Real estate and construction litigation specialist Stephen Schenke, a Montreal-based partner with McCarthy Tétrault LLP, says: “It’s a really big development because the insurers are always trying to argue coverage and extract themselves completely from the case as soon as they can. . . . It’s good news for people involved in the construction industry and for owners who are stipulating that their contractors have to carry adequate insurance. For the defendants it’s good news because you can force an insurer to assume your costs, which can be substantial.”
The Montreal lawsuit arises from abnormal deterioration of the outer surface of a University of Montreal pavilion. When the university became aware of the damage in 2008, it launched an action against everyone involved in the design and construction of the building in the early 1990s. Intact told Placements Lemay Nadon Inc., a Laval, Que.,-based company which supplied clay bricks for the pavilion, that it was denying coverage under its comprehensive general liability policies on the grounds that damage allegedly resulting from defective bricks could constitute property damage or accident as spelled out in the policies.
In ruling in favour of the brick supplier’s motion to compel the insurance company to defend the lawsuit, Justice Daniel Payette relied on last year’s Supreme Court of Canada decision in Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada. That case arose out of a lawsuit launched by the British Columbia Housing Management Commission alleging that Progressive Homes, a general contractor hired to build several housing complexes, was negligent and in breach of contract since water had leaked into four buildings, causing significant rot, infestation, and deterioration, making them unsafe, and posing a serious risk to the health and safety of the occupants.
As Justice Marshall Rothstein stated in setting out the reasons for the unanimous Supreme Court ruling: “An insurer is 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. It is irrelevant whether the allegations in the pleadings can be proven in evidence. What is required is the mere possibility that a claim falls within the insurance policy.”
The insurance policies stipulated that the contractor would be covered for property damage caused by an accident. But Lombard argued that water leaks allegedly caused by defective workmanship could not be defined as an accident. In a rather more complicated set of legal arguments, the insurer also argued that property damage, under the terms of its policies, does not result from damage to one part of a building arising from another part of the same building.
The Supreme Court disagreed with the insurance company’s reasoning and overturned the decision of the B.C. Court of Appeal. Rothstein stated: “‘Accident’ should be given the plain meaning prescribed to it in the policies and should apply when an event causes property damage neither expected nor intended by the insured. According to the definition, the accident need not be a sudden event. An accident can result from continuous or repeated exposure to conditions.”
This ruling was particularly important, according to Legrand, because CGL policies are a very common form of insurance — “the bread and butter of insurance lawyers across the land” — and the Supreme Court took “a very broad view of the coverage under such policies when looking at issues of accidental property damage and opened the door to claims and coverage that may not have been entertained before.”
Insurance lawyers have been waiting to see whether this decision would be fully embraced by lower courts, Legrand adds. The Supreme Court made it clear that its decision was based on a close reading of the insurance policies issued to Progressive Homes, thus leaving the door open for other courts to view the ruling only as specific to that case. But Payette did embrace that decision, Legrand says. “He refers clearly to Progressive Homes and makes it clear that it does apply in Quebec and that the findings of the Supreme Court must be respected and the views taken by the Supreme Court as to the scope of these policies and how to be analyzed must be respected and endorsed.”
CGL policies do not cover the product sold or manufactured by the insured, Legrand explains. “So, if you sell a toaster and it’s defective and there’s a claim, the CGL does not cover it. It’s your business risk. But if the toaster catches fire and the house burns down, we’re talking about consequential damages.” In the Montreal case, the university was claiming for damage that the bricks had allegedly caused over time to the outer walls into which they were incorporated. And Payette, following the reasoning set out in Progressive Homes, found that these claims for property damage were sufficient to require that the insurer must defend the brick supplier in the ongoing litigation. “A couple of years ago, the judgment could have gone the other way,” says Legrand.
It is important to remember that these cases only deal with the insurance companies’ duty to defend and not with the question of whether they should cover the damages, if the courts ultimately rule against the insured. The judges on these motions were required to examine the evidence in the case and considered only the scope of the plaintiff’s allegations and whether the damages, if proven, would be covered by the insurance policies.
But could the new line of reasoning followed in these cases — that insurance companies could be liable for contractors’ shoddy workmanship or suppliers’ defective products — be applied when courts consider the merits of these and other similar cases? “Technically or legally speaking, this judgment is not binding on the trial,” says Legrand. However, he adds, it may have an impact. “The trial judge will surely read it and if the allegations appear to be well-founded, the judge would be influenced. It’s influential.”
In the meantime, lawyers will be examining insurance policies and statements of claim very carefully, says Schenke. “Insurance companies will be looking to make sure that the language in the policy will be clear enough to exclude anything that could be considered a direct consequence of faulty design or workmanship.”
Lawyers representing property owners, on the other hand, will want to describe the damages and consequential loss in a way that would encourage a court to follow the same reasoning as the Supreme Court of Canada and the Quebec Superior Court, adds Schenke. “If the defendant doesn’t have the financial means to entertain a settlement or withstand a litigation, then you would want to make your language broad enough in your statement of claim to try and bring it within the umbrella of the policy and bring a deep pocket defendant into the case.”
Freelance journalist and business writer Kevin Marron can be reached at [email protected].