The Alberta Court of Appeal recently released two insurance coverage decisions analyzing:
- What facts would trigger the insurer’s duty to defend; and
- Whether a policy covered property damage that resulted from a contractor’s faulty workmanship.
In both cases, the three-justice panel decided against the insurer.
The Duty to Defend
In Intact Insurance Company v Clauson Cold & Cooler Ltd, 2020 ABCA 161, Clauson Cold & Cooler Ltd. (“Clauson”) operated a cold warehouse storage business where its customers stored their frozen products. At all material times, Intact Insurance Company (“Intact”) was Clauson’s insurer. In 2015 and 2016, several occurrences at Clauson’s warehouse caused thawing and damage to the products of two of Clauson’s customers. They brought separate claims against Clauson for breach of contract and negligence in storing their frozen goods, both of which Intact refused to defend.
In determining whether the insurer owed a duty to defend, the Alberta Court of Appeal followed the principles established by the Supreme Court of Canada (“SCC”) in Progressive Homes Ltd v Lombard General Insurance Co of Canada, 2010 SCC 33. In that case, the SCC established that an insurer must 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. The legal labels chosen by the plaintiff did not matter; rather, the court would examine the true nature or substance of the claim to determine whether it fell within the scope of coverage. Once the insured demonstrated that the plaintiff’s claim fell within the insurance coverage, the onus then shifted to the insurer to demonstrate that it fell outside the insurance coverage.
The duty to defend is broad and arises where the mere possibility exists that a claim falls within the insurance policy. In other words, triggering the duty does not require evidence of actual liability. It is therefore inappropriate for the courts to consider extrinsic evidence at this stage.
In this case, Intact’s insurance policy (the “Policy”) comprised of more than 20 forms, only 4 of which the court found relevant to the proceedings. Only the CGL Form and Warehouse Legal Liability Form contained a clause pertaining to the duty to defend. The particular clause at issue in the CGL Form stated:
“DEFENCE, SETTLEMENT AND SUPPLEMENTARY PAYMENTS – COVERAGES A, B AND D”
With respect to the insurance afforded by the other terms of this Policy, the Insurer agrees:
(a) to defend in the name of and on behalf of the Insured, claims, suits or other proceedings that may at any time be instituted against the Insured for any accident or “occurrence” covered by this Policy… [Emphasis added].
Intact contended that the CGL Form limited its duty to defend to the three CGL coverage sections listed in the heading (A, B, and D). However, the court found that references to the “Policy” and “other terms of this Policy” meant that Intact’s duty to defend applied to the complete Policy (i.e. comprising all 20 forms and the approximately 150-page bundle of insuring documents). In arriving at this interpretation, the court considered the fact that Intact only assigned one policy number to the entire bundle of documents and the express language in the declarations page stating that the Policy declarations, forms, and other documents completed the Policy.
The court found that Intact could have expressly limited its duty to defend to only the claims on the CGL form, but it did not do so. Because the two other forms provided coverage for loss of third party products under refrigeration due to spoilage, the court concluded that the plaintiffs’ allegations against Clauson triggered Intact’s duty to defend.
As an aside, the court also commented that “it comports with commercial reality that Clauson, being in the business of a cold storage warehouse, would have expected its insurer to provide coverage, somewhere in the volume of forms, for the most basic aspect of its business – the safe warehousing of customers’ frozen products.”
In Condominium Corporation No 9312374 v Aviva Insurance Company of Canada, 2020 ABCA 166, the Condo Corp. contracted with Durwest Construction Systems Alberta Limited and Williams Engineering Canada Inc. (collectively, the “Contractors”) for them to provide parking rehabilitation and maintenance work to the parking surface of the Condo Corp.’s parkade. Under the agreement, the Contractors’ work included cutting into the membrane of the parkade surface but excluded work that would impact the parkade’s structural integrity. However, while stripping and coating the membrane of the parkade surface, the Contractors cut too deeply into the parkade slab and caused damage to the parkade’s structural integrity (the “Property Damage”). At the time the Property Damage occurred, the Condo Corp. was insured under Aviva’s multi-peril insurance contract (the “Policy”). However, Aviva denied coverage for the claim on the basis that the Policy excluded the Property Damage.
The Policy excluded coverage for “the cost of making good faulty or improper workmanship”. However, it also contained an exception to this exclusion clause for “loss or damage caused directly by a resultant peril.”
To interpret the exclusion clause in this case, the Court of Appeal followed the SCC’s approach in Ledcor Construction Ltd v Northbridge Indemnity Insurance Co, 2016 SCC 37. In Ledcor, the building owner had hired a contractor to clean the tower’s windows but ended up having to replace the windows after the contractor used improper cleaning tools and methods that scratched the windows. Both the owner and contractor claimed the costs of replacing the windows, which the insurer denied based on the policy’s faulty workmanship exclusion. While the exclusion clause excluded the “cost of making good faulty workmanship”, it also provided an exception for physical damage resulting from faulty workmanship.
Where an exclusion clause is ambiguous (i.e. where it is capable of more than one meaning), the courts will adopt an interpretation that is consistent with the parties’ reasonable expectations and the existing commercial reality. If any ambiguity remains, the courts will construe the policy against the insurer who drafted the policy by interpreting the coverage provisions broadly and the exclusion provisions narrowly.
In Ledcor, the SCC found that the scope of work contracted for defined the limits of the faulty workmanship exclusion. Therefore, the builders’ risk policies served the purpose of providing insureds with certainty, stability, and peace of mind through broad coverage while also discouraging contractors from being careless and then relying on insurers to pay the cost of correcting their mistake. Any other interpretation would give the insurer carte blanche to use faulty materials, workmanship, or design. The Alberta Court of Appeal in this case found that multi-peril policies also shared the same purpose.
In this case, the Alberta Court of Appeal found the exclusion clause ambiguous because the Policy did not define the term “resultant peril”. The court ultimately interpreted “resultant peril” to mean a “consequence that causes a risk of loss to person or property”. It concluded that the loss of structural integrity to the parkade constituted a resultant peril – the Property Damage resulted as a consequence of the Contractors’ faulty workmanship, which in turn caused a risk of structural collapse.
Because the faulty workmanship exclusion only excludes work contracted for by the parties, the Alberta Court of Appeal found that the exclusion clause only excluded rehabilitation and maintenance work to the parking surface of the Condo Corp.’s parkade. However, since the agreement specifically excluded work that would impact the parkade’s structural integrity (thus being outside the scope of work for which they contracted), the exception to the exclusion clause provided coverage to the Property Damage. The court found that interpreting the exception to the exclusion clause as covering consequences of faulty workmanship (i.e. the resultant peril) accorded with the parties’ reasonable expectations and the commercial reality.
Takeaways from the Alberta Court of Appeal in Clauson and Aviva
These cases are good reminders that the courts will likely turn to fundamental principles such as those laid out by the SCC in Progressive and Ledcor when interpreting a policy, namely:
- The courts will likely turn to whether the insurer included express language that specifically limits the insurer’s duty to defend.
- The courts will likely adopt an interpretation that is consistent with the parties’ reasonable expectations and the existing commercial reality when interpreting a policy.
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