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Revisiting the CGL Policy and the Duty to Defend in Canada: The Triggering Event

The standard wordings in a commercial general liability policy (CGL) will frequently read as follows:

Bodily Injury and Property Damage Liability

Insuring Agreement:

To pay on behalf of the insured those sums which the Insured shall become legally obligated to pay as damages because of:

(b) Property Damage (as defined herein) caused by an occurrence (as defined herein).

Definitions

OCCURRENCE means:

An accident, including continuous or repeated exposure to substantially the same general harmful conditions.

All damage to property arising out of a continuous or repeated exposure to substantially the same general conditions shall be considered as arising out of one occurrence.

PROPERTY DAMAGE means:

(a) Physical injury to or destruction of property which occurs during the policy period, including all resulting loss of use of that property; or

(b) Loss of use of tangible property that has not been physically injured or destroyed provided that such loss of use occurs during the policy period.

Now consider the following: A contractor is insured under a CGL with the above wordings from Year 1 to Year 5. He is engaged to provide roof trusses to a building in Year 1. The policy lapses in Year 5. After the policy has lapsed, the contractor has not obtained new insurance as he has ceased operations. In Year 8, the roof collapses during a heavy snowfall. The owner of the damaged building commences action against the contractor in Year 8. The pleadings allege that the roof collapse was caused by the negligent design and installation of the roof trusses by the contractor. The contractor presents the claim to his broker seeking a defence under his CGL which was in place from Year 1 to Year 5. Is a duty to defend triggered?

A similar set of facts was considered in Co-operators General Insurance Co. v. Wawanesa Mutual Insurance Co., 2014 NSSC 23 in which the court considered whether the duty to defend was triggered by allegations of negligent installation work during the policy period with subsequent failure outside of the policy period. A plumber engaged in plumbing work in 2004 while insured under a CGL policy that lapsed in 2005. The work failed in 2011 which resulted in property damage. The court held that Co-operators did have a duty to defend the plumber based on the allegation of defective installation during the policy period. In so doing, the court held that it was bound by a similar decision of the Nova Scotia Court of Appeal in Meridian Construction Inc. v. Royal & Sun Alliance Co. of Canada, 2012 NSCA 84.

Does the mere allegation of defective work which subsequently gave rise to property damage outside the policy period trigger a duty to defend under the policy period in place at the time the work was done? This requires a closer examination of both the pleadings and the policy wordings.

In Co-operators General Insurance Co. v. Wawanesa Mutual Insurance Co. and Meridian Construction Inc. v. Royal & Sun Alliance Co. of Canada, the courts cite the well known Supreme Court of Canada case of Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33, in which the court said this:

19 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 (Nichols v. American Home Assurance Co., 1990 CanLII 144 (SCC), [1990] 1 S.C.R. 801, at pp. 810-11; Monenco Ltd. v. Commonwealth Insurance Co., 2001 SCC 49 (CanLII), [2001] 2 S.C.R. 699, at para. 28; Jesuit Fathers of Upper Canada v. Guardian Insurance Co. of Canada, 2006 SCC 21 (CanLII), [2006] 1 S.C.R. 744, at paras. 54-55). It is irrelevant whether the allegations in the pleadings can be proven in evidence. That is to say, the duty to defend is not dependent on the insured actually being liable and the insurer actually being required to indemnify. What is required is the mere possibility that a claim falls within the insurance policy. Where it is clear that the claim falls outside the policy, either because it does not come within the initial grant of coverage or is excluded by an exclusion clause, there will be no duty to defend (see Nichols, at p. 810; Monenco, at para. 29).

While these general principles cannot be challenged, it is also true that an insurer is not always "in the hands of a third party pleader": Cansulex Ltd. v. Reed Stenhouse Ltd., (1986) 70 B.C.L.R. 273 (S.C.). One is able to examine the pleadings to determine the real nature of the claims presented and whether it can be fairly said that the pleadings possibly or reasonably allege property damage occurring during the policy period. While amibiguties in the policy wordings will be interpreted in favour of the insured, it has also been said that the courts "must fastidiously guard against the invitation to create ambiguities where none exist.": Pacific Rim Nutrition Ltd. v. Guardian Insurance Company of Canada (1998) 54 B.C.L.R. (3rd) 111 (C.A.). Further, words in a policy, and perhaps in the pleadings, are to be construed in their plain, ordinary and popular sense.

It is sometimes useful to return to first principles. As a general rule, in an occurrence policy, coverage is provided by the policy in force at the time the bodily injury or damage occurs: Hilliker, Liability Insurance Law in Canada, 5th ed., LexisNexis. In most cases, it should not be a matter of great difficulty in determining when the damage occurs. However, in recent years, the analysis has been complicated by a growing number of claims where the precise date of damage can not be readily determined, such as in the water ingress claims in construction projects. Thus, in claims such as Progressive Homes Ltd., supra, there is language that equates defective work with property damage and an occurrence, but this is not always so. Further, in Progressive Homes Ltd., the issue of whether the property damage occurred during the policy period was not in issue as the pleadings alleged damage since the date of construction and continuous thereafter. In such a claim, applying a continuous trigger or triple trigger theory will be appropriate: See Hilliker, ibid., p. 203. In such cases, cause and effect are intertwined and essentially simultaneous.

A simple allegation of defective work in and by itself does not lead to the conclusion of property damage occurring during the policy period. In the first instance, such must be supported by the pleadings themselves, as in Progressive Homes Ltd. Do the allegations, properly interpreted according to their plain, ordinary and popular sense, support an inference of continuous damage? If not, the inquiry should cease there and one should not attempt to contort the pleadings into a different set of allegations: Re Thames Steel Construction Ltd. and Northern Assurance Co. Ltd., 1988 CanLII 4657 (On CA).

In addition to carefully examining the true nature of the allegations made, one must give attention to the actual wordings of the policy under consideration. It is true that in many cases, the damage may be deemed to have occurred at the time of construction depending on the particular allegations. This is the nature of the continuous trigger theory. However, there are certain policy wordings now in use which also deem that the damage occurs at the time the work was done.

On close analysis, this was precisely the case in the previously cited cases of Co-operators General Insurance Co. v. Wawanesa Mutual Insurance Co. and Meridian Construction Inc. v. Royal & Sun Alliance Co. of Canada. In the latter case, the court held property damage that results in loss of use of tangible property that is not physically injured is "deemed to have occurred at the time of the occurrence that caused it." This is only so because of the policy wordings used therein. The definition of "property damage" therein included this:

"Property damage" that is loss of use of tangible property that is not physically injured shall be deemed to occur at the time of the "occurrence" that caused it.

Thus, applying this wording, the time of the occurrence was not the property damage itself, but the event or originating act that led to the property damage.

This wording is distinct from the wording in the policy in issue which defines "property damage" as follows:

PROPERTY DAMAGE means:

(a) Physical injury to or destruction of property which occurs during the policy period, including all resulting loss of use of that property;

While policies can be drafted to provide coverage for the "injury causing event" occurring during the policy period, as opposed to damage occurring during the policy period, such is not always the case and underwriters will wish to exercise due diligence in crafting their wordings to ensure that they do not produce unintended results and coverage that was not intended.

Thus, in the fact pattern presented–the contractor installing alleged defective trusses during the policy period with physical damage occurring well after the expiry of the policy–I would argue that the law remains that no duty to defend arises as the occurrence did not result in property damage during the policy period. In order to find otherwise, one would have to rewrite either the allegations or the policy wordings, and this is not an exercise in which the courts should properly engage.