By: Melissa A. Wright, Litigation Associate
The Ontario Court of Appeal’s recent decision in G & P Procleaners and General Contractors Inc. v. Gore Mutual Insurance Co. (“Procleaners”)[1] is an interesting example of the application of the “your work” exclusion, particularly since the Court rejected the approach to policy interpretation that the Newfoundland Court of Appeal gave to an exclusion with very similar wording.
Procleaners involved a contractor who was hired to clean the windows of a newly constructed commercial building. Some of the windows were damaged by cement debris that adhered to the wet windows during cleaning. The debris came from stone cutting machines that were being used onsite at the time of cleaning. The contractor reimbursed the owner of the building approximately $134,000 for the damage to the windows and then sought indemnification under its commercial general liability policy (the “Policy”).
The coverage grant in the Policy insured against an “occurrence” defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”[2] The contractor argued that the damage to the windows arose as a result of unforeseen environmental conditions at the construction site (e.g., the airborne debris from the stone cutting machines) and was therefore an “occurrence” under the Policy triggering coverage. The insurer denied the claim on the basis that it was excluded by the “your work” exclusion clause in the Policy, which read as follows:
2. Exclusions…
(h) “Property damage” to: . . .
(v) that particular part of real property on which you or any contractor or subcontractor working directly or indirectly on your behalf is performing operations, if the “property damage” arises out of those operations; or
(vi) that particular part of any property that must be restored, repaired or replaced because “your work” was incorrectly performed on it.
The motions judge agreed with the insurer, finding that the property damage was excluded by the Policy. On the motion, the contractor had admitted that the scratches on the windows resulted from, or arose out of, its window cleaning operations.[3] The contractor did not rely on any exception to the “your work” exclusion clause.
An “occurrence” is an event that causes property damage that is neither expected nor intended by the insured.[4] In the reasons for judgment of the Court of Appeal, Justice Hourigan agreed with the motions judge that the “occurrence” causing property damage in this case was the scratching of the windows caused by the contractor’s employees and not the presence of airborne cement debris. The cleaning of the windows using squeegees was expected and intended; however the scratching that occurred from cleaning was unexpected and unintended.[5] The damage did not “arise out of” cleaning itself, because the contractor’s employees chose to undertake their cleaning operations in the midst of airborne debris.[6] If they had not done so, there would have been no property damage.
The damage therefore fell within the initial coverage grant, but was excluded from coverage by the “your work” exclusion. The exclusion covered property damage to that particular part of real property (i.e., the building’s windows) on which the employee was performing operations (i.e., cleaning the windows) since the property damage (i.e., scratching of the windows) arose out of those operations.
The contractor argued on appeal that the exclusion clause was ambiguous, relying on the Newfoundland Court of Appeal’s decision in Lombard General Insurance Company of Canada v. Crosbie Industrial Services Limited (“Crosbie”).[7] In Crosbie, a fuel oil tank was destroyed following an explosion that occurred while the inside of the tank was being cleaned. Crosbie involved a nearly identical exclusion clause. The Court held for the insured on the basis that the exclusions at issue were ambiguous because they failed to identify a relationship between an “occurrence” and “your work” incorrectly performed. Therefore the “your work” exclusions could only apply where the damage was caused by incorrectly performed work absent an occurrence. As the explosion was an occurrence, the exclusions did not apply. The Court of Appeal in Procleaners rejected Crosbie as circular and inconsistent with the proper interpretation of insurance contracts, as it was illogical to apply an exclusion clause prior to determining whether there was an occurrence that triggered coverage. This is the correct result, since first principles require an occurrence to fall within the coverage grant before an exclusion clause can apply.
In response to the contractor’s argument that this interpretation of the policy rendered coverage illusory, the Court of Appeal disagreed and set out what it claimed is the general intention behind commercial general liability policies:
[…] Commercial general liability policies are generally intended to cover an insured’s liability to third parties for property damage other than to the property on which the insured’s work is being performed. They also cover consequential damage to parts of the property other than to the particular part of the property on which the work is performed. But they are not “all-risk” policies. They do not insure the manner in which the insured conducts its business. They do not generally cover the cost of repairing the insured’s own defective or faulty work product (citations omitted).[8]
While Procleaners is not a “cost of making good” case, the facts are reminiscent of the Supreme Court of Canada’s decision in Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co. (“Ledcor”)[9] (previously discussed in Covered, September 16, 2016). Ledcor involved a contractor hired to clean the windows of a building which was covered by an all risks builders-risk wrap up policy. In the course of cleaning the windows, the contractor used improper materials and equipment resulting in significant damage.
The exclusion at issue in Ledcor was, as follows:
This policy section does not insure: […]
(b) The cost of making good faulty workmanship, construction materials or design unless physical damage not otherwise excluded by this policy results, in which event this policy shall insure such resulting damage.
The Supreme Court held that the costs of replacing the windows was covered under the policy at issue as resulting damage, and only the costs of redoing the faulty work (i.e., cleaning the windows) was excluded by the faulty workmanship exclusion in the policy. Essentially the “cost of making good” was limited to the cost of redoing the particular contractor’s work.
The takeaway from Procleaners for policyholders is that small contracts have the potential to result in significant financial liability for costs that may not be covered by a commercial general liability policy. Prudence is required by employees, to not undertake work in conditions that may cause unexpected and unintended property damage. In contrast, greater coverage may be afforded to a contractor under an all-risks builders-risk wrap-up policy, as was the case in Ledcor. For counsel, this case is a good demonstration of the proper approach to policy interpretation, which requires a finding that the loss falls within the coverage grant before the exclusions can be considered.
Footnotes
[1] 2017 ONCA 298.
[2] 2017 ONCA 298 at para 8.
[3] 2017 ONCA 298 at para 11.
[4] 2017 ONCA 298 at para 17.
[5] 2017 ONCA 298 at para 18.
[6] 2017 ONCA 298 at para 20.
[7] 2006 NCLA 55.
[8] 2017 ONCA 298 at para 24.
[9] 2016 SCC 37.
Melissa A. Wright is an associate at Theall Group LLP and maintains a broad commercial litigation practice. Prior to joining Theall Group LLP, Melissa summered, articled and practiced at the Toronto offices of a prominent business law firm gaining corporate tax, dispute resolution and commercial litigation experience. Melissa graduated from the University of Windsor’s Faculty of Law in 2011 and was called to the Ontario Bar in 2012.
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