a duty to defend is triggered.