Bridgewood Building Corp. (Riverfield) v. Lombard General Insurance Company of Canada Beige Valley Developments Limited v. Lombard General Insurance Company of Canada [Indexed as: Bridgewood Building Corp. (Riverfield) v. Lombard General Insurance Co. of Canada]
79 O.R. (3d) 494
[2006] O.J. No. 1288
Court of Appeal for Ontario,
Catzman, Moldaver and Armstrong JJ.A.
April 5, 2006
Insurance -- Interpretation and construction -- Application judge properly declining to decide issue of applicability of exclusion clause on basis of nature of Commercial General Liability policy -- Application [page495] judge correctly focusing on language of insurance policy -- Policy providing that defective work or product exclusion did not apply if damaged work or work out of which damage arose was performed on insured's behalf by subcontractor -- Application judge correctly holding that insurer was required to indemnify insured for cost of repairing new homes built by insured which contained structural defects due to defective concrete supplied by subcontractor.
The insurer was ordered to indemnify the insured under the terms of two Commercial General Liability ("CGL") policies for the cost of repairing defects in new homes built by the insured. The homes contained structural defects due to defective concrete supplied by one of the insured's subcontractors. The policies contained an exclusion for costs incurred by the insured for the repair or replacement of its own defective work or product. That exclusion did not apply "if the damaged work or the work out of which the damage arises was performed on your half by a subcontractor". The application judge rejected the insurer's argument that the "defective work or product" exclusion applied no matter whether the defects were caused by the insured or by a subcontractor employed by the insured. In support of its position, the insurer relied on the first sentence of the coverage clause, which said that the insurer "will pay those sums that the insured becomes legally obligated to pay as damages because of ... 'property damage' to which this insurance applies". The insurer submitted that it is settled law that CGL policies are not intended to cover repair or replacement costs arising out of an insured's own defective work or product and that the words in the coverage clause "to which this insurance applies" incorporated that "general principle", thereby precluding the insured from claiming coverage under the policies in question, as an exception to an exclusion cannot restore coverage where coverage did not exist in the first place. The application judge rejected an approach which focused on the nature of the policy in question, and held that the focus should be on the language of insuring agreements and their interpretation. The insurers appealed.
Held, the appeal should be dismissed.
The approach taken by the application judge, and her interpretation of the insuring agreements, were correct. The application judge was obliged to decide the issue before her not upon general insurance principles, nor upon the general nature of the policies, but upon the exact terms of the insurance policies themselves. General principles of insurance contract interpretation are merely interpretive aids that cannot decide any issues by themselves. The issue at hand was not the integrity of the "general principle" nor the policy considerations that underlie it, but the role it plays in determining what risks an insurer has agreed to cover in any particular CGL policy. It is not the case that, standing alone, the "general principle" precludes coverage of an insured's own defective work or product regardless of provisions in the policy that evidence a contrary intent. Rather, it constitutes an interpretive aid that can be helpful, but not decisive, when interpreting particular provisions of a CGL policy in an effort to determine the scope and extent of the risks that the insurer has agreed to cover. If the interpretive approach offered by the insurer were accepted, the clause "This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor" would be redundant. If insurers do not wish to indemnify general contractors for the shortcomings of their subcontractors, they need only say so in clear and unambiguous language in their policies.
APPEAL from the orders of Stewart J., 2005 63763 (ON SC), [2005] O.J. No. 2083, 26 C.C.L.I. (4th) 93 (S.C.J.) requiring the insurer to indemnify the insured.
Westridge Construction Ltd. v. Zurich Insurance Co., [2005] S.J. No. 396, 269 Sask. R. 1, 357 W.A.C. 1, [2005] I.L.R. para. I-4426, 44 C.L.R.(3d) 204, 2005 SKCA 81, 25 C.C.L.I. (4th) 182 (C.A.), apld [page496] Alie v. Bertrand & Frère Construction Co. (2002), 2002 31835 (ON CA), 62 O.R. (3d) 345, [2002] O.J. No. 4697, 222 D.L.R. (4th) 687, 26 C.L.R. (3d) 5 (C.A.); Celestica Inc. v. ACE INA Insurance, 2003 12210 (ON CA), [2003] O.J. No. 2820, 229 D.L.R. (4th) 392, [2003] I.L.R. ÂI-4218 (C.A.), consd Other cases referred to American Family Mutual Insurance Co. v. American Girl Inc., 673 N.W. 2d 65, 28 Wis. 2d 16 (Wis. Sup. Ct. 2004); O'Shaughnessy v. Smuckler Corp., 543 N.W. 2d 99 (Minn. App. 1996); Qualls v. County Mutual Insurance Co., 123 Ill. App. 3d 831 (1984); Wanzek Construction, Inc. v. Employers Insurance of Wausau, 679 N.W. 2d 322 (Minn. Sup. Ct. 2004) Authorities referred to Shapiro, C.J."Business Risk in Construction Coverage -- The Business Risk Exclusions in CGL Policies" in Insurance Coverage and Claims Institute 2005 (Chicago: Defence Research Institute, 2005) Wielinski, P.J."CGL Coverage for Defective Workmanship -- Current (and Ongoing Issues)" (Paper presented to the 16th Annual Construction Law Conference, State Bar of Texas, March 7, 2003)
Hillel David and Eleni Maroudas, for appellant Lombard General Insurance. Thomas J. Donnelly and Catherine P. Clark, for respondents Bridgewood Building Corp. and Beige Valley Developments Ltd.
The judgment of the court was delivered by
Introduction
1MOLDAVER J.A.:-- Lombard General Insurance Company of Canada ("Lombard") appeals from two orders made by Stewart J. requiring Lombard to indemnify Bridgewood Building Corp. (Riverfield) and Beige Valley Developments Ltd. (the "respondents") under the terms of two Commercial General Liability ("CGL") policies for the cost of repairing a number of new homes built by the respondents. The homes contained structural defects due to defective concrete supplied by one of the respondents' subcontractors.
2For purposes of this appeal, it is only necessary to reproduce two provisions from the policies.
The Insurance Policies
3Under the subheading "Insuring Agreement", the policies provide:
We will pay those sums that the insured becomes legally obligated to pay as damages because of "bodily injury" or "property damage" to which this insurance applies. [page497]
Under the subheading "Exclusions", the policies state:
This insurance does not apply to:
b. "Property damage" to
that particular part of "your work",
that particular part of machinery or equipment forming a part of "your work" described in 1) above, or
a component or constituent of "your work" described in 1) above, whether such component or constituent is a separate physical part or an integral element of "your work",
that is defective or actively malfunctions. This exclusion applies only to "property damage" to "your work" included in the "products-completed operations hazard".
This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.
(Emphasis added)
Position of the Appellant
4Lombard submits that the application judge erred in ordering indemnification. It takes the position that "there is no coverage under a CGL policy for costs incurred by the insured for the repair or replacement of its own defective work or product". Lombard maintains that the "defective work or product" exclusion applies no matter whether the defects are caused by the insured or a subcontractor employed by the insured.
5In support of its position, Lombard relies on the first sentence of the coverage clause in the Insuring Agreement (reproduced at para. 3 above) which says that Lombard "will pay those sums that the insured becomes legally obligated to pay as damages because of ... 'property damage' to which this insurance applies". Lombard submits that it is settled law that CGL policies are not intended to cover repair or replacement costs arising out of an insured's own defective work or product and that the words in the coverage clause "to which this insurance applies" incorporate that "general principle", thereby precluding the respondents from claiming coverage under the policies in question.
Decision of the Application Judge
6The application judge refused to give effect to that argument. Her reasons for rejecting it are set out in paras. 34 and 35 of her reasons. They are brief, but in fairness to her, the issue was raised by Lombard almost as an afterthought and it was overshadowed by other issues that the application judge addressed and that Lombard has chosen not to pursue on appeal:
Further, although Lombard has not relied on any "work" or "product" exclusion in the Policies it nevertheless mandates that a CGL policy, by its [page498] very nature, is intended only to cover an insured's tortious liability to third parties, not including the cost of repairing or replacing the insured's own defective work or product. I am not satisfied that this assertion provides a full answer to the Applicants' claims. Rather, I prefer the approach taken in recent decisions of both the Ontario and British Columbia Courts of Appeal -- that "the focus should be on the language of insuring agreements and their interpretation" (see: Alie v. Bertrand & Frère Construction Co., [(2003), 2002 31835 (ON CA), 62 O.R. (3d) 345, [2002] O.J. No. 4697 (C.A.)], at para. 26). As was noted by the British Columbia Court of Appeal in Ellet Industries Ltd. v. Laurentian P & C Insurance Co. (1996), 34 C.C.L.I. (2d) 294:
While general descriptive terminology distinguishing different categories of insurance coverage no doubt serves a useful purpose in some contexts it cannot be determinative of the rights and duties of the parties to the policy. Those matters can only be resolved definitively by ascertaining the intent of the parties from the language used.
As already noted, I am of the view that the language of the policies should be interpreted in favour of the Applicants in this case.
In support of its assertion that a CGL policy is not meant to be a Performance Bond and that these Policies for CGL coverage do not extend to provide indemnity for anything that is the result of the fault of the insured, Lombard cites the public policy argument that extending coverage to shoddy workmanship or product would serve to encourage poor workmanship and manufacturing. Lombard maintains that if coverage is extended in this case, the liability policy effectively becomes "enormously expanded", opening the floodgates to claims that would include building code infractions, substitution of sinks, repair of chipped tiles, drywall repair and essentially all of the Applicants' work. In considering that position, I am cognizant of Lombard's election not to rely on certain other provisions of the Policies, including the "work" and "product" exclusions. Further, I am of the view that the facts of these cases, combined with the ONHWP [Ontario New Home Warranty Program, now Tarion Warranty Corporation] legislative requirements, raise public policy considerations that serve to outweigh Lombard's concerns.
Analysis
7I agree with the approach taken by the application judge and I am satisfied that she correctly interpreted the insuring agreements.
8The approach taken by the application judge accords with the approach endorsed by the Saskatchewan Court of Appeal in Westridge Construction Ltd. v. Zurich Insurance Co., 2005 SKCA 81, [2005] S.J. No. 396, 25 C.C.L.I. (4th) 182 (C.A.), where, at paras. 33 and 34, Sherstobitoff J.A. observed:
In the concluding paragraphs of his reasons for decision ... the trial judge found that the claims against Westridge did not fall within the insuring agreements. In doing so, he made no reference to the terms of the policies themselves, but appears to have relied on what he termed to be a fundamental principle of insurance law that a Comprehensive General Liability Policy is not intended to be a means for a contractor to cover the expenses to cover its own defective workmanship or materials, or to be a performance bond ... [page499]
While the statement of principle is sound, this was an erroneous approach, as the judge was obliged to decide the issue not upon general insurance principles, nor upon the general nature of the policies, but upon the exact terms of the insurance policies themselves. As noted by the Alberta Court of Appeal in S.(J.A.) v. Gross, 2002 ABCA 36, [2002] 5 W.W.R. 54 at para. 29:
Further, the argument does not take into account the wording of the Policy. The key to coverage lies not in the general nature of the policy itself but in whether the alleged acts fall within its provisions and coverage is not excluded. As Justice Iacobucci noted at para. 67 of Scalera [Non-Marine Underwriters v. Scalera, 2000 SCC 24, [2000] 1 S.C.R. 551, [2000] S.C.J. No. 26], general principles of insurance contract interpretation are "merely interpretive aids that cannot decide any issues by themselves". The provisions of the Policy are discussed below.
See also, Gordon Hilleker, Liability Insurance in Canada, (3d ed.) (Toronto: Butterworths, 2001) at p. 147, which says:
In construction cases the interplay between the insuring agreement in respect of property damage caused by an accident and the exclusions with respect to product and performance requires careful analysis. Many courts approach these cases from the perspective that a liability insurance policy is not a performance bond, which, of course, is correct. Yet one must take care not to allow this perspective to lead to an overly narrow interpretation of the insuring agreement when, on a proper interpretation, the claim falls within the insuring agreement but is captured by one or more of the policy exclusions.
It is therefore necessary to turn to the policies. In doing so, it is well to repeat the general principles of interpretation of such provisions referred to in paragraph [31 of Monenco Ltd. v. Commonwealth Insurance Co., 2001 SCC 49, [2001] 2 S.C.R. 699, [2001] S.C.J. No. 50], that coverage provisions should be construed broadly, while exclusion clauses should be given a narrow interpretation, and that the contra proferentem rule should be applied.
9I agree with the Westridge approach and confirm that it was the proper one for Stewart J. to take in determining what risks Lombard had chosen to cover in its policies with the respondents. In so concluding, I reject Lombard's submission that the reasoning in Westridge conflicts with the approach adopted by this court in Alie v. Bertrand & Frère Construction Co. (2003), 2002 31835 (ON CA), 62 O.R. (3d) 345, [2002] O.J. No. 4697 (C.A.), and Celestica Inc. v. ACE INA Insurance, 2003 12210 (ON CA), [2003] O.J. No. 2820, 229 D.L.R. (4th) 392 (C.A.). I see no such conflict. The issue at hand is not the integrity of the "general principle" nor the policy considerations that underlie it, but the role it plays in determining what risks an insurer has agreed to cover in any particular CGL policy. In that regard, it is not now, nor, to my knowledge, has it ever been the position of this court that, standing alone, the "general principle" precludes coverage of an insured's own defective work or product regardless of provisions in the policy that evidence a contrary intent. Rather, it constitutes an interpretative aid that can be helpful, though not [page500] decisive, when interpreting particular provisions of a CGL policy in an effort to determine the scope and extent of the risks that the insurer has agreed to cover. (See Alie at paras. 24-27 and 51 and Celestica at para. 30.)
10The "interpretative aid" approach only makes sense. Otherwise, CGL policies would effectively become traps for the unwary. The policies under consideration illustrate the point, as evidenced by the key provisions that are reproduced again for convenience.
11Under the subheading "Insuring Agreement", the policies provide:
We will pay those sums that the insured becomes legally obligated to pay as damages because of "bodily injury" or "property damage" to which this insurance applies.
Under the subheading "Exclusions", the policies state:
This insurance does not apply to:
j. "Property damage" to
that particular part of "your work",
that particular part of machinery or equipment forming a part of "your work" described in 1) above, or
component or constituent of "your work" described in 1) above, whether such component or constituent is a separate physical part or an integral element of "your work",
that is defective or actively malfunctions. This exclusion applies only to "property damage" to "your work" included in the "products-completed operations hazard".
This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.
(Emphasis added)
12On a plain reading, clause (j) would seem to indicate that coverage will be provided if the "damaged work or the work out of which the damage arises" is performed on behalf of the insured by a subcontractor. And yet, Lombard says that that is not what it means. When asked what it did mean, counsel for Lombard initially characterized it as "sloppy drafting". Upon further questioning, he retreated from that position and conceded, correctly in my view, that if the effect of the "general principle" was as he would have it, exclusion (j) was redundant, i.e., there would be no need to exempt faulty work performed by subcontractors if the "general principle" excluded such work from coverage in every case. And, as the respondents quite properly point out, if [page501] exclusion (j) is redundant, so too are five other exclusionary provisions in the same policy.
13Despite this anomaly, counsel for Lombard maintained his position, citing authorities to the effect that an exception to an exclusion cannot restore coverage where coverage did not exist in the first place. (See Qualls v. County Mutual Insurance Co., 123 Ill. App. 3d 831 (1984), at pp. 833-34.) I take no issue with that principle. In my view, however, it is unhelpful here because it begs the question.
14The approach suggested by Lombard is problematic for several reasons. It defies basic principles of contract interpretation -- we are asked to read a host of exclusionary provisions out of the insuring agreement on the ground that they are redundant and thus meaningless. It turns the contra proferentem principle on its head -- we are asked to construe ambiguities in an insurance policy against the insured. It ignores the historical evolution of clauses such as exclusion (j) and the reasonable expectation of the parties flowing from this -- exclusion (j) and other like provisions are the product of a Broad Form Property Damage Endorsement ("BFPD") implemented into the CGL in 1986 for the express purpose of bringing claims arising out of faulty work by subcontractors back into coverage through an exception to an exclusion. (See American Family Mutual Insurance Co. v. American Girl Inc., 673 N.W. 2d 65, 28 Wis. 2d 16 (Wis. Sup. Ct., 2004), at paras. 68-69; Patrick J. Wielinski"CGL Coverage for Defective Workmanship -- Current (and Ongoing Issues)" (Paper presented to the 16th Annual Construction Law Conference, State Bar of Texas, March 7, 2003); C.J. Shapiro"Business Risk in Construction Coverage -- The Business Risk Exclusions in CGL Policies" in Insurance Coverage and Claims Institute 2005 (Chicago: Defence Research Institute, 2005), Chicago: Illinois; O'Shaughnessy v. Smuckler Corp., 543 N.W. 2d 99 (Minn. App. 1996), review denied (Minn. 1996) and Wanzek Construction, Inc. v. Employers Insurance of Wausau, 679 N.W. 2d 322 (Minn. Sup. Ct. 2004).)
15A concise statement of the purpose and effect of this revision of the CGL is found in American Family Mutual, supra, at para. 68:
This subcontractor exception dates to the 1986 revision of the standard CGL policy form. Prior to 1986 the CGL business risk exclusions operated collectively to preclude coverage for damage to construction projects caused by subcontractors. Many contractors were unhappy with this state of affairs, since more and more projects were being completed with the help of subcontractors. In response to this changing reality, insurers began to offer coverage for damage caused by subcontractors through an endorsement to the CGL known as the Broad Form Property Damage Endorsement, or BFPD. [page502] Introduced in 1976, the BFPD deleted several portions from the business risk exclusions and replaced them with more specific exclusions that effectively broadened coverage. Among other changes, the BFPD extended coverage to property damage caused by the work of subcontractors. In 1986 the insurance industry incorporated this aspect of the BFPD directly into the CGL itself by inserting the subcontractor exception to the "your work" exclusion. See generally 21 Eric Mills Holmes, Holmes' Appleman on Insurance, 132.9, 152-53.
16Paragraphs 73 and 74 of the same decision are also instructive. They rebut Lombard's contention that the 1986 BFPD was of no consequence because clauses like the subcontractor exception in exclusion (j) could not restore coverage where none existed before:
American Family cites conflicting authorities which appear to hold that damage to an insured's work caused by a subcontractor is not covered because of the "your work" exclusion, but these authorities are no longer controlling because they construed policies that did not include the subcontractor exception. Noting the apparent conflict between O'Shaughnessy, Kalchthaler [224 Wis 2d 387 (App. 1999)], and similar cases on the one hand, and contrary cases on the other, one commentator has pointed out that "those cases [finding no coverage] involved the older policy language while the current policy specifically provides that the 'own work' exclusion does not apply 'if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.'" 2 Jeffrey W. Stempel, Law of Insurance Contract Disputes, 14.13[a]. 14-132
This interpretation of the subcontractor exception to the business risk exclusion does not "create coverage" where none existed before, as American Family contends. There is coverage under the insuring agreement's initial coverage grant. Coverage would be excluded by the business risk exclusionary language, except that the subcontractor exception to the business risk exclusion applies, which operates to restore the otherwise excluded coverage.
(Emphasis added)
17Lombard's argument against the "interpretative aid" approach centres on the policy considerations that inform the "general principle". In short, Lombard maintains that the approach taken by the application judge converts CGL policies into performance bonds, something they were never meant to be. According to Lombard, such an approach provides general contractors, like the respondents, with a windfall. For low premiums, they are able to obtain insurance that permits and indeed encourages them to hire inexpensive subcontractors, comforted in the knowledge that they will be fully indemnified if the subcontractors do their work badly.
18While I acknowledge Lombard's concerns, they do not alter my view that the "interpretative aid" approach is the correct one. My reasons are threefold. [page503]
19First, I find persuasive the response of the Court of Appeals of Minnesota in O'Shaughnessy v. Smuckler, supra, at p. 102 N.W., to this issue:
The rationale behind the Business Risk Doctrine has been articulated as follows:
If insurance proceeds could be used to pay for the repairing and/or replacing of poorly constructed products, a contractor or subcontractor could receive initial payment for its work and then receive subsequent payment from the insurance company to repair and replace it. Equally repugnant on policy grounds is the notion that the presence of insurance obviates the obligation to perform the job initially in a workmanlike manner. Knutson Construction Co. v. St. Paul Fire & Marine Insurance Co., 396 N.W.2d 229 at 235 (Minn. Sup. Ct. 1986) (quoting Centex Homes Corp. v. Prestressed Systems, 444 So. 2d 66 at 66-67 (Fla. App. 1984)).
We note that this rationale is less applicable to a claim by a general contractor for the defective work of its subcontractor. A general contractor has minimal control over the work of its subcontractors by definition, and the fact that the general contractor receives coverage will not relieve the subcontractor of ultimate liability for unworkmanlike or defective work. In such a case, an insurer will have subrogation rights against the subcontractor who performed the defective work. Presumably, the Business Risk Doctrine will preclude the subcontractor from recovering from its own insurer. Thus, the goal of the Business Risk Doctrine would still be achieved because ultimate responsibility for poor workmanship would lie with the one who performed it.
(Emphasis added)
20Second, Lombard's concerns fail to account for practical business realities. General contractors who make a habit of hiring incompetent subcontractors will soon find themselves out of work. The marketplace can be trusted to look after unscrupulous general contractors who, for the sake of a fast dollar, are prepared to risk their reputation by providing defective work product on a regular basis.
21Third, and most important, if insurance companies do not wish to indemnify general contractors for the shortcomings of their subcontractors, they need only say so in clear and unambiguous language in their policies. As the respondents have pointed out, standard industry endorsements designed to accomplish just that have been available since December 1, 2001. The insurance industry drafted those endorsements to remove coverage for faulty work by subcontractors. (See Wielinski"CGL Coverage for Defective Workmanship", supra, at pp. 53-54.) Lombard does not challenge this. And yet, for reasons known only to itself, it has not chosen to incorporate these endorsements into its CGL policies.
Disposition
22For these reasons, I am satisfied that the application judge took the correct approach and came to the correct conclusion on [page504] the scope of coverage provided by the policies in issue. Accordingly, I would affirm her order and dismiss the appeal with costs to the respondents on a partial indemnity basis.
23If the parties cannot agree on the amount of the costs, they may file brief submissions with the court (no longer than three pages double-spaced) within ten days of the release of these reasons.
Appeal dismissed.
