Yacht Harbour Pointe: Balconies crack; developer pays; insurance company denies claim

                                                 Date: 19990325
Docket: C976796
Registry: Vancouver











(In Chambers)

Counsel for the Plaintiff Roger D. Lee

Counsel for the Defendant
Axa Pacific Insurance Company Steven F. Lee

Place and Date of Hearing Vancouver, B.C.
November 26, 1998

1. Background
[1] Both the plaintiff and the defendant, Axa Pacific Insurance
Company (Axa), seek judgment under Rule 18A on the part of the
plaintiff's action that relates to Axa. The application calls
for the interpretation and application of portions of a
comprehensive general liability policy issued by the defendant in
which the plaintiff is a named insured.

[2] The plaintiff, as owner, entered into a contract with the
defendant, Scott Construction Ltd., on August 27, 1993, to build
a 10-storey residential building at 1604 Hornby Street. The
defendants, Architectura, were the architects for the project.
The defendant Axa, under its former name of Laurentian Pacific
issued a comprehensive general liability policy to the defendant,
Scott Construction Ltd. on August 4, 1993, in which the plaintiff
was named as an insured. A certificate of substantial completion
of the building was issued on March 21, 1995.

[3] Purchasers of units in the building began occupying their
units in April, 1995. Shortly after, cracks were detected in the
balconies of a number of the units. In time, engineering reports
were obtained giving opinions of the causes of the cracks and of
design and repair procedures that were required to remedy the
problems. After various discussions between the parties over a
number of months, the plaintiff paid for the cost of the
investigative engineering reports and some of the repairs. The
plaintiff states that those costs amount to $46,328.14.

[4] In the contracts of purchase and sale between the plaintiff
and the purchasers of the units in the building, the plaintiff
agreed to repair major structural defects in the units for one
year after the date of substantial completion. The contracts
also contained a provision for deficiency holdbacks until the
repair of the deficiencies was confirmed by the architect.

[5] As a result of these contractual obligations to purchasers,
the plaintiff claims that its cost of investigating and repairing
the balcony defects is a liability imposed upon it by law and is
therefore covered under the policy of insurance issued by the
defendant. The plaintiff seeks a declaration that $46,328.14 is
the amount of that liability. Alternatively, it seeks a
declaration that the sums paid by it are a liability imposed by
law, with the exact sums to be assessed at a later date.

[6] The defendant says that for the policy of insurance to
apply, the sum which the plaintiff is obliged to pay must be for
damages and no claim for damages has been advanced against the
plaintiff. It submits that "damages" as interpreted in a number
of cases means damages that flow from tortious liability. As a
result the defendant says that there has not been any tortious
liability imposed by law upon the plaintiff, the policy of
insurance does not cover the claimed expenses, and the
plaintiff's action against Axa should be dismissed.

[7] In addition, the defendant says that General Condition 4 of
the policy provides that no action lies against the insurer until
the amount of the insured's obligation has been determined by a
judgment against the insured or there is a written agreement of
the insured, the claimant and the insurer. Neither of these
prerequisites exists here and the defendant says this action
against it must be dismissed on this ground as well. In reply,
the plaintiff says that to accede to the defendant's position on
Condition 4 would lead to a permanent ouster of the court's
jurisdiction, such an ouster is contrary to public policy, and
the condition should be declared void.

[8] There are essentially two issues raised in the applications
of the parties:

1) is the plaintiff's contractual obligation to
purchasers of the units a liability covered by the
policy? and

2) is the plaintiff's claim for relief against Axa
barred by General Condition 4, the "no action"

2. Policy Coverage
[9] The policy coverage is set out in 4 paragraphs entitled
"Insuring Agreements" on page 3 of the policy. The relevant
portion for purposes of this application states:

1. The Insurer agrees to pay on behalf of the Insured
all sums (including prejudgment 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.

Section 5 of the Definitions under the policy states:

"Contract" means:

(a) a warranty of fitness or quality of the
Insured's products or a warranty that work
performed by or on behalf of the Insured
will be done in a workmanlike manner.

[10] The plaintiff has referred to paragraph 2(a) of the Course
of Construction Wrap-up Liability Endorsement (CGL 16) of the
policy which states:

2. This policy shall only provide indemnity to:

a) The "Named Insured" in respect to
liability arising from construction
operations described in Item 1 of the
Liability Declarations.

[11] The plaintiff argues that the phrase "in respect to
liability arising from construction operations" enlarges the
policy coverage beyond that set out in the Insuring Agreements
noted above.

[12] In my view, paragraph 2 of the CGL 16 Endorsement deals only
with the description of the insured and the location of the
business operations that are covered by the policy. It does not
expand the scope of coverage beyond that set out in the "Insuring
Agreements" provisions of the policy.

[13] In Capital Regional Dist. v. General Accident Assur. Co. of
Can. (1987), 27 C.C.L.I. 81 (B.C.C.A.) the court considered the
same Insuring Agreements wording as is present in this case. It
held that the phrase, "obligated to pay by reason of the
liability imposed by law upon the Insured ... for damages" means
liability for tortious conduct and did not extend to liability
imposed upon an insured for damages for wrongful dismissal.
Although the wrongful dismissal was found to have its basis in
contract, in this instance there was no "contract" as defined in
the policy and the court was not called upon to consider the
meaning of liability "assumed by the Insured under contract (as
defined herein)".

[14] In Acklands Ltd. v. Canadian Indemnity Co. (1985), 8
C.C.L.I. 163 the Manitoba Court of Appeal considered a similar
but not identical version of those additional words. The
liability in issue arose out of the alleged wrongful dismissal by
Acklands Ltd. of a number of its employees. The Court of Appeal
agreed with the trial judge that the phrase "liability imposed by
law" covered only damages for tortious conduct and not damages
breach of contract. As a result the policy was held not to cover
this claim.

[15] In considering the phrase "or assumed by the insured under
contract or agreement" the trial judge held that it contemplated
a tortious rather than a contractual liability. In agreeing with
that conclusion, Huband J.A. noted at page 21-21:

I therefore agree that liability assumed under contract
or agreement means a liability arising out of tort
which would normally fall upon some other party, but
which the insured assumed under a contract or

[16] In Cultus Lake Park Board v. Gestas Inc. (1992), 12 C.C.L.I.
(2d) 1 (B.C.S.C.) the court was asked to determine whether the
liability insurer was obliged to pay damages and costs of a
defence relating to an action against the insured based on breach
of contract. Shaw J. held that the phrases "legally obligated to
pay" and "liability imposed by law" were not necessarily confined
to tortious claims but could include contract claims unless the
context in which the phrases were used compelled a narrower
interpretation. In so holding he found that in the insurance
policy before him the plain meaning of the policy was such that
it extended to cover damages for breach of contract as well as
tortious damages.

[17] In considering the language of the policy in the case before
me, it is my view its plain meaning leads to a conclusion that
the policy coverage extends to liability assumed by the plaintiff
under its contract with purchasers where the fitness of the units
has been warranted. The Insuring Agreements sections of the
policy clearly contemplate liability "assumed by the Insured
under contract". The definition of "contract" includes "a
warranty of fitness or quality of the Insured's products".
Furthermore, McGregor on Damages, 16th ed. (London: Sweet &
Maxwell, 1997) defines "damages" at pages 3-4:

Damages are the pecuniary compensation, obtainable by
success in an action, for a wrong which is either a
tort or a breach of contract, the compensation being in
the form of a lump sum awarded at one time,
unconditionally ... .

This definition covers the usual and strictly correct
meaning of the term "damages" and excludes claims for
money other than those which are for compensation for
a tort or breach of contract.

3. The Effect of General Condition 4

[18] Before considering the implications of this finding, it is
necessary to consider the application of General Condition 4 of
the policy to the plaintiff's application. General Condition
4 provides:

No action shall lie against the insurer unless as a
condition precedent thereto there shall have been full
compliance with all of the terms of this policy, nor
until the amount of the insured's obligation to pay
shall have been finally determined either by judgment
against the insured after actual trial, or by written
agreement of the insured, the claimant and the insurer.
Every action or proceeding against the insurer shall be
commenced within one year of the date of such judgment
or written agreement and not afterwards. Nothing
contained in this policy shall give any person or
organization any right to join the insurer as a
co-defendant in any action against the insured to
determine the insured's liability.

[19] The plaintiff says that the balconies of the project were
cracking and the cause was unknown. This situation raised
concerns for the potential safety of the occupants of the
building that needed to be addressed immediately. It also raised
liability concerns if the nature of the problem had a serious
structural source. In addition, the plaintiff had contractual
obligations to the purchasers of the units to correct
deficiencies. To have waited for actions to have been commenced
by the potential claimants would have driven up the cost
substantially and the expense claimed in this case by the
plaintiff in remedying the problem would have had to be incurred
in any event. The plaintiff therefore submits that to uphold the
applicability of Condition 4 is to effectively oust the
jurisdiction of the court to determine the defendant, Axa's,
liability to the plaintiff under the policy.

[20] The plaintiff refers to Svetlichny et al v. Overend,
Davidson and Company and Travelers Indemnity Company of Canada
(1982), 33 B.C.L.R. 214 (C.A.) where the Court of Appeal
considered the application of a "no action" clause similar to
Condition 4. The defendant sought to join the insurer as a third
party, the insurer having denied liability and also having
declined to defend the action on behalf of the defendant. The
insurer argued that the "no action" clause barred the third party
joinder, no judgment having been obtained against the defendant.
The chambers judge agreed.

[21] In the Court of Appeal the defendant argued that under Rule
22 of the Rules of Court there were additional considerations
that the chambers judge had to weigh in exercising his discretion
to set aside a third party notice. They included the interests
of other litigants in other proceedings and the resulting
multiplicity of actions that could result. Lambert J.A. stated
at page 222:

There is then a clash between two principles. The
first is freedom of contract. The second is the need
to avoid multiplicity of proceedings and inconsistent
decisions on the same issue. Is it clear that freedom
of contract must always prevail? I do not think so.
Is it clear that freedom of contract must always give
way? I do not think that either. I see no reason why
the "no action" clause should not be a significant
consideration in the decision as to whether to set
aside a third party notice, without being the only

Lambert J.A. went on to consider "reason and principle" at

page 222:

The effect of the "no action" clause is to oust the
jurisdiction of the courts temporarily, with respect to
the issue of indemnity, and permanently, with respect
to third party proceedings. A permanent ouster on the
indemnity issue would, of course, be contrary to
public policy and void. But the two polarities do not
represent the only alternatives in this case. There is
a middle ground between declaring the "no action"
clause void, on the one hand, or enforcing it without
regard to any other consideration, on the other hand.

[22] The middle ground identified by Lambert J.A was that the "no
action" clause would not be declared void but it would not be
enforced. In Svetlichny the decision was to allow the third
party notice to stand in spite of the "no action" clause.

[23] In my view there are significant differences between the
decision in Svetlichny and the case at bar. In Svetlichny the
insured seeking indemnification was already a defendant in the
action. There was also at least a real possibility that if the
third party notice was struck out there would then be another
court action to follow and there was value in avoiding an
additional action before the court. The decision also places
considerable significance upon the fact that the issue was
arising in the context of a third party proceeding.

[24] In the case at bar there is an element of the plaintiff
having made, in part, a business judgment to assume
responsibility for remedying the problem and avoiding law suits,
even though it carried insurance to protect it in the event of
such actions. I do not in any way question the soundness of the
business judgment but recognize it as a factor that was present
in the decision the plaintiff had to make about its contractual
rights under the insurance policy. It may well be, however, that
a different decision would have been taken by the plaintiff had
the loss been substantially higher than the amount claimed in
this action.

[25] I also note that the insuring agreement states that the
insurer agrees to pay for "damages", a term defined earlier in
this decision to entail compensation "obtainable in an action"
(my emphasis). In this action, the plaintiff has not become
obligated to pay "damages" because no action was commenced
against it. While Condition 4 also provides that short of there
being a judgment after trial, a payment under the policy may be
made with the written agreement of the insured, the claimant and
the insurer, no such agreement exists in this case.

[26] It is my conclusion that the circumstances that might give
rise to declaring Condition 4 void or to giving it no application
are not present in this case. Condition 4 is a valid part of the
contract. In my view this action does not present the same
"clash" between freedom of contract and public policy that was
present in Svetlichny. Under Condition 4 the condition precedent
to the plaintiff bringing its action against the insurer has not
been met.

[27] In the result, although I have found that the loss that
arose in this case was a risk covered under the insuring
agreement, the plaintiff cannot succeed in its action against the
defendant, Axa, by reason of the "no action" provision of General
Condition 4. The plaintiff's application for judgment must be
dismissed. The defendant, Axa's, application for judgment
dismissing the action against it must be granted.

[28] Costs follow the event. As the issue was not argued the
parties may make written submissions if they are unable to agree.

"Ralph J."
Ralph J.

Vancouver, British Columbia
March 25, 1999