You buy insurance to protect you if things go wrong. Last Thursday the BC Court of Appeal confirmed that insurance does not defend builders against many claims arising due to negligent subtrades. The Court held that Progressive Homes Ltd. (“Progressive”), and hundreds of other builders in BC, did not have the umbrella insurance they thought they had. And it was, and still is, raining lawsuits.
Over the years, Progressive, a general contractor, had purchased typical commercial general liability insurance policies, as well as umbrella policies, from a large Insurance Company. Progressive thought it was protected from lawsuits brought against it 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.
The Insurance Company initially defended Progressive, but later deserted Progressive saying the insurance policies did not cover the damage claimed. This was a common “leaky condo” strategy by the Insurance Company and others insurers at the time.
Progressive sued the Insurance Company for the court to order the Insurance Company to stand by its duty to defend.
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?
BC Court of Appeal Decision
Generally speaking, you cannot insure yourself for your own poor workmanship, as insurance policies are not intended to indemnify you for your own poor work, whether intentional or not. Makes sense. However, you can generally insure yourself 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 if sued for damages (medical costs or car repairs) would usually be covered by insurance. Similarly, if the same negligent window installation work years 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. Wrong!
In the Progressive case, there were several insurance policies. Without going into details, on the face of the insurance it would have appeared that Progressive was covered for the damage to one part of the building (say rotting framing) that was caused by work (say defective drywall installation) negligently performed by one of its subcontractors on another part. But 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 to deliver a fully functioning building, this was Progressive’s “own work” and was not covered by the insurance policies.
The majority of the BC Court of Appeal judges (2 out of 3) found that, since Progressive was responsible for building the project, to interpret insurance as covering subtrade work defects causing damage to other parts of the building “flies in the face of the underlying assumption that insurance is designed to provide for fortuitous contingent risk”. And they decided that, “the expected consequence of poor workmanship can hardly be classified as fortuitous”. The Court concluded that this was Progressive’s own poor workmanship that they were responsible for and not the kind of thing that the insurance covered. It should noted that this not the same as the law in other Canadian provinces.
What this means for general contractors in BC is that, despite purchasing insurance, they will be left to defend themselves if sued due to a subcontractor’s negligent work that causes damage to another part of the building.
Given this decision, and the difficult money-tight times builders and Insurance companies are facing, it would be prudent to:
- Understand your Insurance. When is the last time you read your insurance policy or had it thoroughly explained to you?
- Promptly make insurance claims unless you 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 your subcontractors have and will maintain adequate insurance to cover negligently performed work.
This article was written by Robert G. Kuhn and Ian C. Moes, lawyers who practice in construction law at the law firm of Kuhn LLP. It is only intended as a guide and cannot cover every situation. 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 us at 604-864-8877.