By David I. Bristow, QC, LSM, C.Arb
What is an insurer’s duty to defend its insured when it comes to legal action? In construction, this issue comes up time after time in court cases, arbitrations, and mediations. In 2004, BGS Homes Inc. (BGS) retained Parkhill to design, install, and supervise the construction of 36 septic systems in homes it built and sold. The work, performed from 2004 to 2010, was deficient. BGS and Tarion Warranty Corporation replaced the 36 septic systems in 2011.
The following year, BGS sued Parkhill for negligence and breach of contract. Parkhill defended the action of BGS and commenced a third-party claim against a sub-trade, Young Construction (Young). Parkhill then requested its insurance companies defend it in the action. The insurers denied they had a duty to defend the action and they relied on the exclusionary clauses in the insurance contracts, which stated the insurers do not cover damage to “your work”—that is, the work of Parkhill under its contract with BGS. Parkhill then commenced action against the insurers to force them to provide a defence to the claim.
The hearing judge found the “your work” exclusion applied and dismissed the case against the insurers.
Parkhill appealed and argued there would be consequential damages over and above the cost of repairs to the faulty work—therefore, the insurers must defend Parkhill in BGS’s action against it. The Court of Appeal agreed and allowed the appeal.
In allowing the appeal, the court quoted from paragraph 37 of the initial judge’s reasons for judgement:
The damages sought in the underlying action are approximately four times what Parkhill was paid to install the septic systems. The plaintiffs in the underlying action claim losses arising from deficiencies in the septic system. At para. 44 of the claim, it is alleged that the “[b]uilder has incurred costs and continues to incur costs performing remedial work necessary to satisfy the orders to comply.” Paragraph 51 of the claim alleges that the plaintiffs “are expected to have to perform further remedial work at their own expense”. Paragraph 82 refers to the cost of remedial work “including the higher cost of remedying work once the homes had been sold.” Accordingly, in addition to the question of whether defective work can be an accident, which has been answered affirmatively by Progressive Homes at paras 42-50, it is not at all clear from the claim that the damages sought are restricted only to the replacement of the allegedly deficient systems due to the work performed by Parkhill.
The Court of Appeal stated, “Having made this finding, the motions judge should have concluded that there was a mere possibility that claims for consequential damages were being asserted and that therefore the insurers must defend.”
This case now puts a heavy burden on insurers regarding the “own work” exclusion found in most all insurers’ contracts, and a mere possibility the work is even partially for consequential damages requires the insurers to defend.
The case was reported at 2016-ONCA-832.
David I. Bristow, QC, LSM, C.Arb., is a Toronto-based provider of alternative dispute resolution (ADR) services consisting of mediations, arbitrations, and early neutral evaluations. He is co-author of Construction Builders’ and Mechanics’ Liens in Canada. Bristow is a member of the American Arbitration Association’s (AAA’s) panel of arbitrators, a mediation and arbitration panel member of both the International Chamber of Commerce and the Centre for Public Resources Institute of Dispute Resolution, and a charter member of Mediators Beyond Borders. He can be reached at email@example.com.