The Supreme Court of Canada delivered a HUGE win for general contractors yesterday. In a much-anticipated decision, the Supreme Court of Canada held that an insurer did in fact owe a duty to defend a general contractor for claims made as a result of negligent subtrades. After years of being denied coverage for these claims, this decision will surely help general contractors get their swagger back.
Facts
For several years, Progressive Homes purchased typical commercial general liability (CGL) and umbrella insurance policies from a large insurance company. Through these insurance policies Progressive thought it was protected from lawsuits for damage caused by negligent subtrades.
During the 1990’s Progressive was hired to build several residential projects and, as usual, used subcontractors for most of the work. Some of the projects were alleged to be “leaky condos” and the owners sued Progressive.
Progressive reported the claim to their insurance company and the insurance company initially defended Progressive. Later, the insurance company deserted Progressive saying the insurance policies did not cover the damage claimed. This was a common “leaky condo” strategy by the insurance company and other insurers at the time due to a lower court decision in the Swagger case which found that similar damage was not covered by a similar insurance policy.
Progressive sued the insurance company to try and force the insurance company to defend Progressive under its insurance policy.
Issue
Are general contractors insured for lawsuits brought against them to recover the costs to repair damage caused to one part of a building by the negligent workmanship of their subcontractors on another part of the project?
Supreme Court of Canada Decision
Generally speaking, contractors cannot insure themselves for their own poor workmanship as insurance policies are not intended to indemnify them for their own poor work. This makes sense. However, contactors can generally insure themselves for damage to persons or property that may arise as a result of poor workmanship by a subtrade. For example, if a window installer does a faulty job installing a window and it falls out and harms the building owner or his car, the contractor would usually be covered by insurance if sued for damages (medical costs or car repairs). Similarly, if the same negligent window installation results in water damage to the drywall or the electrical system, it was thought that the contractor would be covered if sued by the owner for damages to fix the drywall/electrical system. For several years, however, this was not case as a result of the Swagger decision.
The reason for this is that CGL insurance policies typically consist of several sections, which specify (a) what types of coverage are provided, (b) specific exclusions to the coverage, and (c) exceptions to the exclusions.
In the Progressive case, two key factors in determining whether the general contractor had coverage were:
- Whether the “property damage” coverage was limited to damage to third-party property (i.e. the window falling out and injuring a person or property), and
- Whether the “work performed” exclusions precluded coverage for damage to the insured’s “own work” once it was completed.
In Progressive, the insurance company argued that Progressive was being sued for delivering a wholly defective building, not simply for isolated rot and deterioration to parts of the building. As Progressive was required under its contract with the owner to deliver a fully functioning building, the insurance company said this was Progressive’s “own work” and was not covered by the insurance policies as the building could not be subdivided into its component parts for the purpose of finding resulting property damage. They were successful at both the BC Supreme Court and the BC Court of appeal.
However, the Supreme Court of Canada rejected these arguments. The court found that on the plain meaning of the words in the insurance policy “property damage” was not limited to third-party property and the exclusions did not exclude coverage for damage caused by subcontractors or damage to subcontractors’ work.
As such, the insurance company’s duty to defend Progressive was triggered. It is important to note, however, that while representing a huge win for general contractors, this decision was the result of the particular wording in Progressive’s insurance policies. While other policies may be different and so generate a different result, the general principles set out in this case set a good framework for insisting on coverage.
Lessons Learned
What this decision means for general contractors is that with an appropriate insurance policy, they will have coverage if sued due to a subcontractor’s negligent work that causes damage to another part of the building.
In order to better ensure this, it is important that general contractors:
- Understand their insurance policy. When is the last time you read your insurance policy or had it thoroughly explained to you?
- Promptly make insurance claims unless they are certain they are not covered (based on independent advice, not that of the insurance company)
- Do not simply accept an insurance company denial of coverage without careful review.
- Ensure that their subcontractors have and will maintain adequate insurance to cover negligently performed work as additional protection.
This article was written by Ian Moes, a lawyer who practices construction law with the law firm of Kuhn LLP. It is only intended as a guide and it is important to get legal advice for specific situations. If you have questions or comments about this case or other construction law matters, please contact him at 604-682-8868.
