Lombard General Insurance Company of Canada v. 328354 B.C. Ltd.

2012 BCSC 431 Lombard General Insurance Company of Canada v. 328354 B.C. Ltd. IN THE SUPREME COURT OF BRITISH COLUMBIA Citation: Lombard General Insurance Company of Canada v. 328354 B.C. Ltd., 2012 BCSC 431 Date: 20120326 Docket: S115212 Registry: Vancouver Between: Lombard General Insurance Company of Canada Petitioner And 328354 B.C. Ltd. Respondent - and - Docket: S116933 Registry: Vancouver Between: 328354 B.C. Ltd., Edward Vernon and Ricki L. Vernon Petitioners And Lombard General Insurance Company of Canada Respondent Before: The Honourable Mr. Justice Butler Reasons for Judgment Counsel for Lombard General Insurance Company of Canada: Christopher A. Rhone Paul J. Miller Counsel for 328354 B.C. Ltd., Edward Vernon and Ricki L. Vernon: Craig A. Wallace Place and Date of Hearing: Vancouver, B.C. November 23, 2011 Place and Date of Judgment: Vancouver, B.C. March 26, 2012 [1] I have before me competing petitions relating to the scope of an insurer's duty to pay or contribute to defence costs in the context of "leaky condo" litigation. The underlying proceeding is an action by the strata corporation on behalf of the owners of Strata Plan LMS 2599, a residential condominium complex commonly known as "Marina Estates" in Squamish, British Columbia (the "Action"). The Action is brought against the developer, 328354 B.C. Ltd., its directors and others in relation to the alleged defective or deficient design and construction of the complex and resultant property damage. Edward Vernon and Ricki L. Vernon are both directors of 328354 B.C. Ltd. All three defendants will hereinafter be collectively described as "the Developers". [2] In the first petition, Lombard General Insurance Company of Canada ("Lombard") seeks a declaration that its obligation to contribute to the costs of defending the Developers in the Action is limited to a pro rata share based on the proportion of time for which three comprehensive general liability ("CGL") policies issued by Lombard to the Developers were "on risk" relative to the overall period of time in which damage is alleged to have occurred. Lombard has averaged the time it was on risk for the three buildings which are the subject of the litigation. According to this rough calculation, it should only be responsible for 16.3% of the costs of defending the action. Lombard seeks a further declaration that any interim allocation of defence costs shall be without prejudice to the parties' right to seek a reallocation of such costs at a later date in the proceedings. [3] The Developers oppose the relief sought and in the second petition, seek a declaration that Lombard is obligated to defend them in the Action and to fund 100% of the costs of defence. In addition, the Developers seek an order that Lombard reimburse them for defence costs reasonably incurred to date. [4] The petitions raise the issue of whether an insurer's obligation to fund the costs of defence can be apportioned prospectively prior to trial on a "time on risk" basis. Despite the extensive jurisprudence in this province regarding issues of insurance coverage in the context of leaky condo disputes, this specific question has not been addressed. BACKGROUND [5] I will begin by summarizing the pertinent background facts. The Marina Estates complex comprises three residential buildings, with a total of 90 strata units and one amenities building. The residential buildings were constructed in phases. According to the notice of civil claim, construction on Phases 1 and 2 began in or about 1995 and was substantially completed in approximately November 1996. Construction on Phase 3 began in or about 1996 and was substantially completed in approximately September 1997. [6] In the Action, the plaintiff alleges that the buildings contain a number of structural, mechanical, and envelope deficiencies and defects which it claims have resulted in significant property damage from water ingress, including premature deterioration and structural rot of the buildings and their components. At para. 41, the plaintiff claims the alleged deficiencies and defects have caused continuous property damage and loss of use of property since Marina Estates was substantially completed: Since Marina Estates was substantially completed and continuing to date, the Envelope Deficiencies described herein have compromised and continue to compromise the building envelope of the buildings comprising Marina Estates, and have resulted in continuous property damage and loss of use of property due to water ingress and premature deterioration and structural rot of the building components. [7] In addition to these claims, the plaintiff seeks damages for negligent misrepresentation, breach of warranty, and failure to warn regarding deficiencies and defects of which the Developers were either aware or ought to have been aware. [8] On May 28, 2009, the plaintiff filed a writ of summons naming the Developers and others as defendants. In or about June 2009, the plaintiff began to remediate or repair the alleged damage to the three residential buildings in the Marina Estates complex. The plaintiff filed an amended notice of civil claim on September 30, 2010. Insurance Coverage [9] Prior to substantial completion of the Marina Estates project, Lombard issued three separate "wrap-up" CGL policies (the "Policies") to the Developers in relation to the three residential buildings. The relevant provisions of the Policies, the terms of which are identical, provide as follows: COVERAGE A. BODILY INJURY AND PROPERTY DAMAGE LIABILITY 1. Insuring Agreement. a. We will pay those sums that the insured becomes legally obligated to pay as compensatory damages because of "bodily injury" or "property damage" to which this insurance applies. ...This insurance applies only to "bodily injury" or "property damage" which occurs during the policy period. The "bodily injury" or "property damage" must be caused by an "occurrence". The "occurrence" must take place in the "coverage territory". We will have the right and duty to defend any "action" seeking those compensatory damages ... Section V - Definitions 7. "Occurrence" means an accident, including continuous or repeated exposure to substantially the same general harmful conditions. 10. "Property damage" means: a. Physical injury to tangible property, including all resulting loss of use of that property; or b. Loss of use of tangible property that is not physically injured. [10] Each of the Policies included Wrap-Up Endorsements, which extended the Developers' coverage as follows: ... As respects the "Products-Completed Operations Hazard", the policy shall continue to apply for a period of 24 months following the Termination date which is the earlier of: the expiry date shown on item No. 2 of the Declarations or the date the project is physically completed and accepted by or on behalf of the Owner but in any event no later than the date shown on item No. 2 of the Declarations. Section V - Definitions 9.a. "Products-completed operations hazard" includes all "bodily injury" and "property damage" ... arising out of "your product" or "your work" ... [11] It is common ground that the Policies lapsed on November 26, 1996, February 28, 1997 and September 30, 1997. However, the Wrap-Up Endorsements extended the Developers' coverage for completed operations hazards under each of the Policies for a further two years. [12] It is also undisputed that the Developers did not purchase any further insurance coverage after the Policies expired, thereby leaving themselves uninsured for the remainder of the period of time in which the property damage at issue is alleged to have occurred - approximately ten years with respect to each of the buildings. POSITION OF THE PARTIES [13] Lombard concedes that the substance of the claims in respect of property damage in the Action is sufficient to trigger its duty to defend the Developers under the terms of the Policies. However, Lombard submits that where "continuous" or "progressive" damage is alleged, its responsibility to contribute to defence costs does not extend to claims in respect of property damage which is alleged to have occurred outside the period of coverage afforded by the Policies. Rather, Lombard argues that its defence obligation is restricted to "[the] portion of the occurrence allegedly falling within the Lombard policy periods". [14] Lombard argues that the weight of authority in Canada establishes the principle that in a case involving continuous or progressive damage, apportionment of defence costs to an insurer should be effected on the basis of the length of time for which that insurer was on risk relative to the overall time in which the damage is alleged to have occurred. It also argues that Canadian courts have determined that equity or fairness requires that defence costs be apportioned in these circumstances. Further, Lombard says that in the case of continuous or progressive damage, the apportionment can be made before trial. [15] Lombard has calculated what it considers to be its pro rata share of the defence costs in respect of the property damage claims by averaging the periods of time for which the Policies were on risk. Applying this formula to the facts, Lombard calculates its pro rata share of the defence costs at 16.3%, leaving the Developers to contribute the remaining 83.7%. [16] I note parenthetically that Lombard also submits that its duty to defend does not extend to the claims in respect of negligent misrepresentation, breach of warranty, and breach of the duty to warn; however, Lombard does not seek to apportion defence costs on this basis at the present time. Therefore, the sole basis upon which Lombard seeks to limit its defence obligation is according to its "time on risk". [17] The Developers argue that it is premature to attempt to allocate defence costs prior to trial when it is uncertain to what extent damage may have occurred outside the period of coverage. They submit that in this case, defence costs cannot be separated such that those costs incurred defending allegations of property damage occurring within the covered and non-covered periods can be identified and distinguished with any precision. In their submission, there is "no rational or practical means" at this preliminary stage of the proceedings to make this determination. The allegations in the pleadings are broadly framed and do not clearly establish a timeline for the occurrence of the alleged damage. Therefore, the Developers submit that the apportionment of defence costs is a matter that should be left to be determined at or after the trial. The apportionment can be made at that time based on the relevant findings of fact. In the interim, the Developers maintain that Lombard is obliged under the Policies to fund 100% of the defence costs in the Action. To hold otherwise at this stage, they say, would effectively undermine their right to a full defence in the litigation. [18] In support of their respective submissions, both parties point out that should their proposed allocation of defence costs prove to be incorrect, it will be open to the other party to seek a reallocation at a later stage in the proceedings. As such, each party submits that the other will not be prejudiced by their proposed allocation. ISSUES [19] The principal issues raised by the circumstances of the case and the arguments of the parties are: 1. In cases of continuous or progressive damage, should defence costs be apportioned between an insurer and an insured on the basis of time on risk? 2. Does the equitable concept of fairness require apportionment of defence costs in cases of continuous or progressive damage? 3. If either of the above principles requires apportionment of defence costs, should the apportionment be made prior to trial? 4. In the circumstances of this case, what order should be made regarding the Developers' obligation to pay or contribute to defence costs? [20] In the analysis that follows, I have set out the general principles applicable to the duty to defend and interpretation of insurance contracts. I have then considered the issues in this case. In many respects, the first three issues are intertwined. However, I have considered them separately and in light of the relevant authorities. I have then applied my conclusions as to the applicable principles to the circumstances of this case. My conclusions on the four issues outlined above can be simply stated as follows: 1. There is no principle that requires defence costs to be apportioned between an insurer and an insured on the basis of time on risk in the case of continuous or progressive damage. 2. The concept of fairness does not require a court to order an apportionment of defence costs in cases of continuous or progressive damage. Rather, the obligation owed by an insurer to defend an insured and the extent to which an insurer must pay or contribute to the costs of that defence are dependent upon the terms of the policy and the circumstances of the underlying litigation. 3. Apportionment of defence costs prior to trial can be ordered where there is a reasonable or practical means of making an order that fairly assesses the relative obligations of the two parties to pay defence costs. However, time on risk is not a reasonable or practical means of apportioning costs in the absence of evidence which suggests that the costs of defending the uncovered claims will approximate that apportionment. 4. Finally, I have concluded on the basis of the material before me that there is no reasonable or practical means of apportioning costs at this stage of the proceedings. Rather, I conclude it is likely that most of the defence costs that will be incurred would have been incurred even if the period of continuous or progressive damage ended when the insurance coverage terminated. It does not matter that those defence costs will incidentally benefit the insured by assisting with the defence of damage that occurred outside of the period of coverage. In these circumstances, the apportionment of defence costs should be left to be determined after findings of fact have been made in the underlying action or, alternatively, sufficient information regarding allocation of defence expenses can be placed before the court. ANALYSIS The Duty to Defend [21] The parties agree that the scope of an insurer's duty to defend in a particular case is governed by the pleadings. If the allegations fall within the general parameters of the policy coverage, the insurer's duty to defend is engaged. The test is whether the pleadings allege facts which, if true, would require the insurer to indemnify the insured for the claim: Bacon v. McBride (1984), 51 B.C.L.R. 228 at 232 (S.C.); Nichols v. American Home Assurance Co., [1990] 1 S.C.R. 801 at 810-11; and Monenco Ltd. v. Commonwealth Insurance Co., [2001] 2 S.C.R. 699 at para. 28. [22] The analysis on a duty to defend application is typically restricted to a consideration of the allegations in the pleadings, which are assumed to be true, and the relevant policy of insurance. The court may only consider extrinsic evidence if it is explicitly referenced in the pleadings, and only then for the purpose of determining the substance and true nature of the allegations in the pleadings: Monenco at para. 36. [23] It is well settled that the duty to defend is broader than the duty to indemnify - which is to say that the duty to defend does not depend on the insured actually being liable for the claims and the insurer actually being required to indemnify them for the corresponding damages: Nichols at 810; and Reform Party of Canada v. Western Union Insurance Co., 2001 BCCA 274. All that is required is the mere possibility that the claim falls within the coverage provided by the insurance policy: Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, [2010] 2 S.C.R. 245 at para. 19. If the insured can establish this, then a prima facie duty to defend is made out. [24] Any doubt as to whether the pleadings in the underlying action would bring the claims within the policy's coverage is to be resolved in favour of the insured: Swagger Construction Ltd. v. ING Insurance Co. of Canada, 2005 BCSC 1269 at para. 6. Rules of Insurance Contract Interpretation [25] Of course, the principles outlined above must be considered within the overall context of the general rules of insurance contract interpretation: Agresso Corp. v. Temple Insurance Co., 2007 BCSC 19, aff'd 2007 BCCA 559. [26] The primary interpretive principle in this context is that when the wording of a policy is unambiguous, the court should give effect to clear language, reading the contract as a whole: Non-Marine Underwriters, Lloyd's of London v. Scalera, [2000] 1 S.C.R. 551 at para. 71; and Progressive Homes at para. 22. Where, on the other hand, the wording of the policy is ambiguous, the courts will resort to general principles of contract construction: Consolidated-Bathurst Export Ltd. v. Mutual Boiler and Machinery Insurance Co., [1980] 1 S.C.R. 888 at 900-902. The basic principles may be summarized as follows: · Courts should prefer interpretations that are consistent with the reasonable expectations of the parties, so long as such an interpretation can be supported by the wording of the policy; · Courts should avoid interpretations that would give rise to an unrealistic result or one that would not have been in the contemplation of the parties at the time the policy was concluded; · Courts should also strive to ensure that similar insurance policies are construed consistently; · Courts should not apply these rules to create ambiguity where there is none in the first place; and · When these rules of construction fail to resolve ambiguity in an insurance policy, courts will construe the policy contra proferentem - against the insurer. A corollary of the contra proferentem rule is that coverage provisions are interpreted broadly, and exclusion clauses narrowly. (Progressive Homes at paras. 23-24) [27] With these guiding principles in mind, I turn to the analysis in the instant case. [28] Lombard concedes that at least some of the pleadings allege "property damage" of a nature sufficient to trigger its duty to defend under the Policies. For completeness, I am also satisfied that a prima facie duty to defend has been established. Therefore, the only issue before the Court on this application is the extent of Lombard's defence obligation - specifically, its responsibility to fund the costs of defending the action. Extent of the Duty to Defend [29] Where the pleadings allege numerous claims against an insured, some of which are covered and some are not, it is axiomatic that an insurer's prima facie duty to defend arises only in respect of the claims which, if proved at trial, would trigger its duty to indemnify. However, the extent of the insurer's responsibility to contribute to the costs of defending the action is a separate question that cannot always be determined according to the scope of its prima facie obligation. [30] It is well settled that where it is possible to distinguish between claims falling within and outside the policy coverage, the extent of an insurer's defence obligation can be limited accordingly: Continental Insurance Co. v. Dia Met Minerals Ltd. (1996), 77 B.C.A.C. 251. An insurer has no duty to defend claims which clearly fall outside the grant of coverage: Progressive Homes at para. 19. [31] On these principles, the extent of an insurer's defence obligation in a case involving a mix of covered and non-covered claims will depend primarily on the precision of the allegations in the pleadings and the operative language in the coverage provisions of the policy. In this respect, it is worth recalling that on a duty to defend application, any uncertainty is resolved in the insured's favour. [32] In this case, the Policies state that Lombard will defend "any action seeking compensatory damages" in respect of "property damage" occurring "within the policy period". It is the occurrence of damage, and not the initial precipitating event, which triggers coverage under occurrence-based CGL policies, such as the policies in question. This was stated clearly in Alie v. Bertrand & Frère Construction Co. (2002), 222 D.L.R. (4th) 687 at para. 91 (Ont. C.A.): ... the property damage must have taken place during the policy period. The policies are "triggered" to respond to the claim only when there is an occurrence resulting in property damage suffered during the policy period, no matter when the timing of the initial precipitating cause or event. [33] It follows that in this case, the plain meaning of the coverage grant in the insuring agreement is that Lombard is obliged to defend claims in respect of property damage which occurs - no matter when the precipitating cause took place - during the policy period for each of the Policies. [34] The pleadings allege defects and deficiencies in the construction and components of the Marina Estates complex which are alleged to have resulted in water ingress from the time of substantial completion. The resultant damage is alleged to have begun at this time and to have still been in progress at the time the action was commenced. In summary, the substance of the allegations is that a number of defects and deficiencies in the buildings caused them to leak from the moment they were complete, resulting in ongoing property damage from that time and continuing after the Policies expired. [35] In view of the coverage language and the substance of the allegations in the pleadings, it is clear that some of the property damage claims in the Action are covered and some are not. The question that arises is whether the costs of defending the claims in these two categories can be readily apportioned at this stage. Apportionment of Defence Costs [36] Lombard submits that in this case, the costs of defending the property damage claims can be readily apportioned. To the extent that damage is alleged to have occurred after the Policies expired, Lombard argues it cannot owe a duty to defend, as there is no possibility that such claims could ever fall within the scope of coverage. In Lombard's submission, the pleadings and the coverage wording are clear and capable of grounding a reasonable pro rata apportionment of defence costs based on its time on risk. [37] In support of its position, Lombard refers to a number of cases - both in Canada and the United States - in which the courts have prorated defence costs where only some of the claims in the underlying action fell within the insurer's policy period: Alie; Royal & Sun Alliance Insurance Co. of Canada v. Fiberglas Canada Inc. (1999), 12 C.C.L.I. (3d) 282 (Ont. C.J. Gen. Div.); Goodyear Canada Inc. v. American International Companies, 2011 ONSC 5422; and Insurance Co. of North America v. Forty-Eight Insulations Inc., 633 F.2d 1212 (6th Circ., 1980). In particular, Lombard submits that in cases of continuous or progressive damage, an insurer's responsibility for defence costs should be determined according to its time on risk. In this regard, Lombard relies on Surrey v. General Accident Assurance Co. of Canada (1994), 92 B.C.L.R. (2d) 115 (S.C.), aff'd 19 B.C.L.R. (3d) 186 (C.A.). [38] Lombard further submits that the decisions of the Ontario Superior Court of Justice in Hay Bay Genetics Inc. v. MacGregor Concrete Products (Beachburg) Ltd. (2003), 6 C.C.L.I. (4th) 218 (Ont. S.C.J.) and General Electric Canada Co. v. Aviva Canada Inc., 2010 ONSC 6806, set out a fair and principled approach to pre-trial apportionment that can be readily applied in the circumstances of this case. Issue 1: In cases of continuous or progressive damage, should defence costs be apportioned between an insurer and an insured on the basis of time on risk? [39] Having reviewed the authorities, I conclude that there is no settled principle in the Canadian decisions regarding continuous damage claims that favours an apportionment based on time on risk. Rather, the principle I extract from the decisions is that defence costs can be apportioned between an insurer and an insured if there is a reasonable or logical basis upon which to do so. However, most courts faced with the difficulty of apportioning defence costs at an early stage of proceedings have declined to do so either on the basis of time on risk or any other basis. [40] In light of Lombard's reliance on the Surrey, Hay Bay, and General Electric cases, I will explain my conclusion on this issue by touching on the relevant aspects of these decisions. [41] Surrey arose from an action against the named municipality relating to flood damage caused by the continuous overflow of water from municipal drainage systems over the course of many years. The defendant insurer provided liability coverage to the municipality for only one year during the overall period in which the flooding occurred. During that year, the owners of a local golf course were forced to prematurely repair and replace a concrete flume which they had installed to contain the increasing floodwaters. The golf course brought an action against Surrey alleging negligence, nuisance, and unjust enrichment and was successful in its unjust enrichment claim. [42] In the indemnity action, Surrey claimed that the occurrence which caused the damage to the flume fell within the policy period. The court in the indemnity action found that although part of the damage to the flume took place within the policy period, it was "beyond dispute" that the damage would have occurred over the course of many years. The court generally accepted that erosion is a cumulative process, the effects of which unfold and increase in severity with the passage of time. In this respect, the court observed that the particular facts of the case were unique. [43] The court found that it was impossible to precisely determine the proportion of damage which occurred within the policy coverage. It declined to order payment of defence costs based on time on risk. However, it ordered a pro rata apportionment of liability and defence costs between the municipality (2/3) and its insurer (1/3). This disposition was upheld on appeal. [44] I accept Lombard's submission that the reasoning in Surrey supports its position that where there are allegations of continuous or progressive damage and it is proved that some of the damage falls outside of the coverage period, the insured may be required to pay a portion of the defence costs. However, the decision does not provide authority for an apportionment based on time on risk, nor does it support making such an apportionment prior to trial. Rather, the authority in Surrey must be considered in view of the fact that the apportionment in that case was made retrospectively following the trial of the underlying action. With the benefit of the evidence and the findings at trial, the court was in a position to determine when the damage occurred and could assess the defence costs accordingly. I am not in a position on this pre-trial application to make a similar allocation in the absence of the relevant findings of fact. [45] Significantly, Sheffield J. came to a similar conclusion regarding the application in Hay Bay, which was also brought prior to trial. Hay Bay concerned a duty to defend application against two insurers regarding pollution liability under federal environmental legislation and a pending civil action. The insured supplied a concrete holding tank to the owner of a hog farm, which subsequently leaked manure into a nearby body of water and led to charges under the Fisheries Act, R.S.C. 1985, c. F-14. The resultant environmental damage occurred over the course of four years. When the owner of the hog farm commenced an action against the insured seeking damages for the cost of cleanup and all other costs associated with the leakage, both insurers denied coverage, arguing that the claims fell outside their respective periods of coverage or were captured by exclusions in the policies. [46] Although the court found that both insurers had a duty to defend the claims, it declined to address the matter of allocating the costs of defending the underlying action. In the court's view, this was an issue "entirely within the purview of the trial judge" (emphasis added) (at para. 13). The court went on to order that the parties' liability for the costs of the motion would be proportional to the respective periods of the insured's coverage. However, the order was made with hesitation "considering the fact that numerous liability issues have yet to be resolved" (at para. 47). The apportionment of costs for the motion is, of course, a matter within the discretion of the motions judge. There is no reason why that exercise of discretion is of particular relevance to the issue of apportionment of defence costs under the terms of the Policies in this case. [47] In the more recent case of General Electric, the circumstances involved historical soil contamination at a former industrial property of the applicant, which was alleged to have migrated to neighbouring lands and groundwater. The applicant, faced with an action for damages by the neighbouring landowners, sought a declaration requiring its two insurers to investigate and defend the claims. The situation was complex. Indeed, as Penny J. noted at para. 78, "the evidence is insufficient not only to determine when the alleged damage actually took place but even the time period within which the damage might have taken place." The court noted that one of the insurers was on risk for five years and the other for eight years, although some of those overlapped. The insured, depending on when the contaminant migrated offsite, could be treated as self-insured for as much as 65 years or not at all. This is because soil contamination at the plaintiff's site could have commenced anytime between 1903 and 1964. [48] Given the "occurrence roulette wheel" that resulted from this lack of information, the court concluded that a pre-trial allocation of defence costs would be appropriate and decided that to apportion defence costs in equal shares to the applicant and its two insurers would be appropriate (at paras. 78-82). The court went on to state that because this was a preliminary allocation before trial and based on limited information, it was made expressly without prejudice to the parties' ability to revisit the issue (at para. 84). [49] The court arrived at the decision on two bases. It cited the Hay Bay decision as "reasonably settled authority" on the point (at paras. 64 and 77) and it determined that such an order would achieve fairness between the parties. At para. 82, the court explained the preliminary allocation in the following terms: ... The burden these insurers (including, in this case, GE, which, for the purposes of this application, must be treated as self-insured before September 1968) assumed in insuring against property damage should fall on all of them and the costs should be shared by all of them. All of them, as well, have the same interest in minimizing their exposure by conducting the best defence available. ... It seems to me, as a matter of fairness between the parties, having regard to their shared interest and governed by the principles of equity and good conscience, that the fairest, most reasonable and most equitable allocation of defence costs that can be done in the circumstances is to apportion the costs equally between the three of them. [50] The reliance on Hay Bay is misplaced. As I have noted above, the court actually declined to make such an allocation in that case. The reliance on the principle of fairness between insurers was clearly expressed by the Ontario Court of Appeal in Alie. It is less certain if that principle necessarily applies when considering a single insurer and the contractual rights between the insured and the insurer. However, in light of the unusual circumstances in General Electric, it is understandable why the court took the fairness concept into consideration when making the order for apportionment. [51] It is also significant that the court in General Electric specifically declined to make an allocation of costs based on the time on risk. The court considered the uncertainty and the unusual circumstances and concluded it would not be fair to allocate defence costs, even on a preliminary basis, on the basis of time on risk. [52] For the reasons discussed above, I conclude that none of these authorities support a pre-trial apportionment of defence costs between an insurer and an insured on the basis of time on risk. In my view, time on risk is not a reasonable or practical means of apportioning defence costs in the absence of evidence from which it can be established or inferred that the costs of defence for periods of time when an insured did not have coverage will approximate that apportionment. Issue 2: Does the equitable concept of fairness require apportionment of defence costs in cases of continuous or progressive damage? [53] A number of the other authorities cited by Lombard involve the apportionment of defence costs between an insured and multiple insurers on the basis of fairness or equity: Alie; Royal & Sun Alliance; Goodyear; and Forty-Eight Insulations. The rationale for importing equitable considerations into the analysis is that there is, in such situations, no contractual relationship between the insurers. The insurers do not owe duties to each other. The Ontario Court of Appeal noted in Alie that the apportionment of defence costs in such cases is "not an exact science" (at para. 225). However, the question of fairness does not arise in the same way where there is only a single insurer and the focus is on the contractual relationship. [54] In Hanis v. University of Western Ontario, 2008 ONCA 678, leave to appeal to SCC refused [2008] S.C.C.A. 504, the court thoroughly canvassed the basic principles governing the apportionment of defence costs. Following the general approach set out by the British Columbia Court of Appeal in Coronation Insurance Co. v. Clearly Canadian Beverage Corp. (1999), 168 D.L.R. (4th) 366 (B.C.C.A.), Doherty J.A. distinguished the apportionment of defence costs between insurers from apportionment between insurers and insureds on the basis that the latter involves a contractual relationship that specifically addresses the obligation of one party to pay the defence costs of the other. At para. 22 he explained: ... The relationship between an insured and an insurer is contractual and must be governed primarily by the terms of the relevant policy of insurance. The insurer's obligations are found first and foremost in the policy. Those obligations may include the obligation to pay all or some of the costs associated with the defence of covered claims. It makes eminent sense that any inquiry as to the nature and scope of the insurer's duty to pay those costs should start with the language of the policy. [55] The issue in Hanis was the scope of an insurer's defence obligation where some, but not all, of the claims in the underlying action were covered by the policy. The claims involved multiple causes of action arising out of the same complex and interconnected set of facts. Regarding the apportionment of defence costs in these circumstances, Doherty J.A. stated at paras. 23 and 25: 23 I see no unfairness to the insurer in holding it responsible for all reasonable costs related to the defence of covered claims if that is what is provided for by the language of the policy. If the insurer has contracted to cover all defence costs relating to a claim, those costs do not increase because they also assist the insured in the defence of an uncovered claim. The insurer's exposure for liability for defence costs is not increased. Similarly, the insured receives nothing more than what it bargained for - payment of all defence costs related to a covered claim. ... 25 ... in the context of defending covered and uncovered claims in the same suit, a distinction must be drawn between cases where defence costs are related exclusively to the defence of either covered or uncovered claims, and cases where the same costs are incurred in the defence of both covered and uncovered claims. In the former circumstance, an allocation of costs would be required, barring a policy which provided for payment of uncovered claims. In the latter case, allocation would not be necessary unless the policy provided for allocation where the costs related to both covered and uncovered claims. [56] Ultimately, the court held that the apportionment of defence costs between an insurer and an insured should be determined by the operative language in the policy. Where there is an unqualified obligation to pay for the defence of claims falling within coverage, the court stated, the insurer is required to pay all reasonable costs associated with the defence of those claims, even if those costs also further the defence of uncovered claims (at para. 2). [57] Although the circumstances in Hanis involved a different sort of "mixed" claim than in the instant case, the approach to the basic principles regarding apportionment is persuasive. In my view, the contractual interpretation analysis is particularly well suited to the circumstances of a pre-trial application for apportionment between an insurer and an insured, at which stage there is only limited information available. Moreover, this approach embraces all of the established principles regarding the duty to defend and the rules of construction - just as an insured cannot expect to receive any greater benefit than what he or she contracted for, an insurer cannot seek to limit its defence obligation beyond what is expressly stated in the policy. [58] I do not accept Lombard's submission that Hanis is limited to claims involving separate but overlapping causes of action, and inapplicable to cases in which the pleadings allege continuous or progressive damage, where the essential cause of action is the same but the occurrence of damage is alleged to have taken place both within and outside the policy period. That distinction is irrelevant to the issue before this Court. What is important is that in both situations, defence costs are intertwined and it is difficult to separate them as between covered and uncovered claims - in one situation because the essential causes of action are intertwined, and in the other, because the defence costs may be incurred regardless of the length of the period during which damage was caused. [59] In summary on this issue, I conclude that the equitable concept of fairness does not require a court to order an apportionment of defence costs in all cases of continuous or progressive damage. Rather, an insurer's duty to defend and the extent to which it must pay for or contribute to the cost of that defence are to be determined according to the terms of coverage and the circumstances of the underlying litigation. Issue 3: If either of the above principles requires apportionment of defence costs, should the apportionment be made prior to trial? [60] As I stated in my analysis under the first issue, courts in many cases have acknowledged the difficulty in apportioning defence costs prior to trial. In St. Paul Fire & Marine Insurance Co. v. Durabla Canada Ltd. (1996), 137 D.L.R. (4th) 126 (Ont. C.A.), the Ontario Court of Appeal considered a pre-trial application to apportion the costs of defending a number of actions against the insured manufacturer relating to injuries resulting from asbestos exposure. The insurer acknowledged its duty to defend the actions but sought a contribution to the defence costs from the insured, who was uninsured for part of the time when damages were alleged to have occurred. [61] At 128, the court summarized the general challenges that arise with respect to pre-trial apportionment as follows: ... The impediments to a formulation that would fairly reflect the competing interests of the insurer and the insured at this stage of the proceedings are the imprecision of the allegations asserted by the claimants in the underlying action and the absence of any firm factual foundation for whatever proration formula might be selected. [62] In light of these considerations, the court upheld the motion court judge's ruling that the insurer should bear the sole cost of discharging its duty to defend, subject to its entitlement to recover all or an appropriate portion of its costs of defence from the insured following the ultimate disposition of the underlying actions at trial. [63] Similarly, in Axa Pacific Insurance Co. v. Guildford Marquis Towers Ltd., 2000 BCSC 197, a leaky condo case in which some of the alleged damages were within coverage and some were not, Bauman J. (as he then was) declined to apportion defence costs prior to trial, holding that the extent of the insurer's defence obligation would only be known with certainty after difficult findings of fact by the trial judge (at para. 59). [64] The Court of Appeal in Dia Met also spoke to the inherent challenges of apportioning defence costs in cases involving mixed claims and opined that retrospective assessment "offers the solution to the almost insurmountable difficulty of apportioning defence costs, on the basis of the pleadings alone, before or even after trial" (at para. 18). [65] In view of these established principles, I reject Lombard's submission that the extent of the duty to defend, or to put it more exactly, the amount it must pay to fulfill that duty, is to be determined solely on the basis of the pleadings. This argument conflates the duty to defend - which is determined solely on the pleadings - with the responsibility to pay for or contribute to the cost of that defence, which should be determined on some rational basis that has a real connection with the actual cost of defending the covered claims. [66] There is a decided preference in the jurisprudence for waiting to make the assessment as to apportionment until there is a solid basis in fact for doing so. The assessment necessarily involves consideration of the circumstances at the time of the application. The circumstances relevant to the apportionment of defence costs prior to trial can be very different from those arising at the conclusion of trial. The courts in St. Paul, Guildford Marquis and Hay Bay expressly acknowledged that reality. Issue 4: In the circumstances of this case, what order should be made regarding the Developers' obligation to pay or contribute to defence costs? [67] I conclude on the basis of the material before me that there is no reasonable or practical means of apportioning defence costs at this stage of the proceedings. The pleadings do not specify the extent to which damage is alleged to have occurred within or outside the policy period, and there is no useful evidence regarding the costs associated with defending the claims falling within coverage and those not. Accordingly, there is no basis upon which I can infer that the defence costs bear a direct proportion to the parties' time on risk. Indeed, it is evident to me that this proposition is without merit. All of the property damage claims have their genesis in the same allegations of water ingress due to construction deficiencies and defects. The fact that some of the damage is alleged to have occurred outside the period of coverage does not necessarily lead to separate and readily ascertainable costs of defence. Rather, I conclude it is likely that a substantial amount of the defence costs that will be incurred would have been incurred even if the period of continuous or progressive damage ended when the insurance coverage terminated. Furthermore, there is no evidence before the Court that allows me to fairly apportion the costs of defence on any other basis. In my view, any apportionment at this time would be arbitrary and premature. [68] Lombard relied on the decision in the Forty-Eight Insulations case for the proposition that time on risk is a reasonable means of prorating defence costs in a case of continuous exposure to conditions which result in injury. However, that case concerned the scope of insurance coverage for an asbestos manufacturer that was facing huge liabilities as a result of numerous lawsuits. It did not involve a single accident with a single insurer that owed a duty to defend. The court acknowledged that distinction in its decision at 1224: ... An insurer must bear the entire cost of defense when "there is no reasonable means of prorating the costs of defense between the covered and not covered items." Nat'l Steel Construction... [Citation omitted.] Thus, in the typical situation, suit will be brought as the result of a single accident, but only some of the damages sought will be covered under the insurance policy. In such cases, apportioning defense costs between the insured claim and the uninsured claim is very difficult. As a result, courts impose the full cost of defense on the insurer. [69] This case is similar to the "typical situation" described in Forty-Eight Insulations. This case does not involve the defence of hundreds of similar claims over a long period of time with many insurers as well as periods of self-insurance. Here, it is very difficult to apportion or prorate defence costs at this time. [70] As the express wording of the Policies provides that Lombard has a duty to defend any action seeking compensatory damages because of property damage occurring within the policy period, it follows that Lombard must pay all reasonable costs of defending such claims, regardless of whether they also assist in the defence of claims in respect of damage falling outside the policy period. This conclusion imposes no greater obligation on Lombard than what it contracted for in the first place. This interpretation accords with the clear language in the insuring agreements. [71] This conclusion does not amount to providing the Developers with a "free defence" for the claims in respect of damage falling outside the period of coverage. To the extent that the defence of those claims results in separate and readily ascertainable costs of defence, it will be open to Lombard to seek reimbursement for such costs as they are incurred or at a later stage in the proceedings. Accordingly, there is no unfairness to Lombard in requiring it to provide a full defence at this time. [72] In summary, I conclude that Lombard is entitled to a declaration that the Developers are obligated to pay the costs of defence solely relating to damage claims falling outside of the coverage period. However, at this stage of the proceedings there is no reasonable basis upon which to prorate defence costs between the Developers and Lombard. As Lombard owes a duty to defend, it must pay the costs of the defence as they are incurred. The Developers are entitled to the relief sought at paragraphs 1 and 2 of their petition. The Developers are also entitled to costs at Scale B. "Butler J."