A Ruff Day for Insurers: Bulldog Bag Ltd. v. AXA Pacific 2011 BCCA 178

In the recent decision of  Bulldog Bag Ltd. v. AXA Pacific 2011 BCCA 178, the British Columbia Court of Appeal addressed the “own product / loss of use” exclusion and in doing so, arguably, greatly restricted it’s potential application.

Bulldog Bag Ltd. (“Bulldog”) manufactures plastic and paper packaging and was insured under a Commercial General Liability (“CGL”) Policy with Axa Pacific Insurance Company (“AXA”).

Bulldog entered into a contract to supply printed plastic packaging to a customer, Sure-Gro, to be filled by them with manure and soil products and ultimately sold to Canadian Tire.  Unfortunately a manufacturing defect in the bags resulted in ink coming off the packaging and as a result of this defective packaging, the products could not be sold to Canadian Tire.  Sure-Gro returned the unused bags to Bulldog who manufactured new packaging (using different ink this time), and Sure-Gro used the replacement packaging, filling it with product in time to meet its contractual commitments to Canadian Tire.

Sure-Gro claimed against Bulldog for its loss resulting from the defective packaging.  The losses sustained by Sure-Gro totaled $ 784,221.34 and related to the costs directly associated with packaging different products for sale to Canadian Tire, removing the raw materials from the defective packaging, disposing of the defective packaging, and the loss of about 10 percent of the raw material in the salvaging process.

Bulldog reported Sure-Gro’s claim to AXA who denied coverage. Bulldog eventually settled with Sure-Gro and sought recovery of these amounts from AXA.   Bulldog did not claim the cost of supplying replacement packaging.

At trial the British Columbia Supreme Court commented that under a CGL policy, in which property damage is defined as “physical injury to or destruction of tangible property”, an insurer’s obligation to indemnify will generally not be triggered where the property damage resulting from an insured’s defective work is confined to the insured’s own property.  Further, in the absence of damage to a third party’s property, an insured will not be entitled to indemnity under their CGL for the cost of replacing or repairing its own defective work, or work product.

The trial judge cited a line of case authority holding that where the installation or incorporation of the insured’s defective component causes physical damage to a third party’s property, the cost of repairing the damage caused by the defective component is recoverable [Ontario (Attorney General) v. Fatehi [1984] 2 S.C.R. 536; Bundy Tubing Company v. Royal Indemnity Company 298 F. 2d 151 (1962) ; Carwald Concrete and Gravel Co. v. General Security (1985) 24 D.L.R. (4th) 58 (Alta. C.A.); Gulf Plastics Ltd. v. Cornhill Insurance (1990) 47 B.C.L.R. (2d) 379 (B.C.S.C.)] However, here the trial judge noted that the plastic bag had not been incorporated into Sure-Gro’s product (rather it simply contained the product) and that 90% of the product was salvaged unharmed, repackaged and ultimately resold. As such, the trial judge held that except for the 10% of product that was lost through the salvage process, Bulldog was not entitled to indemnification under the CGL for Sure-Gro’s costs incurred in the replacement and refill of the defective bags.

Between the British Columbia Supreme Court decision and the Appeal being heard, the Supreme Court of Canada released it’s reasons in Progressive Homes v. Lombard General Insurance Company 2010 SCC 33 (“Progressive”). There the Supreme Court of Canada reversed a line of insurance cases which had taken a narrow view of the scope of coverage under a CGL policy and, as noted by the Court of Appeal in Bulldog, held that:

  • “Property damage” in a CGL policy is not limited to damage to “third-party property” and can include damage from part of a building to another part, previously regarded as irrecoverable “pure economic loss”;
  • The term “accident” may, depending on the facts of each case, include the consequences of defective workmanship; and,
  • Depending on context, the “own product/work” exclusion is to be construed narrowly such that it may be limited to damage caused by the insured to its own work and not extend to “resulting damage”.

On Appeal AXA conceded that, as a result of Progressive, Bulldog’s claims constitute “property damage”  as  Bulldog’s faulty bags were ‘injured’ and Sure-Gro lost the use of them.  AXA also conceded that the faulty workmanship which resulted in the defective bags qualified as an “accident” or “occurrence” within the meaning of the CGL policy.  While this may have triggered the insuring agreement, AXA argued that Bulldog’s claim was caught by the following exclusion clause:

6. This insurance does not apply under Insuring Agreement 1(c) to claims for property damage to:
(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 that is defective.

AXA argued that exclusion 6(a) could be paraphrased to read “this insurance does not apply to claims for physical injury to and loss of use of Bulldog’s bags”.  Since Sure-Gro’s claim was for costs incurred in removing and re-packaging product because of the loss of use of Bulldog’s bags, these costs were caught by the exclusion.

As well, AXA argued that Progressive did not alter the basic nature or purpose of a CGL policy, namely, that they are not intended to pay the costs associated with repairing or replacing the insured’s defective work and products

In contrast, Bulldog argued that exclusion 6 (a) did not exclude coverage for claims that flow from the defective work or work product but rather only exclude coverage for property damage to the goods supplied by an insured.  They argued that as the damage flowed from the supply of the defective bags (rather than being a claim for the loss of use itself), exclusion 9 (a) did not operate to bar recovery of the claim.

The Court of Appeal accepted Bulldog’s argument and held that:

[33] … Bearing in mind that exclusion clauses are to be read narrowly and in a manner consistent with the parties’ reasonable expectations, I find that the clause operates to exclude claims for damage to Bulldog’s bags, including loss of use thereof, but cannot be extended to compensation for Sure-Gro’s costs separating those bags from its products, repackaging in different bags, and salvaging the “old” product some months later.

The effect of this decision is to narrowly restrict the application of an exclusion for “property damage to … goods or products manufactured or sold” by an insured and to allow recovery for damage flowing from such defective product.  As any loss of use must necessarily flow from a defective product, the Court of Appeal’s interpretation may well render this exclusion effectively toothless.

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