Court Says Repair Costs Like Environmental Cleanup — CGL Must Pay

We are happy to report that The Canadian Legal LEXPERT Directory for 2005 lists Steve Cavanagh as a “Leading Practitioner” in “Civil Litigation—Commercial Insurance”, one of only five lawyers in eastern Ontario to be so recognized. Congratulations also to the other four Ottawa lawyers who made the LEXPERT list: David Scott, Q.C., Brian Parnega, Pat Santini and Bruce Carr-Harris.  BridgewoodBuilding v. Lombard Insurance

At last week’s Canadian Defence Lawyers ’ CGL seminar in Toronto yesterday, everyone was talking about the decision released the previous Friday, in Bridgewood Building v. Lombard Insurance. Tom Donnelly of Cassels Brock, one of the winning counsel, was good enough to forward to us a copy of the reasons, which are attached. (The case has not yet been reported, so the attachment is a PDF of a fax.)Just when Alie v. Bertrand was starting to recede from memory, Bridgewood deals again with claims arising from failed concrete foundations. The builders in Bridgewood had sought coverage from their insurer, Lombard, for the cost of repairing homes damaged by a subcontractor’s defective concrete. The court found that the builders were entitled to indemnity for the repair costs (approximately $2 million). This decision may represent a rather startling expansion of coverage under CGL policies. In finding coverage for major repair costs, Justice Stewart likened those expenses to the cost of cleaning up environmental spills. She justified saddling the insurer with this cost on grounds of public policy, rather than an interpretation of the policy language. (To be fair, she concluded that the policy language, which she interpreted against Lombard , did not preclude her expansive interpretation.)At yesterday’s CDL conference, one speaker expressed surprise that Lombard had not attempted to argue either the “work” or “product” exclusions in the CGL. (The reasons of Stewart J. make it clear that indeed, Lombard did not argue either exclusion.) Instead, Lombard advanced three other arguments in support of its denial of coverage: 1.     the insureds were not “legally obligated to pay as damages” the repair costs resulting from the faulty concrete, as required by the insuring agreement;2.     the payments made by the Insureds were “voluntary” and so, not recoverable; and

3.     the “liability assumed in a contract” exclusion applied.

 

 

“Legally obligated to pay” The CGL’s insuring agreement only provided coverage for what the builders were “legally obligated to pay as damages”. However, because the builders had gone ahead and repaired the damaged homes, no one had sued them. Lombard argued that this meant that there was no coverage.But the evidence showed that both the homeowners and the administrator of the Ontario New Home Warranty Plan would have sued, had the homes not been repaired.Justice Stewart held that “the plain meaning of ‘legally obligated to pay as damages’, construed broadly, embraces the statutorily imposed warranty obligations which are the subject of this dispute”. She had no difficulty finding that the potential claims against the insured builders were within the insuring agreement.  

Voluntary payments”Lombard also submitted that its insureds were not entitled to go ahead and incur the cleanup costs and then look to the insurer for recovery. It characterized these as “voluntary payments” that were not recoverable.The court rejected this argument: [T]he simple principles of good faith and reasonableness which apply to the obligations of the parties to the Policies would require Lombard to acquiesce to the responsible conduct of the Applicants in this instance. Under Lombard’s interpretation, the Applicants would be required to breach the statute by refusing to repair, run the risk that the houses would collapse or cause personal injury and have their licences to carry on business placed in jeopardy for failure to comply with the statute. I agree with the Applicants that such an interpretation is contrary to both public policy and common sense and would not have been in accordance with the reasonable expectations of the parties. Accordingly, I am sure of the opinion [sic] that the costs incurred by the Applicants are not “Voluntary Payments” within the meaning of that term in the Policies. 

The CGL’s insuring agreement only provided coverage for what the builders were “legally obligated to pay as damages”. However, because the builders had gone ahead and repaired the damaged homes, no one had sued them. Lombard argued that this meant that there was no coverage.Lombard also submitted that its insureds were not entitled to go ahead and incur the cleanup costs and then look to the insurer for recovery. It characterized these as “voluntary payments” that were not recoverable.The court rejected this argument: [T]he simple principles of good faith and reasonableness which apply to the obligations of the parties to the Policies would require Lombard to acquiesce to the responsible conduct of the Applicants in this instance. Under Lombard’s interpretation, the Applicants would be required to breach the statute by refusing to repair, run the risk that the houses would collapse or cause personal injury and have their licences to carry on business placed in jeopardy for failure to comply with the statute. I agree with the Applicants that such an interpretation is contrary to both public policy and common sense and would not have been in accordance with the reasonable expectations of the parties. Accordingly, I am sure of the opinion [sic] that the costs incurred by the Applicants are not “Voluntary Payments” within the meaning of that term in the Policies. 

Contractual liability exclusionJustice Stewart also made short work of Lombard ’s argument, that there was no coverage because the liability was one imposed by contract. She pointed out that the builders’ liability under the Ontario New Home Warranty Plan stemmed not from contract, but from statute. Therefore, in her view, the “liability assumed in a contract” exclusion did not apply.

Repair costs as environmental cleanup Even though Lombard , for some reason, did not raise the “work” and “product” exclusions, it did make some submissions in a similar vein. It said that it had “never expected to provide the [Insureds] with coverage tantamount to that offered by a Performance Bond, and thereby insure the quality of the [Insureds’] work and the work and materials of the [Insureds’] subcontractors”. And it argued that a “CGL policy, by its 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”. If the court were to allow this claim, Lombard argued, the “floodgates” would thereby be opened to all sorts of other claims, such as building code infractions, substitution of sinks, repair of chipped tiles, drywall repair and essentially all of the builders’ work. (It is just this sort of argument that is usually made in the context of the “work” and “product” exclusions.)The court’s handling of the “performance bond” argument will be rather alarming to insurers. Stewart J. stressed that Lombard had not relied on the “work” or “product” exclusions. But quite apart from that, she seems to have rejected the “performance bond” argument solely on the basis of public policy concerns, treating the remedial work on these homes as being equivalent to an environment cleanup. She said: 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 legislative requirements, raise public policy considerations that serve to outweigh Lombard ’s concerns.It is evident that the Act and ONHWP are in the nature of consumer protection legislation, designed to assist and protect the purchasers of new homes. In my view, this no-fault remedial and protective legislative scheme is akin to environmental protection legislation which requires pollution clean-up and the costs thereof to be carried out and absorbed by persons regardless of proof of negligence or fault.If courts are now going to require CGL policies to pay millions of dollars in repair costs, “regardless of proof of negligence or fault”, underwriters should probably be warned.Many at the CDL meeting anticipated an appeal of the Bridgewood ruling. Stay tuned. 

The CGL’s insuring agreement only provided coverage for what the builders were “legally obligated to pay as damages”. However, because the builders had gone ahead and repaired the damaged homes, no one had sued them. Lombard argued that this meant that there was no coverage.Lombard also submitted that its insureds were not entitled to go ahead and incur the cleanup costs and then look to the insurer for recovery. It characterized these as “voluntary payments” that were not recoverable.Justice Stewart also made short work of Lombard ’s argument, that there was no coverage because the liability was one imposed by contract. She pointed out that the builders’ liability under the Ontario New Home Warranty Plan stemmed not from contract, but from statute. Therefore, in her view, the “liability assumed in a contract” exclusion did not apply.

The CGL’s insuring agreement only provided coverage for what the builders were “legally obligated to pay as damages”. However, because the builders had gone ahead and repaired the damaged homes, no one had sued them. Lombard argued that this meant that there was no coverage.Lombard also submitted that its insureds were not entitled to go ahead and incur the cleanup costs and then look to the insurer for recovery. It characterized these as “voluntary payments” that were not recoverable.Justice Stewart also made short work of Lombard ’s argument, that there was no coverage because the liability was one imposed by contract. She pointed out that the builders’ liability under the Ontario New Home Warranty Plan stemmed not from contract, but from statute. Therefore, in her view, the “liability assumed in a contract” exclusion did not apply.

The CGL’s insuring agreement only provided coverage for what the builders were “legally obligated to pay as damages”. However, because the builders had gone ahead and repaired the damaged homes, no one had sued them. Lombard argued that this meant that there was no coverage.Lombard also submitted that its insureds were not entitled to go ahead and incur the cleanup costs and then look to the insurer for recovery. It characterized these as “voluntary payments” that were not recoverable.Justice Stewart also made short work of Lombard ’s argument, that there was no coverage because the liability was one imposed by contract. She pointed out that the builders’ liability under the Ontario New Home Warranty Plan stemmed not from contract, but from statute. Therefore, in her view, the “liability assumed in a contract” exclusion did not apply.The CGL’s insuring agreement only provided coverage for what the builders were “legally obligated to pay as damages”. However, because the builders had gone ahead and repaired the damaged homes, no one had sued them. Lombard argued that this meant that there was no coverage.Lombard also submitted that its insureds were not entitled to go ahead and incur the cleanup costs and then look to the insurer for recovery. It characterized these as “voluntary payments” that were not recoverable.The court rejected this argument: [T]he simple principles of good faith and reasonableness which apply to the obligations of the parties to the Policies would require Lombard to acquiesce to the responsible conduct of the Applicants in this instance. Under Lombard’s interpretation, the Applicants would be required to breach the statute by refusing to repair, run the risk that the houses would collapse or cause personal injury and have their licences to carry on business placed in jeopardy for failure to comply with the statute. I agree with the Applicants that such an interpretation is contrary to both public policy and common sense and would not have been in accordance with the reasonable expectations of the parties. Accordingly, I am sure of the opinion [sic] that the costs incurred by the Applicants are not “Voluntary Payments” within the meaning of that term in the Policies. The CGL’s insuring agreement only provided coverage for what the builders were “legally obligated to pay as damages”. However, because the builders had gone ahead and repaired the damaged homes, no one had sued them. Lombard argued that this meant that there was no coverage.Lombard also submitted that its insureds were not entitled to go ahead and incur the cleanup costs and then look to the insurer for recovery. It characterized these as “voluntary payments” that were not recoverable.The court rejected this argument: [T]he simple principles of good faith and reasonableness which apply to the obligations of the parties to the Policies would require Lombard to acquiesce to the responsible conduct of the Applicants in this instance. Under Lombard’s interpretation, the Applicants would be required to breach the statute by refusing to repair, run the risk that the houses would collapse or cause personal injury and have their licences to carry on business placed in jeopardy for failure to comply with the statute. I agree with the Applicants that such an interpretation is contrary to both public policy and common sense and would not have been in accordance with the reasonable expectations of the parties. Accordingly, I am sure of the opinion [sic] that the costs incurred by the Applicants are not “Voluntary Payments” within the meaning of that term in the Policies.Justice Stewart also made short work of Lombard ’s argument, that there was no coverage because the liability was one imposed by contract. She pointed out that the builders’ liability under the Ontario New Home Warranty Plan stemmed not from contract, but from statute. Therefore, in her view, the “liability assumed in a contract” exclusion did not apply. Even though Lombard , for some reason, did not raise the “work” and “product” exclusions, it did make some submissions in a similar vein. It said that it had “never expected to provide the [Insureds] with coverage tantamount to that offered by a Performance Bond, and thereby insure the quality of the [Insureds’] work and the work and materials of the [Insureds’] subcontractors”. And it argued that a “CGL policy, by its 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”.The CGL’s insuring agreement only provided coverage for what the builders were “legally obligated to pay as damages”. However, because the builders had gone ahead and repaired the damaged homes, no one had sued them. Lombard argued that this meant that there was no coverage.Lombard also submitted that its insureds were not entitled to go ahead and incur the cleanup costs and then look to the insurer for recovery. It characterized these as “voluntary payments” that were not recoverable.Justice Stewart also made short work of Lombard ’s argument, that there was no coverage because the liability was one imposed by contract. She pointed out that the builders’ liability under the Ontario New Home Warranty Plan stemmed not from contract, but from statute. Therefore, in her view, the “liability assumed in a contract” exclusion did not apply.

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