Same policy, same insured, different coverage: BC Court of Appeal takes one step forward and two steps back in Progressive Homes
On March 26, 2009, the British Columbia Court of Appeal delivered its long-awaited decision in Progressive Homes Ltd. v. Lombard General Insurance Co., 2009 BCCA 129. While this decision provides some clarity on the principles governing the interpretation of insurance policies, Progressive is a disappointing blow not only to participants in the construction industry but also to plaintiff homeowners. It is also likely to result in confusion over the very policies the court had hoped to clarify, since it departs from the position other courts across the country have taken. In the result, a general contractor facing a claim in British Columbia for damages arising from defective workmanship would likely find itself without the benefit of insurance coverage, while a contractor facing the very same claim in Ontario would be entitled to coverage.
In Progressive, four separate actions (underlying actions) had been brought against the petitioner, Progressive Homes Ltd., a general contractor, with respect to four "leaky condo" developments in which Progressive had been involved. The developments had been built almost entirely by subcontractors. The insurer had initially defended the underlying actions on behalf of Progressive under a reservation of rights, but later withdrew from the defence of the actions on the basis that it had no duty to defend because the claims were not covered under the applicable insurance policies. In a petition to the British Columbia Supreme Court, Progressive sought an order declaring that the insurer was under a duty to defend it in the underlying actions, but was unsuccessful before Mr. Justice Cohen. The decision of the British Columbia Supreme Court was discussed in an earlier bulletin.
On March 4, 2008, Progressive’s appeal of Mr. Justice Cohen’s decision was heard. On March 26, 2009, in a decision that split the Court of Appeal panel 2-1, the Court of Appeal affirmed the decision of the court below and dismissed Progressive’s appeal.
Points of clarity
Setting the outcome of the case aside, Progressive provides significant clarity with respect to the interpretation of insurance policies. Specifically, the Court of Appeal expressly rejected the insurer’s proposal of a two-step principle of construction in examining the extent of coverage contained in an insurance policy.
The insurer submitted that the rules of interpretation required that the court must first look at the insuring clauses, determine the scope of coverage, and only then examine the exclusions to see how the scope of coverage might be narrowed.
Madam Justice Ryan, writing for herself and Madam Justice Kirkpatrick, disagreed with this approach and expressly found favour in undertaking exactly the opposite approach in determining the scope of coverage. According to Madam Justice Ryan, "A court begins with the presumption that all sections of an agreement have meaning. Thus, the contract should be read as a whole to understand each of its parts." [italics added]
The court further stated that insuring clauses and exclusions cannot be read in isolation since exclusion clauses, by definition, reference the grant of coverage. They must therefore be understood as a whole, and in order to do so, must be read together.
The court also found it unnecessary to delve into other principles such as the "complex structure theory" (discussed in an earlier bulletin) in order to determine the scope of coverage under an insurance policy. Ultimately, the wording of the policy governs, and should be examined to determine whether it covers damage to one part of a building caused by defects in work or product provided by the insured.
In Progressive, the policies at issue excluded coverage for "property damage" to that particular part of an insured’s work arising out of it or any part of it (the "Your Work Exclusion"), but the Your Work Exclusion was expressly stated not to apply if the damaged work or the work from which the damage arises was performed on the insured’s behalf by a subcontractor. Given the existence of this "subcontractor exception," Progressive argued that coverage surely extended to damage from work undertaken by subcontractors or these express words would have been unnecessary.
Points of confusion
Despite the court’s insistence that the wording of an insurance policy governed in determining the scope of coverage, and its own finding that the plain meaning of the words of the contract supported an interpretation that the policies in issue provided coverage for damage to one part of the building caused by defect in another, the court ultimately denied coverage to Progressive.
In so doing, Madam Justice Ryan retreated from what she considered to be the proper approach of reading and relying on the clear wording of an insurance policy, and instead relied upon an "implied assumption" of insurance law to determine the scope of coverage of the policies at issue. Citing Justice Iaccobucci’s view of the purpose of insurance, characterized in Non-Marine Underwriters, Lloyd’s of London v. Scalera, 2000 SCC 24 as "a mechanism for transferring fortuitous contingent risks," the court found that "the expected consequences of poor workmanship can hardly be classified as fortuitous" and that the policies in Progressive ultimately did not contain "clear language" that provided coverage for such damage. Little heed was paid to the meaning of the Your Work Exclusion and the subcontractor exception, which Madam Justice Ryan termed "meaningless" and "useless or inexplicable."
This finding is also in stark contrast to settled law in other Canadian jurisdictions, including Ontario, where appellate level courts, having held that the plain language of an insurance policy determined the scope of its coverage, found the identical language supported the insured’s petition for coverage. In particular, Madam Justice Ryan distinguished Progressive from Bridgewood Building Corp. v. Lombard General Insurance Co. of Canada (2006), 266 D.L.R. (4th) 182 (Ont. C.A.) — which interpreted a policy underwritten by the same insurer in favour of providing coverage for the insured — by noting that the Ontario Court of Appeal’s analysis took into account evidence of industry practice, whereas in Progressive Homes, no such evidence was placed before the trial judge.
Finally, in an attempt to give meaning to the words of the policies at issue as a whole, the court accepted the insurer’s argument that the insuring provisions could be read as covering damage to property caused by a distinct item, such as a boiler explosion. Thus, work performed by a subcontractor may attract coverage under the "completed operations" phase of a project since a general contractor cannot be expected to find latent defects from items such as boilers, which can cause damage after the work is completed. However, despite the fact that the latent defects in Progressive arose from work undertaken by subcontractors prior to the completion of the project, coverage to Progressive was nonetheless denied.
In denying coverage, the court referred to the pleadings in the underlying actions and distinguished "interior components of a building," such as boilers or electrical wiring that cause damage (and would attract coverage), from the damage caused by allegedly malfunctioning roofs and walls (for which no coverage arises). This is, with respect, a non-distinction. It disregards the fact that the damage is the same in both instances. There is no difference, for example, between damage arising from latent defects in a boiler and damage arising from latent defects in part of the external structure, both of which arise following the completion of a project. The general contractor could not be expected to find the latent defects in either case. The defect itself, be it in an "interior component" or in a part of the external structure, must be distinguished from the damage caused by the defective part. In this case, Madam Justice Ryan conceded that the wording of the policies at issue did not cover damage for the defective part itself, but did provide coverage for the damage arising from the failure of the part. To deny coverage simply because the pleadings in the underlying actions referred only to the defective parts is to disregard the damage caused and fail to give meaning to the entirety of the policies.
For the industry at large: While Madam Justice Huddart, in her dissent, recognized the commercial importance of a uniform interpretation of a general contractor’s commercial general liability policy, the result of the decision in Progressive is that an identical policy purchased by an insured provides coverage in Ontario but not in British Columbia. An insurer will be therefore be obligated to defend a general contractor facing a claim of damages arising from defective work in Ontario, but not in British Columbia.
For insureds: Given the importance of evidence of industry practice, as articulated by Madam Justice Ryan, an insured should consider commencing an action rather than a petition to enforce an insurer’s duty to defend it under an insurance policy. By commencing an action, the insured can avail itself of the various rights of discovery in order to obtain evidence of industry practice to assist the court in interpreting the policy at issue. This is likely an unintended consequence of Madam Justice Ryan’s decision — and is contrary to the established "pleadings rule," which mandates that the determination of whether an insurer’s duty to defend has been triggered rests with an examination of the claims contained within the pleadings in the underlying action. The commencement of an action will undoubtedly expand the scope of evidence examined by a court in making determinations of coverage, and likely increase litigation costs, but an insured may have little choice if it wishes to enforce its contractual rights.
For plaintiffs: Finally, persons and corporations commencing actions for damage arising from defective work must be sure to articulate clearly their claims, including any defects and all resultant damage. So long as the scope of coverage remains to be determined on the basis of the strict wording of the policy at issue and the pleadings alone, incomplete pleadings are not only to the detriment of the insured who may find itself without coverage, but also to the pleader in the underlying action, which may find itself left with an unnecessarily smaller pool of assets from which to satisfy any judgment it may ultimately obtain.