Contractor alert - defective work coverage

September 23, 2010 has seen a ruling from the Supreme Court of Canada that affects the payouts under the Commercial General Liability (CGL) portion of insurance policies.

The new ruling is that defective workmanship can be interpreted as an "accident" under a CGL policy. And further that "property damage" under a CGL is not necessarily limited to third-party property damage.

The case is Progressive Homes Ltd. v. Lombard General Insurance. The Supreme Court of Canada ruled that Lombard owed a duty to defend a claim made against Progressive for negligence and breach of contract.

The basis for the case is when B.C. Housing Management Commission (BCHMC) hired Progressive Homes as a general contractor to build several housing complexes in B.C.

BCHMC sued Progressive alleging significant damage caused by water leaking into four buildings that were part of the housing complexes to be completed.

When Lombard (insurer) reviewed the policy wordings they denied a duty to defend Progressive. Lombard's argument was that "property damage," as defined in its CGL policy, cannot result from damage arising from another part of the same building. Their interpretation is that "property damage" is limited to damage caused to third-party property and therefore cannot apply to damage arising from the insured's own work.

When presented to the lower courts, Lombard's position was affirmed. So it was taken to the Supreme Court. Supreme Court of Canada Justice Marshall Rothstein wrote: "The definition of ‘property damage,' according to the plain definition…include[s] damage to any tangible property. I do not agree with Lombard that the damage must be to third-party property. There is no such restriction in the definition."

Again Lombard had successfully argued in the lower courts that workmanship defects were excluded from the policy because such defects could never constitute ‘accidents.' Once again, the Supreme Court disagreed. "Whether defective workmanship is an accident is necessarily a case-specific determination."

The lower courts declared that if defective workmanship were to be construed as an ‘accident,' that would cancel out the notion that insurance should provide coverage only in the event of "fortuitous contingent risk."

The Supreme Court refuted the lower courts and said the notion of fortuity was built right into the policy definition of an ‘accident.' The policy definition requires only that the insured, Progressive, did not intend or expect the damage to occur.

"In my view, the [BCHMC] pleadings sufficiently allege an ‘accident,'" Rothstein wrote. "There is no reference to intentional conduct by Progressive which would suggest that the property damage was expected or intended. The pleadings allege negligence, which, on its face, suggests that the damage was fortuitous."

So since Canadian law is based on precedent then contractors need to be aware that of this change. Happenstance or accidental damage (fortuitous) is the definition that is more strongly held in a case of negligence then the requirement that it not be a result of your "own work".

Of course, a contractor has a good safety program and does what can be done to avoid or control claims. But if and when it does happen then be sure to reference this case to your adjuster if you get a denial of defense based on the property damage being from your "own work". This could assist in a wider interpretation of the wordings of your CGL.