|By: Dylan J. Cox, Litigation Associate|
In KBK No. 11 Ventures Ltd. v. XL Insurance Company Ltd., the BC Supreme Court (“BCSC”) ruled for the insureds in a petition brought after their insurer, XL Insurance Company (“XL”) refused to defend an action alleging negligent construction of a tower (the “Tower”). The judge rejected XL’s arguments that would have either permitted it to disclaim or severely limit the scope of its defence obligation. XL was ordered to fully defend its insureds.
XL issued a “wrap up” construction liability policy covering the developers of the Tower, as well as their construction manager and project manager (collectively, the “Insureds”). The Insureds were sued in a series of actions alleging negligent design, manufacturing and installation of the Tower’s exterior curtain-wall system (the “Underlying Actions”). The plaintiffs sued for the cost to repair and/or replace defective components of the curtain-wall system, as well as for consequential damage that these defects caused to other Tower components.
XL relied on its policy’s “your work” exclusion, which stated:
This insurance does not apply to … “Property damage” to that particular part of “your work” out of which the “occurrence” arises and included in the “completed operations hazard”.
XL Ordered to Defend
XL made two arguments, each of which the judge rejected. First, XL argued that the Insureds, as developers and managers of the construction project, were responsible for the entire Tower. This meant that the only “property damage” alleged in the Underlying Actions (i.e., damage to various Tower components) was to “work” the Insureds were responsible for. The “your work” exclusion therefore applied to all alleged damage, meaning XL had no duty to defend.
In dismissing this first argument, the judge referred to the Supreme Court of Canada’s decision in Progressive Homes v. Lombard, another coverage decision involving allegations of negligent construction. The insured in Progressive Homes was a general contractor, who would have been responsible for the entire construction project.
In Progressive Homes, the SCC interpreted a similar “your work” exclusion, which focused on “that particular part” of the insured’s work. The intent of those words was to divide the general contractor’s work into components. Coverage would only be excluded for damage to “that particular part” of the insured’s work that was done defectively. However, there would be coverage for any resulting damage that the defects caused to other parts of the insured’s work.
Therefore, if the curtain-wall system was defective, XL would not have to pay to repair and/or replace it. However, it would have to pay for any resulting damage to other Tower components. It did not matter that the Insureds were responsible for all Tower components.
Next, XL argued that even if it had to cover resulting damage claims, those claims could be carved out from those captured by the “your work” exclusion (i.e., the “Defective Work Claims”). XL claimed that most of the claims in the Underlying Actions were Defective Work Claims.
Again, the judge disagreed. The Underlying Actions had not yet been tried. Even the cases relied on by XL noted the impossibility of disentangling resulting damage and defective work claims before trial. The trial would determine what work was defective and what losses (if any) were resulting damage. Until then, XL had to provide a full defence in the Underlying Actions.
This decision reiterates that the “your work” exclusion only excludes damage to that part of the insured’s work that resulted in wider construction damage; the insurer must cover that resulting damage.
The insurer will also often have to defend the entire proceedings. A similar order was recently made in GFL Infrastructure Group v. Temple, an appeal argued by our office. In these cases, the insurer must provide a full defence because until the underlying proceedings are resolved, it is usually impossible to disentangle excluded claims for repairing defects from potentially covered resulting damage claims.
 2022 BCSC 1652
 2010 SCC 33
 2022 ONCA 390
Dylan J. Cox is an associate at Theall Group LLP and maintains a broad commercial litigation practice. Prior to joining Theall Group LLP, Dylan articled at a prominent litigation boutique in downtown Toronto where he worked on commercial litigation, appellate, class actions and insurance law files. Dylan graduated from the University of Toronto law school and was called to the Ontario bar in 2016.
For more information, visit https://theallgroup.com/
Photo courtesy of Simone Hutsch on Unsplash