In Depth Insurance Coverage For Construction Deficiency Claims: Lessons from B.C.’s “Leaky Condo” Wars Neo J. Tuytel Senior Partner TABLE OF CONTENTS I. INTRODUCTION .......................................................................................................... 1 II. THE ‘LEAKY CONDO’ PROBLEM ................................................................................... 1 III. GOVERNMENT AND INSURANCE INDUSTRY RESPONSE TO DATE ................................. 3 IV. MORE THAN JUST NEGLIGENT DESIGN AND CONSTRUCTION CLAIMS .......................... 3 V. THE ‘CLASSIC’ CLAIMS: DEFENDING DEVELOPERS, DESIGN CONSULTANTS AND THE CONSTRUCTION INDUSTRY ......................................................................................... 3 A. DEVELOPERS............................................................................................................ 4 B. DESIGN CONSULTANTS ........................................................................................... 6 C. CONTRACTORS, TRADES AND SUPPLIERS ............................................................... 7 D. MUNICIPALITIES ...................................................................................................... 7 E. OTHER DEFENDANTS ............................................................................................ 10 1. New Home Warranty ................................................................................ 10 2. Related Companies ................................................................................... 10 3. Financial Institutions ................................................................................. 10 4. Federal and Provincial Governments ........................................................ 11 F. POTENTIAL DEFENCES ........................................................................................... 12 1. No Breach of Standard of Care ................................................................. 12 2. No Causal Connection ............................................................................... 12 3. Contribution/Lack of Mitigation ............................................................... 12 4. Betterment ................................................................................................ 13 5. Limitation Periods ..................................................................................... 13 6. Damages .................................................................................................... 16 VI. COVERAGE ISSUES UNDER LIABILITY POLICIES ........................................................... 17 A. CGL GRANTS OF COVERAGE .................................................................................. 17 1. “Legally Obligated To Pay” ........................................................................ 19 2. “Property Damage” ................................................................................... 19 3. “Occurrence”/“Accident” ......................................................................... 26 B. EXCLUSION CLAUSES ............................................................................................. 31 1. ‘Contractual Liability’ Exclusion ................................................................ 32 2. ‘Owned Property’ Exclusion ...................................................................... 34 3. “Work”/”Product” Exclusions ................................................................... 36 4. “Impaired Property” Exclusion ................................................................. 40 C. ADDITIONAL INSUREDS AND POLICY LIMITS: BAD AND GOOD NEWS ......................................................................................................... 40 D. E&O ISSUES ........................................................................................................... 41 E. D&O ISSUES ........................................................................................................... 42 VII. DISPUTES BETWEEN INSURERS: WHO’S ON THE RISK (AND FOR HOW MUCH)? ........ 42 VIII. FIRST PARTY CLAIMS ................................................................................................ 46 IX. SPECIFIC LESSONS FOR INSURERS: A COVERAGE-CENTRED PRESCRIPTION FOR COST- EFFECTIVE CLAIMS HANDLING .................................................................................. 46 A. GENERAL ADVICE (PUTTING A SYSTEM IN PLACE) ................................................ 47 1. Put Somebody In Charge........................................................................... 47 2. Look At The Whole Claim (And Determine Your Over-All Exposure) ....... 48 3. Look At All Potential Claims (And Insureds), And Determine The Real Over-All Exposure) ..................................................................... 48 4. Deal Directly With Other Insurers (Avoid Disputes Within The Industry) ............................................................................................. 48 5. Deal With Insureds (And Independent Counsel), Regarding Their Over-All Exposure ............................................................................ 48 6. Consider The Potential For Future Claims (And Possibly Change Your Underwriting Practices) ....................................................... 49 B. SPECIFIC ADVICE (A PLAN FOR HANDLING CLAIMS) ............................................. 49 1. Reserve Rights To Deny Coverage (In All Cases) ....................................... 49 2. Obtain Copies Of All Other Insurance Policies .......................................... 49 3. Determine Which Insurer Should Be Defending ....................................... 49 4. Involve The Insured (And Independent Counsel) In Defence and Settlement ................................................................................................ 50 5. Make A Preliminary Assessment Of Liability And Quantum (Are You A Big Or Small Player?) ............................................................... 50 6. Retain An Expert (But Hold Off On Getting A Report) .............................. 50 7. Cooperate With The Plaintiff (And Other Parties) In Exchanging Information - Hold Off On Documents And Discoveries ........................... 50 8. Obtain A Case Management Order ........................................................... 50 9. Try The Original ADR Technique: Settlement Negotiations..................... 51 10. Use “B.C. Ferries” Releases (To Get Your Insured Out, If Other Defendants Are Being Unreasonable) .......................................................................... 51 11. Mediate (With Judicial Assistance, If Necessary) ..................................... 51 12. Simplify The Trial (By Severing Issues And/Or Parties) ............................. 52 X. CONCLUSION ............................................................................................................ 52 INSURANCE COVERAGE FOR CONSTRUCTION DEFICIENCY CLAIMS: Lessons From B.C.’s ‘Leaky Condo’ Wars by Neo J. Tuytel, Senior Partner I. INTRODUCTION The insurance industry is painfully aware of the leaky condominium crisis in British Columbia. Particularly in the Lower Mainland and on Vancouver Island, condominiums have leaked badly and the collective repair costs have been very substantial. Insurers’ legal bills, for defending the resulting litigation, settling those claims and resolving related coverage disputes, have been very significant. There have also been an increasing number of water ingress claims for schools and other public buildings, and rumblings of a second phase of condo litigation, moving beyond low-rise, wood-frame buildings, to concrete, steel and glass high-rises. Moreover, with the 2010 Winter Olympics on the horizon, and yet another general building boom in the Greater Vancouver area, construction deficiency claims, and related coverage disputes in B.C., as well as elsewhere in Canada, can only be expected to increase in number. Consider, for example, the ‘crumbling concrete’ litigation in Ontario, featured in the epic ‘Lafarge’ coverage battle between the insured supplier and many of the country’s major insurers.1 All of this begs the question: What lessons can be learned? Or is history doomed to repeat itself? If you are only interested in the bottom-line for members of the insurance industry, then you may want to turn to heading IX, at p. 43 for: “A Coverage-Centred Prescription For Cost-Effective Claims Handling”. There, we provide some pragmatic advice for dealing with the construction deficiency issues that continue to beset the insurance industry. But, if you would first like to get an overview of the ‘leaky condo’ problem, and some of the specific liability and coverage issues which it involves, and are involved in construction deficiency cases generally, then it may be worth your while to read all (or at least most) of what follows. II. THE ‘LEAKY CONDO’ PROBLEM The problem with leaking condominiums in B.C. actually began to surface in the late 1980s. Because many owners did not understand the severity of problems they were facing, and many developers spent several years making ineffective repairs, the situation did not emerge as a full- blown ‘crisis’ until the mid-1990s. The original version of this paper was prepared in 1998, for a seminar hosted by the Insurance Institute of British Columbia. 1 Alie v. Bertrand & Frere Construction Co. [2002] O.J. 4697 (C.A.) (QL), leave to appeal dismissed [2001] S.C.C.A. No. 418 (QL) 2 At one time, a report by CMHC predicted that