Home Buyers Take Note > Coverage for Home Builders > Duty to Defend and Insurance Policies

When buying a new home, you probably assume that if there is any terribly wrong with your new home, that you can sue the builder and that this builder will have an insurance policy to back them up.

That is, you probably do not expect that you will be chasing only the builder’s assets, which may not be substantial.

So, for example, if you purchase a new home which later shows “significant water damage caused rot, infestation and deterioration”, then when you sue, will there be an insurance policy protecting the builder and thereby responding to your lawsuit?

To answer that question, you have to read through the builder’s insurance policy and wade through the coverage, exclusions and exceptions that are involved with almost every policy.

This is no easy task.  If you ask two different lawyers about the same fact scenario, you may receive two different answers.  This may also hold true if the case proceeds to different levels of Court – different answers may be given to the same fact scenario.

So it was in the recent 2010 Supreme Court of Canada case of Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33, which involved a home builder that was being sued by purchasers for defects in four new homes.

The motions court ruled that the builder (Progressive Homes) was not owed a defence nor coverage, as the “…defective construction is not an “accident” unless it causes damage to the property of a third party…. the court could not artificially divide the insured’s work into its component parts for the purpose of establishing resulting property damage.”

The British Columbia Court of Appeal dismissed the appeal by the builder.  In a split decision, it was found that on the wording of the insurance policy did not support a defence or coverage.

At the Supreme Court of Canada, Rothstein, J. for the Court held:

[29] Each insurance policy covers property damage caused by an accident.  The question, then, is what are the meanings of “property damage” and “accident” in these policies.  The onus is on the insured, Progressive, to show that the pleadings fall within the initial grant of coverage.
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[36] I would construe the definition of “property damage”, according to the plain language of the definition, to include 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. 

[37] The plain meaning of “property damage” is consistent with reading the policy as a whole.  Qualifying the meaning of “property damage” to mean third-party property would leave little or no work for the “work performed” exclusion (discussed in more detail below).  Lombard argues that the exclusion clauses do not create coverage.  This is true.  But reading the insurance policy as a whole is not the same as conjuring up coverage when there was none in the first place.  Consistency with the exclusion clauses is a further indicator that the plain meaning of “property damage” is the definition intended by the parties.

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[41] Do the pleadings allege “property damage”?  In my view, they do.  The pleadings describe water leaking in through windows and walls and allege “deterioration of the building components resulting from water ingress and infiltration”. The pleadings also describe defective property, which may also be “property damage”: e.g., improperly built walls, inadequate ventilation system, poorly installed windows.  Whether specific property actually falls within the definition of “property damage” is a matter to be determined on the evidence at trial.  This meets the low threshold of showing that the pleadings reveal a possibility of property damage for the purpose of deciding whether Lombard owes a duty to defend.

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[49] “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.

[50] In my view, the pleadings sufficiently allege an “accident”.  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.  In addition, it is clear from the pleadings that the damage alleged is the result of “continuous or repeated exposure to conditions”, which squarely fits within the definition.  If at trial it emerges that the damage was expected or intended by Progressive, then Lombard would not be required to indemnify Progressive.  However, the duty to defend only requires a possibility of coverage and I am satisfied that possibility is made out in this case.

Readers can review our January 18, 2010 blog for similar issues regarding the defence and coverage of a homeowner/builder under a homeowner’s policy.
Gregory Chang
Toronto Insurance Lawyer