“Property damage” in the context of the duty to defend

July 2, 2020 | Chris T.J. Blom

St. Paul Fire and Marine Insurance Company v. AIG Insurance Company of Canada

In 2002 Lockerbie & Hole Eastern Inc. installed a steam heating and cooling pipe system at York University in Toronto. The system was buried in trenches, such that the owner had no access for inspection, repair or maintenance once it was completed.

York alleged that defects in the mechanical system led to various failures requiring repairs and remediation in 2003, 2005 and 2011, culminating in a leak in the cooling system in 2013. Investigation of the system in 2013 revealed the improper installation of weeping tiles, inadequate waterproofing and the improper use of calcium silicate as pipe insulation.

York University commenced an action against Lockerbie. From 2003 when the project was completed to 2016 when York’s claim was finalized, Lockerbie was insured by St. Paul Fire & Marine Insurance Company, AIG Insurance Company of Canada, Northbridge General Insurance Company and Zurich Insurance Company Ltd.

St. Paul was the only insurer to acknowledge its duty to defend and brought an application for an order that the remaining three insurers also had a duty to defend the action. The language of each policy was essentially the same.

The application was heard by Justice Sossin of the Ontario Superior Court of Justice.[1]

The first issue before the court was the question of whether two exclusions in the policy applied.

The first exclusion related to faulty workmanship:

(1) “property damage” including loss of use

(2) except with respect to liability under a written sidetrack agreement or arising out of the use of “elevators”, to…

(d) that particular part of any property

(ii) the restoration, repair or replacement of which has been made necessary by reason of faulty workmanship thereon by or on behalf of the insured.

The responding insurers argued that the allegations in the statement of claim related to the need to repair the faulty workmanship and were thus excluded by the faulty workmanship exclusion. “That particular part of any property”, they argued, involved the work performed by the insured. The policies did not insure the work. They insured against consequential damage arising from the work.

St. Paul accepted this approach, but pointed out that the allegations in the statement of claim extended to consequential damage. By way of example, the exclusion applied to the damage to the weeping tile, but not to the resulting damage to the pipes and other structures, an approach supported by the Supreme Court of Canada in Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, [2010] 2 S.C.R. 245.

St. Paul argued that some of the allegations in the statement of claim did not fall within the exclusion for faulty workmanship. Sossin J. agreed, as a generous reading of the pleadings suggested that some of the claims were related to consequential damage, arising from the faulty workmanship. He therefore held that there was ambiguity in the phrase “that particular part of any property”, so as to create the possibility of coverage for the claims for consequential damage.

The second argument raised by the insurers in relation to the faulty workmanship exclusion related to the phrase “including loss of use”. York’s claim went beyond the loss of use of the mechanical system and extended to the loss of use of the entire campus. The pleadings raised the allegation that the campus may suffer significant disruptions to the infrastructure and operations in the course of the repair of the faulty work, such that the university would incur further damages arising from the disruption. Sossin J. noted that the allegations extended beyond the loss of use of the heating and cooling system. He found sufficient ambiguity in the phrase “loss of use” to hold that the broadly worded allegations in the claim raised the possibility of coverage under the policy, as they related to the loss of use of the campus, beyond simply the mechanical system.

AIG also relied on a loss use exclusion, as follows:

Loss of use of tangible property which has not been physically injured or destroyed resulting from,

(3) a delay or lack of performance by or on behalf of any insured of any contract or agreement, or

(4) the failure of any Insureds products or work performed by or on behalf of any Insured to meet the level of performance, quality, fitness or durability warranted or represented by any Insured.

St. Paul argued that the first clause of the exclusion did not apply because York did not allege “delay” or “lack of performance” but rather poor performance.

St. Paul argued that the second clause did not apply because York did not allege breach of warranty of representation.

Sossin J. noted that the exclusions should be interpreted narrowly and held that the broad allegation in the claim of loss of use of the campus and not simply the mechanical system raised the possibility of coverage that was not subject to the exclusion.

The final issue on the application was to determine how the defence costs should be allocated among the insurers. Relying on the time on risk approach approved by the Court of Appeal in Goodyear Canada Inc. v. American International Corp. 2013 ONCA 395 (Goodyear Canada Inc.), and assuming the damage to be continuous from 2003 to 2016, Sossin J. held that each of the insurers was responsible for the defence costs based on the time of coverage under each policy.

If the evidence at trial or otherwise determined that the actual damage occurred over a different period of time, the allocation of defence costs could be recalculated.

As part of the allocation issue, Zurich argued that it should not be on risk in respect of the self-insured retention of $50,000.00 held by Lockerbie. As that issue was not formally part of the application, Sossin J. declined to rule on it, but added that it could be part of a separate proceeding in the future.

On an application of this type, the motion judge merely had to be satisfied that there was a possibility that the policies could be called upon to respond to the claims. It appears that the bulk of the claims in the action related to faulty workmanship and loss of use related directly to the mechanical work performed by the contractors. That would be excluded under the policies. However, the motion judge was correct in finding that the exclusions did not apply to the more limited allegations of consequential damage and loss of use related to the faulty workmanship more broadly incurred throughout the campus.

The issue of the self-insured retention was not before the court, but, if so, could also have been resolved with the application of the Goodyear Canada Inc. decision. Goodyear faced multiple actions for damages arising from asbestos related injuries from 1969 onward. It was insured by multiple insurers for some of the period over which the claims were made, with policies carrying various deductibles for each claim. The Court of Appeal held that Goodyear was responsible for the payment of the deductibles on each claim. On this basis, Sossin J. would likely have held that Zurich was not on risk in respect of the self-insured retention of $50,000.00, if the issue was properly before him.


[1] St. Paul Fire and Marine Insurance Company v. AIG Insurance Company of Canada et al. 2019 ONSC 6489.

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