Last July, in Deguise v. Montminy, 2014 QCCS 2672 the Québec Superior Court had occasion to revisit these issues from in Alie v. Bertrand & Frere Construction Co. Ltd., 2002 CanLII 31835, applying the Ontario Court of Appeal decision in that 2002 case to civil law concepts relating to allocation of responsibility among insurers. Many of the rulings in the decision were specific to Québec civil law. In one aspect, however, the case provided an opportunity to test the writer’s hypothesis that the Alie court called on parties and counsel to present expert evidence to show when damage actually started to occur, for the purpose of allocating insurer responsibility.* In other words, Deguise offered an opportunity to apply the ‘injury in fact theory’ of liability insurance coverage to facts proven by evidence, instead of legal conjecture. The decision, penned in French and applying civil law, has so far escaped the notice of the Bar in the rest of Canada.
The Deguise court found on the evidence that the damage started to occur starting at the time of pouring of concrete. For the coverage question presented, that meant the damage occurred over a long period of time, thus legitimating the application of an ancillary theory, namely the ‘triple trigger theory’ or ‘continuous trigger theory.’ That the evidence was used in this manner did not take away from the fact that it showed how scientific evidence can be used to show when damage occurred, as opposed to requiring the court to spread coverage by guessing that it occurred sometime between exposure to harm and actual manifestation of structural compromise.**
Revisiting Alie
Alie has been widely cited for several insurance law principles arising from the defective building materials. The decision, dealing with defective concrete basement walls and footings, offered paradigmatic factual circumstances for the court to consider these principles because of the large number of affected newly-built homes, the delayed onset of signs of building compromise over months and years, and the contest among numerous insurance liability carriers. In Canada, Alie relied to some extent on American insurance coverage trigger theories from litigation involving defective concrete, asbestos and tobacco.
Many cite Alie as expressing a definitive preference for the ‘continuous trigger theory’ of insurance coverage. That theory holds that standard general liability policies with definitions of property damage occurrences incorporating exposure to harmful conditions will provide coverage from the onset of the exposure to the manifestation of damage, as well as the intervening period. In the context of Alie, this meant from the time the concrete was poured to the time when cracks or other signs of expected actual damage to building foundations were noticed. The court rejected two other theories, the exposure theory because actual damage could be delayed, and the manifestation theory because it unfairly ignored the fact that unseen damage is, nevertheless, damage.
In fact, this widely-held interpretation of Alie is incomplete. The Court of Appeal did apply the ‘continuous trigger theory,’ but only because it was fairer and more comprehensive than the exposure and manifestation theories, in the circumstances. All three theories were, in fact, subsets of an overarching fourth principle that the court’s role was to determine when, in fact, the injury occurred: the ‘injury in fact theory’:
[93] Four approaches have been developed in the U.S. and Canadian jurisprudence for determining the timing of property damage which is latent, or developing over time, and which does not become apparent immediately. The “Exposure Theory”, the “Manifestation Theory”, the “Injury in Fact Theory” and the “Continuous Trigger or Triple Trigger Theory” are often referred to as the “four trigger theories”. The word “trigger” is not a term of art, nor is it used in the policy language. It is rather a term used in the jurisprudence to signify that the coverage afforded by a particular policy has been effectively called upon or activated and that the policy will respond to the loss.
[94] Although the four formulations are referred to as “theories”, we do not endorse that nomenclature as it may imply an arbitrary or conceptual basis rather than an evidentiary basis for triggering coverage under a policy. As will be evident, the trigger theories are, in effect, four ways of interpreting the often-complex evidence of how and when the damage occurred, then labelling the approach. Upon close analysis, each theory is effectively an application of the “injury in fact” theory where the court determines, on the evidence, at what point or continuum of points in the process, the property damage in fact occurred. [emphasis added]
The failure to digest the significance of paragraphs 93-94 of the Alie decision is widespread within the insurance law community. The brains of tort lawyers are hard-wired to spread responsibility among the greatest number of community pools of loss funding. Historically, the Ontario Court of Appeal has actually endeavoured to allocate legal consequences with as much precision as possible, and it has been deficiencies in the factual record that have led to apparent agreement with a loss-spreading approach. Look no further than Hanis v. Teevan, 2008 ONCA 678, for a pronouncement that there can be “no justification” for imposing upon an insurer more responsibility than is to be found in the insurance contract. (In that decision, the court upheld a 95/5 allocation of defence costs as between covered and non-covered liability claims: an incredibly precise partition.)
Close reading of the Alie decision actually reveals a strongly held position that the law must follow the evidence, both in the language of the insurance policy wording and in the scientific evidence of the chemical properties of defective building products. In this regard, the Court of Appeal was critical of counsel and left the door wide open for parties to establish more precisely when damage occurred, for the purpose of allocating and excluding insurer responsibility among multiple insurance policies and coverage terms:
[129] In this context, the trial judge made an important observation which reflects on the significance of manifestation of the damage as part of the continuous trigger theory. He noted at 154 that: “It may be that with proper testing, the experts could have concluded prior to 1992 that the foundations would have to be replaced”. The trial judge was correct to treat this as an evidentiary matter. Had there been evidence accepted by the trial judge, that could fix the point in time when the foundations required replacement, and if that point was before 1992, the trial judge would have been obliged to give effect to that finding, no matter when the full extent of the damage was actually discovered or manifested. This is because the policy covers damage during the policy period. Under the triple trigger or continuous trigger theory, the use of manifestation of the injury is a device to establish the latest time when the damage is complete. However, if the timing of the completion of the damage can be established after the fact, and it is earlier than when the damage was discovered, then the application of this device is no longer necessary. [emphasis added]
Earlier in the decision, the court had rejected the argument that damage could only be determined when it was visible, and left it open for a party to prove that damage could occur when a harmful substance or condition was introduced:
[38] We do not agree that this major structural defect to the homes is but a threat of future harm and not “physical injury” or “injury” to property. The fact that the injury is expected to get worse over time and to ultimately result in the total collapse of the home does not change its present character. In our view, any interpretation of the policy that would lead to the conclusion that there is no coverage for a defect to the plaintiffs’ houses until the houses themselves collapse as a result of this defect should be rejected as contrary to the true intention of the parties.
Thus, it was clear, this reasoning could be applied to allocation of insurance coverage based on a necessity to replace all or part of a structure due to the pouring of defective concrete. If counsel tendered expert evidence to this effect, it would have been possible for the court to allocate and exclude insurance coverage more precisely. If that meant some insurers shouldered more liability and others were relieved of responsibility, it would have been the most just result based on the contracts of insurance they had offered to the public.
The closer and more appropriate reading of the reasoning in Alie can impact on the handling of an insurance coverage dispute, from both the insurer’s side and the insured’s. In Deguise, expert evidence of actual injury was used against the two insurers who were arguing that delayed manifestation meant delayed triggering of insurance coverage.
How Evidence of Injury in Fact Affects Coverage Analysis
Because of the vast range of permutations, the ability in law and in fact to prove the precise timing of the property damage occurrence can have a wide range of outcomes. In the right circumstance and policy wording, a finding that pouring of bad concrete was sufficient to trigger coverage can bring multiple occurrences into a single coverage period. Accumulation of multiple claims into a single tower of insurance would then affect excess insurers or cause underinsured exposures to the an insured. Different policy wording and circumstances can lead to a spreading of insurance liability over several periods. Multiplicity of coverage periods can also lead to multiple deductibles or self-insured retentions, whereas a single tower can be a significant advantage to an insured, who only self-insures for one layer in one period. One can readily see how increased precision in the presentation of evidence in complex insurance coverage cases can cause very different judicial outcomes.
For example, a finding that a building’s basement had to be removed during one policy term does not multiply or ‘stack’ the insurance limits available to parties. A million dollars in insurance limits does not become three million, because it took three years for cracks to form in the basement. Nor does the delay in manifestation necessarily provide insurance to a party who chose to self-insure or to assume a higher deductible during one of several years. As argued by the writer in a 2012 article, “Horizontal or Vertical? Stacking and Unstacking the Limits of Multi-Term CGL Policies,” the fact that building damage can occur over time does not mean that insurer liability can be stacked or spread contrary to the precise coverage provided by each of several policies. This reasoning was subsequently affirmed in Canada for the first time in Goodyear Canada Inc. v. American International Companies (American Home Assurance Company), 2013 ONCA 395. The Court of Appeal held, in Goodyear, that to recognize coverage where insurers made the decision not to assume risk and not to accept premiums would be unjust.
As a further permutation, one can foresee an insurer arguing that different onsets of damage based on different environmental circumstances can lead to multiple occurrences and claims, leading to multiple deductibles or self-insured retentions. Expert evidence proving that the pouring of concrete was the starting point could be improved to establish the mixing of concrete as the origin of the damage, expecially given that concrete cures within several hours. The mixing of a common batch of concrete could thus trigger a common occurrence and a single deductible, compared to a multiple-occurrence theory. A court can only decide a case based on the evidence as presented. Prior judicial case law is helpful, but the evidence always governs the outcome.
Despite its reliance on Québec civil law, the Deguise decision is helpful to our understanding of the Common Law in cases involving delayed manifestation of property damage, not so much because of the treatment of the issues specific to that case. Rather, we can see it as a rare application of the statements of the Alie court requiring parties and their counsel to prove, through evidence, the facts to be applied to the insurance coverage questions in any given case. The Deguise court specifically referenced the Alie decision in navigating the interpretation of the insurance contracts and in applying the expert evidence.
After revisiting the Alie decision through this lens, we can see how insurance counsel should approach a complex property damage case, no matter whether one is acting for an insurer or an insured:
- without resort to the ‘artificial’ complex structure theory developing in American case law, a court can determine that the incorporation of harmful materials into the building structure is property damage without waiting for the building to collapse,
- the date on which damage starts to occur inside the building materials used to construct a structure can determine the specific insurance policies and insurance companies on risk over a span of months and years, and
- one ought not ignore the basic rule of civil litigation and advocacy, that a court cannot apply facts to law or contractual interpretation in the absence of proof of what the facts are.
* With reasoning based on this close review of the Alie decision, the writer has successfully used scientific expert evidence to settle complex insurance coverage claims out of court. The Deguise decision is helpful because it proved this hypothesis, and because the flexibility of the method allows it to be used by both insurer and insured, in the appropriate case.
** At paragraphs 700-82, the court considered the trigger theories in conjunction with the evidence of an expert hired by two insurers seeking to establish that actual damage occurred at least 20 months after the concrete mix was poured. The court preferred the evidence of the plaintiffs’ experts, who concluded the damage started to occur at the time the concrete was poured:
[700] Seuls ces deux assureurs plaident que la théorie de « Injury in fact theory » devrait s’appliquer au présent cas.
[701] Ils soumettent que l’application de la « triple trigger theory » retenue dans l’arrêt Alie c. Bertrand ne trouve pas application dans notre affaire en raison de la preuve soumise par leurs experts Maher et Hanna.
[702] À leurs yeux, seule la théorie qu’ils invoquent serait applicable au présent dossier car elle est la seule théorie qui respecte à la fois l’esprit et la lettre des polices d’assurance.
[703] Par contre, pour les parties demanderesses l’endommagement est survenu dès l’incorporation des granulats contenant de la pyrrhotite au mélange de béton, de sorte que la cinétique réactive de ce sulfure débute et entraîne inévitablement un dommage que les assureurs doivent compenser en vertu des termes de leurs polices d’assurance.
…
[781] Quand on considère que le développement chimique du phénomène varie selon les saisons et la température ambiante et que les conditions de la tenue de ses expériences de laboratoire n’ont pas respecté les conditions idéales, le Tribunal estime qu’il n’y a pas lieu de retenir cette preuve.
[782] Le Tribunal retient plutôt que les dommages ont commencé à exister dès le moment où le béton a été coulé.
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