The Supreme Court of Canada on a Duty to Defend - part 2

“Leaky condominiums” have become notorious in British Columbia.  In this case, Progressive Homes served as a general contractor and built several housing complexes.  Several actions were initiated against Progressive Homes alleging significant damage to the housing complexes caused by water leaking into each of the buildings.  Progressive Homes sought a defence to these actions from its insurer, Lombard, pursuant to commercial general liability insurance policies. 

The policies require Lombard to defend and indemnify Progressive Homes when Progressive is legally obligated to pay damages because of property damage caused by an occurrence or accident.  Lombard refused to defend the claims and Progressive brought an application for a declaration that Lombard is under a duty to defend.

Justice Rothstein went on to declare that an insurer is required to defend a claim where the facts alleged in the pleadings, if proven to be true, would require the insurer to indemnify the insured to the claim. It is irrelevant whether the allegations in the pleadings can be proven in evidence. What is required is the mere possibility that the claim falls within the insurance policy. In examining the pleadings to determine whether the claim falls within the scope of coverage, the parties to the insurance contract should not be bound by the labels selected by the plaintiff but by the true nature or substance of the claim.

Justice Rothstein, for the Supreme Court of Canada, reiterated some significant principles of insurance policy interpretation, including that when the language of the policy in unambiguous, the court should give effect to the clear language and should read the contract as a whole. Where the language of the insurance policy is ambiguous, courts should prefer interpretations that are consistent with the reasonable expectations of the parties and courts should avoid interpretations that would give rise to an unrealistic result. Where these rules of construction failed to resolve an ambiguity, courts will construe the policy contra proferentem. Subsumed by the contra proferentem rule is that coverage provisions should be interpreted broadly and exclusion clauses narrowly.

Progressive Homes Ltd. v. Lombard General Insurance Company of Canada, 2010 S.C.C. 33.

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