Citation:

Axa v. Guildford Marquis

2000 BCSC 0197

Date: 20000202

Docket No:

C993197

Registry: Vancouver

IN THE SUPREME COURT OF BRITISH COLUMBIA

BETWEEN:

AXA PACIFIC INSURANCE COMPANY LTD.

PETITIONER

AND:

GUILDFORD MARQUIS TOWERS LTD.

RESPONDENT

AND

Docket:

C994058

Registry: Vancouver

BETWEEN:

METRO-CAN CONSTRUCTION(GM) LTD. AND
GUILDFORD MARQUIS TOWERS LTD.

PETITIONERS

AND:

AXA PACIFIC INSURANCE COMPANY LTD.

RESPONDENT

REASONS FOR JUDGMENT
OF THE
HONOURABLE MR. JUSTICE BAUMAN

Counsel for the petitioner/respondent, Axa Pacific Insurance Company Ltd.

M.L. Tweedy

Counsel for the respondent/petitioner, Guildford Marquis Towers Ltd. and Metro-Can Construction (GM) Ltd.

T.A.M. Peters

Date and Place of Hearing:

6 January 2000

Vancouver, B.C.

I. OVERVIEW

[1] In this so-called "leaky condo" litigation there are two petitions before the court. Both concern the issue of coverage under an insurance policy issued by Axa Pacific Insurance Company Ltd. ("Axa") to Guildford Marquis Towers Ltd. ("Guildford") and Metro-Can Construction (GM) Ltd. ("Metro-Can"), the developer and general contractor, respectively, of two high-rise residential buildings in Surrey, British Columbia.

[2] In the underlying action, it is alleged that Guildford is responsible for "substantial defects in design and construction" of the buildings which have resulted in "substantial water infiltration into the exterior walls." The defects are alleged to have been caused solely or in part by the negligence of Metro-Can.

[3] Guildford and Metro-Can say that some of the claims in the underlying action are within the coverage provided by the policy of insurance and that accordingly Axa is bound to defend them in the action.

[4] Axa maintains that the claims in the underlying action overwhelmingly represent ones for pure economic loss, that such claims are not within the policy's coverage on the face of its wording or, at least, are expressly excluded from coverage.

[5] The claims in the underlying action which Axa admits do trigger a duty to defend are so minor that Axa seeks an order at this time apportioning defence costs.

[6] On Axa's rough and ready calculation, it should only be responsible for about 2% of the defence costs in the action.

II. THE COMPREHENSIVE GENERAL LIABILITY POLICY

[7] I set out these relevant provisions from the policy of insurance:

INSURING AGREEMENTS
1. The Insurer agrees to pay on behalf of the Insured all sums (including prejudgement interest) which the Insured shall become obligated to pay by reason of the liability imposed by law upon the Insured or assumed by the Insured under contract (as defined herein), for damages because of:
...
(c) injury to or destruction of property, including loss of use thereof, or loss of use of property which has not been physically injured or destroyed, due to an accident or occurrence (as defined herein);
during the Policy period, subject to the limits of liability, exclusions, conditions and other terms contained herein.
...
3. ADDITIONAL AGREEMENTS
With respect to the insurance afforded by the other terms of this Policy, the Insurer agrees:
(a) to defend in the name of and on behalf of the Insured, claims, suits or other proceedings which may at any time be instituted against the Insured for any occurrence covered by this Policy, although such claims, suits, proceedings or allegations and demands may be groundless, false or fraudulent; or to make settlement of such claims as may be deemed expedient by the Insurer, or if the Insurer is prevented by law or otherwise from defending the Insured as aforesaid, the Insurer will reimburse the Insured for defense costs and expenses incurred with the consent of the Insurer;
...
EXCLUSIONS
...
6. This insurance does not apply to claims for injury to or destruction of or loss of use of:
(a) goods or products manufactured or sold by the Insured; or
(b) work done by or on behalf of the Insured where the cause of the occurrence is a defect in such work, but this exclusion shall only apply to that part of such work which is defective.
...

III. THE NATURE OF THE PROPERTY DAMAGE

[8] The plaintiff in the underlying action pleads that:

... the Plaintiff has suffered, and will suffer, damages, losses and expenses as follows:
a. The cost associated with inspecting and investigating water infiltration into the building;
b. The cost of effecting temporary and urgent repairs to the building;
c. The cost of effecting permanent repairs to the project;
d. Diminution in the value of their investment.

[9] In that proceeding, the plaintiff has filed a Scott schedule defining, at this time, the nature and quantum of its alleged loss. The claims in the schedule total some $513,000.

[10] The bulk of the claims involve costs associated with repairing the buildings themselves.

[11] These fall into at least two categories: required repairs to a part of the building which was constructed defectively and required repairs to a part of the building which was damaged as a result of defective construction in another element of the building. For example in the first category we find this item in the east tower:

ITEM

AMOUNT

CLAIMED

BASIS FOR LIABILITY

4. Provide caulking at all joints of window assemblies including corner posts, vertical couplers, horizontal mullions, window frames to sill flashings and to surrounding construction.

$69,816

The sub-standard windows and lack of waterproofing details used by the Contractor has allowed water to enter through the window units as well as surrounding construction damaging other elements of the building.

[12] In the second category, we have this entry:

ITEM

AMOUNT

CLAIMED

BASIS FOR LIABILITY

4. Unit 601. Paint the northwest corner of the bedroom. Replace drywall and re-paint the west wall of the living room.

$500.00

Incorrect construction and sealing of the exterior claddings by the Contractor has allowed water to infiltrate the unit.

[13] It is Axa's position that a small number of claims involve damage to something other than the buildings themselves. As an example, it points to damage to resident-installed wallpaper in one unit. Axa calls these "resultant damage claims." It acknowledges that such claims are within the policy and that it has a duty to defend Guildford and Metro-Can in respect of them. But they amount to only $10,100 on the basis of the Scott schedule at this time.

IV. THE EXTENT OF COVERAGE

[14] It is common ground between the parties that the vast bulk of the claims which have been particularized to date are ones for pure economic loss.

[15] In Bird Construction Company Ltd. v. Allstate Insurance Company of Canada (1996), 110 Man. R. (2d) 305, [1996] 7 W.W.R. 609, 36 C.C.L.I. (2d) 29 (C.A.), the issue was whether Allstate's policy covered the builder for the costs of replacing the exterior stone cladding of a building. The cladding had to be replaced because its mortar work was defective. In earlier proceedings, the Supreme Court of Canada had held that the builder could be liable in tort to subsequent purchasers for the loss: Winnipeg Condominium Corporation No. 36 v. Bird Construction Co., [1995] 1 S.C.R. 85, 121 D.L.R. (4th) 193, 3 W.W.R. 85.

[16] In Winnipeg Condominium, Justice La Forest, for the court, observed at p. 97, para. 13 (S.C.R.):

Traditionally, the courts have characterized the costs incurred by a plaintiff in repairing a defective chattel or building as "economic loss" on the grounds that costs of those repairs do not arise from injury to persons or damage to property apart from the defective chattel or building itself; see Rivtow Marine Ltd. v. Washington Iron Works, [1974] S.C.R. 1189, at p. 1207.

[17] In the result in Bird Construction the court held that the losses did not come within the insurance coverage provided, that is: "physical injury or destruction of tangible property ...".

[18] Now I wish to return again to the categories of loss which present here.

[19] Apart from the diminution in value claim, they break down, as I outlined above, as follows:

(i) repairing the defective parts of the buildings themselves;
(ii) repairing parts of the buildings which were damaged as a result of defects in other parts: e.g. drywall damaged by the ingress of water through the defective joints or caulking; and
(iii)repairing third party property damaged by the ingress of water - that is Axa's category "resultant damage."

[20] The parties agreed before me that categories (i) and (ii) are claims for pure economic loss.

[21] It might be argued that category (ii), analytically, is "resultant damage" - that is, the defective element in the building has led to the resulting water damage to, for example, the interior drywall of the building.

[22] In Winnipeg Condominium, Justice La Forest considered the condominium corporation's submission that the losses in question could, in fact, be characterized as damage to property as opposed to pure economic loss. Justice La Forest called this approach the "complex structure" theory. By this theory, the claimant seeks to localize the defect in one part of the structure and to claim that the damage to the rest of the structure was "caused" in some manner by the defect.

[23] Justice La Forest accepted Lord Bridge's criticism of the complex structure theory in Murphy v. Brentwood District Council, [1990] 2 All E.R. 908 at 928 (H.L.)(quoting Lord Bridge at S.C.R. 99-100):

The reality is that the structural elements in any building form a single indivisible unit of which the different parts are essentially interdependent. To the extent that there is any defect in one part of the structure it must to a greater or lesser degree necessarily affect all other parts of the structure. Therefore any defect in the structure is a defect in the quality of the whole and it is quite artificial, in order to impose a legal liability which the law would not otherwise impose, to treat a defect in an integral structure, so far as it weakens the structure, as a dangerous defect liable to cause damage to other 'property'.
A critical distinction must be drawn here between some part of a complex structure which is said to be a 'danger' only because it does not perform its proper function in sustaining the other parts and some distinct item incorporated in the structure which positively malfunctions so as to inflict positive damage on the structure in which it is incorporated. Thus, if a defective central heating boiler explodes and damages a house or a defective electrical installation malfunctions and sets the house on fire, I see no reason to doubt that the owner of the house, if he can prove that the damage was due to the negligence of the boiler manufacturer in the one case or the electrical contractor in the other, can recover damages in tort on Donoghue v. Stevenson principles.

[24] In this case, it is arguable that category (ii) damage does not include parts of the buildings which form "a single indivisible unit" of structural elements with the defective parts of the buildings.

[25] Justice La Forest, as did Lord Bridge, recognized that damage caused by a distinct item incorporated into a structure, when it malfunctions, is not pure economic loss. His Lordship noted (at 98):

... Adopting this traditional characterization as a convenient starting point for my analysis, I observe that the losses claimed by the Condominium Corporation in the present case fall quite clearly under the category of economic loss. In their statement of claim, the Condominium Corporation claim damages in excess of $1.5 million from the respondent Bird, the subcontractor Kornovski & Keller and the architects Smith Carter, representing the cost of repairing the building subsequent to the collapse of the exterior cladding on May 8, 1989. The Condominium Corporation is not claiming that anyone was injured by the collapsing exterior cladding or that the collapsing cladding damaged any of its other property. Rather, its claim is simply for the cost of repairing the allegedly defective masonry and putting the exterior of the building back into safe working condition.
[Emphasis added.]

[26] However, as I have indicated the parties argued this case on the basis that category (i) and category (ii) damages represented pure economic loss and I will analyse the issue of coverage on that basis.

[27] The question then is this: Are category (i) and (ii) damages within the insuring agreement's words: "injury to or destruction of property, ..., due to an accident or occurrence (as defined herein)?"

[28] No issue was taken by Axa based on the definitions of "accident or occurrence".

[29] It rested its case on the submission that economic loss is not "injury to or destruction of property". It relied on my colleague Justice Drost's decision in Privest Properties Ltd. v. Foundation Co. of Canada Ltd. (1991), 57 B.C.L.R. (2d) 88, 6 C.C.L.I. (2d) 23 (S.C.).

[30] There, the court was considering a claim covering the cost of removing defective asbestos fireproofing material. Again, it was clear that it was considered to be a case of pure economic loss.

[31] Justice Drost then considered whether the loss was covered by the wording of five separate insurance policies.

[32] The policies in question covered property damage liability with various wordings:

[33] In a very thorough analysis my colleague detailed the evolution of the wording of property damage coverage in the North American insurance industry as insurers struggled to contain coverage in the area of economic loss.

[34] Justice Drost analysed the plaintiffs' claims and concluded (at 125) that none of them could be construed as allegations of a state of facts which, if proven, would constitute physical injury or damage to or loss of use of tangible property. That excluded three of the policies.

[35] However, the learned judge then went on (at 125):

... I find that the decisions to which I have referred do support a finding that the claims advanced by the plaintiffs allege facts which, if proven, would constitute "injury to property" in the sense of an infringement of intangible property or an incorporeal right. As such, they fall within the terms of cl. (c)(i) of the Allstate insuring agreement.
I am also of the opinion that those claims allege facts which would constitute "damage to property" and therefore fall within the terms of the Dominion insuring agreement. While the word "damage" may have a narrower meaning than that of "injury", they are quite similar, and as Mr. Justice Macfarlane observed [p. 331] in the Greenwood case, "the terms may, in a certain context, be synonymous." I believe that when they are considered in the context of an insuring agreement, to which a liberal interpretation should be given, as opposed to the context of an exclusion clause in which any ambiguity will be resolved against the insurer, they are synonymous

[36] It will be observed that the wording of the property damage coverage at bar is the same as Allstate's wording considered in Privest. I conclude, therefore, that Axa's property damage coverage does extend to economic loss like that claimed in the underlying action.

V. THE SCOPE OF THE EXCLUSION

[37] In anticipation of such a finding, Axa relied on the exclusions set out in its policy. In particular, it invoked exclusion 6(a). It provides:

6. This insurance does not apply to claims for injury to or destruction of or loss of use of:
(a) goods or products manufactured or sold by the Insured;

[38] On this submission, Axa rests on the decision in Pier Mac Petroleum Installation Ltd. v. Axa Pacific Insurance Co. (1997), 41 B.C.L.R. (3d) 326, 47 C.C.L.I. (2d) 229 (S.C.).

[39] There, the general contractor constructed a gas bar with underground storage tanks and pipes. The underground pipes leaked and the owner sued the contractor for the cost of repairs. Axa denied coverage under its CGL policy to the contractor and it relied on exclusion 6(a). Justice Drossos held (at para. 25, p. 334):

Pier Mac submits that the word "products" or the phrase "products manufactured" as used in the exclusion clauses, in particular 6(a), does not include the gas bar, and its storage tanks and pipes, as a product of Pier Mac. I am, however, satisfied on considering the plain and normal meaning of those words as used in the exclusion clauses, and 6(a) thereof, and in the context of the whole of the Insurance Policy that it was intended by the parties to be a general liability insurance policy and not a performance bond, that the words "products" or "products manufactured" include the gas bar constructed, in effect, manufactured, by Pier Mac for Domo. ...

[40] Now in the policy at bar, the work/product exclusion includes clause 6(b):

6. This insurance does not apply to claims for injury to or destruction of or loss of use of:
...
(b) work done by or on behalf of the Insured where the cause of the occurrence is a defect in such work, but this exclusion shall only apply to that part of such work which is defective.

[41] Justice Drossos found that the gas bar, tanks and pipes in Pier Mac were "goods or products manufactured or sold by the insured."

[42] At first blush, one might not normally consider a construction project as a "good or product manufactured or sold". But Justice Drossos did for the reasons he stated.

[43] Indeed, as a matter of first impression, one would more readily categorize a construction project as a "work done by or on behalf of the Insured" within clause 6(b).

[44] I am told by counsel for Axa before me, who was also counsel in Pier Mac, that the policy considered by my colleague included exclusion 6(b) but that the clause was not referred to in argument.

[45] That fact allows this court to consider a principled departure from the conclusion in Pier Mac in accordance with In re Hansard Spruce Mills Limited (In Bankruptcy) (1954), 13 W.W.R. (N.S.) 285 (B.C.S.C.).

[46] On the meaning and scope of exclusion 6(b), Guildford and Metro-Can seek to lead extrinsic evidence consisting of a product bulletin issued by Laurentian Pacific Insurance Company (Axa as it then was) in September 1990. The policy at bar was issued in February 1990, but it was renewed thereafter annually.

[47] Axa objected to the admission of the bulletin.

[48] In my view, in light of Pier Mac there is an ambiguity on the face of the policy. If exclusion 6(a) covers a construction project as well as more traditional "goods or products manufactured or sold" as Pier Mac holds, what is one to make of exclusion 6(b)? What is left for it to cover? This is particularly important because exclusion 6(b) is a narrower one than 6(a): the exclusion under clause 6(b) does not include all work done by or on behalf of the insured, only that part of such work which is defective.

[49] In my view, given Pier Mac, exclusions 6(a) and 6(b) are irreconcilable and a patent ambiguity on the face of the policy arises: Brown, Insurance Law in Canada, (Toronto: Carswell, 1999) pp. 8-8, 8-9.

[50] Accordingly, extrinsic evidence is admissible to assist in resolving the ambiguity: Fridman, The Law of Contract in Canada, 4th ed. (Toronto: Carswell, 1999) pp. 482-484).

[51] Turning then to the bulletin, the intended scope of exclusion 6(b) is made clear. First, exclusion 6(b) is specifically applicable to the construction industry. Second, the bulletin touts the added breadth of Laurentian Pacific's coverage by comparing its exclusion 6(b) to two other standard industry wordings.

[52] I reproduce these parts of the bulletin:

...
The standard industry wording excludes:
A) Property damage to work performed by or on behalf of the insured arising out of the work or any portion thereof......
Some companies will upgrade this standard exclusion to read:
B) With respect to the completed operations hazard; to property damage to work performed by the insured arising out of the work or any portion thereof......
The difference between these two clauses could be illustrated as follows:
1. - A house building contractor - Does framing, electrical and mechanical work worth $30,000 - All other portions of the job are sublet for $45,000.00. Total project value $75,000.00.
- A house fire caused by faulty wiring in the kitchen, causes a total loss fire, one year after completion.
- Damages - Building $75,000.00 - Standard Exclusion (A) would Eliminate Coverage Completely.
2. - Under Exclusion (B) Broad Form P.D. including completed operations, using the same figures as above:
- Of the $75,000.00 in damage, $30,000.00 is excluded as the Insured's work, The Balance is covered.
The Laurentian Pacific Insurance Company has gone one step further in providing (C) Broad Form Completed Operations Coverage by virtue of its Exclusion 6(B) which reads:
Work done by or on behalf of the insured where the cause of the occurrence is a defect in such work, but this exclusion shall only apply to that part of such work which is defective.
3. - As a result, using the previous examples:
- With damages of $75,000.00 where $1,000.00 of the work was wiring and this turned out to be faulty: ONLY THAT $1,000.00 OF FAULTY WIRING WOULD BE EXCLUDED
The advantages to your contractor clients will vary depending on their style of business, but this coverage would be advantageous to BOTH GENERAL CONTRACTORS and SUB-TRADES.
...
[Emphasis in original.]

[53] From this it becomes clear that exclusion 6(b) is the relevant provision to consider in the case of the condominium towers constructed by Guildford and Metro-Can. And it seems that the insurer has adopted what might be characterized as a modified "complex structure" approach to coverage. That is, at least to this extent: one is to isolate (and exclude from coverage) only that part of the work which is defective.

[54] On this wording, the exclusion would not extend to deny coverage to what I have characterized as category (ii) damage. And it goes without saying that category (iii) damage, Axa's "resultant damage", is not excluded from coverage.

[55] I conclude that exclusion 6(b) is the relevant exclusion and it is limited in the manner which I have described, and which the Bulletin explains by way of example.

[56] I should add that this conclusion does not offend the policy consideration that Justice Drossos gave effect to in Pier Mac. That is, I have not transformed a CGL policy into a performance bond. I have simply given effect to the insurer's express limitation on its work/product exclusion.

VI. ALLOCATION OF DEFENCE COSTS

[57] Axa acknowledges that a duty to defend arises under the policy in respect of claims "which may be argued to fall under the policy": Nichols v. American Home Assurance Co., [1990] 1 S.C.R. 801, 68 D.L.R. (4th) 321, 45 C.C.L.I. 153, at 812 of S.C.R.

[58] Here, as Axa has admitted in respect of resultant damage claims, and as I have explained in respect of the exception to exclusion 6(b), there are claims which fall under the policy.

[59] We do not now know their extent. The claims excepted from exclusion 6(b) will only be known with certainty after the difficult findings of fact are made by the trial judge after trial. The quantum of Axa's "resultant damage" category must similarly await trial. I agree with Mr. Peters that the Scott schedule prepared by the plaintiff in the underlying action cannot be taken as a definitive statement of the amount of these claims at this time.

[60] The claims, then, represent a mix of those within and those without coverage and there should be an apportionment of defence costs between the covered and non-covered claims: Surrey (District) v. General Accident Assurance Co. of Canada (1994), 92 B.C.L.R. (2d) 115, [1994] 7 W.W.R. 226, 24 C.C.L.I. (2d) 34 (S.C.); (1996), 19 B.C.L.R. (3d) 186, [1996] 7 W.W.R. 48, 35 C.C.L.I. (2d) 154 (C.A.).

[61] However, in my view, it is premature to consider a fair allocation of defence costs at this time. In the circumstances that should await trial and it should be undertaken retrospectively: Continental Insurance Co. v. Dia Met Minerals Ltd. (1996), 20 B.C.L.R. (3d) 331, [1996] 7 W.W.R. 408, 36 C.C.L.I. (2d) 72 (C.A.).

VII. DISPOSITION

[62] Guildford and Metro-Can shall have a declaration that Axa has a duty to provide a defence in respect of Vancouver Registry Action No. C972316, limited to claims within the policy as I have described. The petition of Axa is dismissed.

[63] Guildford and Metro-Can are entitled to their costs on scale 3.

"Bauman J."

Bauman J.

Vancouver, B.C.

2 February 2000