Everything You Always Wanted to Know About Triggerage and the Duty of Excess Insurers to Defend Progressive Injury Cases (But Were Afraid to Ask) - According to the Ontario Court of Appeal

On Friday, December 6, 2002, the Ontario Court of Appeal issued an important insurance coverage judgment in Alie v. Bertrand, the defective concrete case that has been before the Ontario courts for many years. The rulings in this case will be of great significance to the West Coast "Leaky Condo" litigation and, indeed, to construction defect claims generally. Hence this unusually lengthy bulletin.

FACTS OF THE CASE

Bertrand and Frere Construction supplied concrete for the construction of about 140 homes during 1986 through 1988. Bertrand used fly ash supplied by Lafarge Canada as one ingredient. The concrete proved to be defective, and in 1992 it was determined that the foundations of all of the homes would have to be replaced. The defect was traced to the fly ash supplied by Lafarge. In a series of actions, Bernard Alie and 136 other homeowners sued Bertrand and Lafarge. Bertrand's 5 insurers and Lafarge's 18 insurers all denied coverage and were third partied into the action.

After a 150 day trial, Bertrand and Lafarge were found 20% and 80% liable, respectively. The Plaintiffs' damages totalled approximately $20 million, and legal costs were estimated to be in the same range. Between 1986 and 1992, Bertrand maintained $1 million of CGL and $4-5 million in excess liability coverage. The trial judge held that all of them owed both a duty to defend and obligation to indemnify. Over that same period, Lafarge carried $1-2 million CGL coverage, plus two or more excess policies, for a total of $20-50 million each year. The trial judge held all of the CGL insurers liable for defence and indemnity, all of the first excess insurers liable for a portion of indemnity, and all excess insurers up to $10 million in total coverage for each year to be liable for a portion of both defence and third party costs.

'PROPERTY DAMAGE' AND 'OCCURRENCES'

The Bertrand insurers argued that:

• there was no "property damage" because the defective concrete merely represented a "threat of future harm" not actual and present physical injury; and

 
• in any event, the only thing which was defective (and therefore damaged) was the Bertrand concrete and hence coverage was negated by the work/product exclusions.

• the Bertrand "product" was the concrete not the foundations formed by the same;

 
• the incorporation of the defective concrete damaged both the foundations and the structural integrity of the homes both of which constituted "property damage" within the meaning of CGL policies; and

 
• the fact that the injury was expected to get worse over time and to ultimately result in the total collapse of the home did not change the present character of the damage so as to take it outside coverage.

While emphasizing that this conclusion was essentially an evidentiary ruling, the result lends support to the sometimes controversial notion that the incorporation of a defective component which damages the structural integrity of the structure as a whole represents "property damage" to that structure for liability coverage purposes.

The insurers also argued that neither the mere failure of an insured's product nor damage caused by repairing a defective product constituted an "occurrence" within the meaning of a CGL policy. But the Court summarily dismissed this argument saying "the loss to the plaintiffs went beyond a simple failure of the insured's product; there was damage to their property caused by the defective product, and therefore the loss resulted from an "occurrence".

TRIGGERAGE THEORIES: WHICH INSURER IS ON RISK?

Four approaches to 'triggering' coverage for progressive injury claims have been developed in the Canadian and United States' case law to determine which insurers on risk must respond to the claim:

• The Exposure theory holds that only the policy in place when the first exposure to the condition or conditions causing the deterioration of the property should respond because, from that point on, damage is a certainty;

 
• The Manifestation theory holds that the policy in place when the injured third party does or could have become aware of the damage must respond;

 
• The Injury in Fact theory holds that a policy will respond if damage actually occurred during the policy period, whether or not any one was or could have been aware of it, and regardless of when the negligent act or omission causing the damage actually took place; and

 
• The Continuous or Triple Trigger theory deems property damage to have occurred from the initial exposure or negligent act, through to the time when damage became manifest, or ought to have been manifest.

"[94] Although the four formulations are referred to as "theories", we do not endorse the 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 [merely] labeling 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.
 
...
 
"[101] The second question is whether the type of insurance policy should be determinative of which trigger is applicable. This issue has arisen both in the American and Canadian case law because courts have applied different triggers when dealing with first party indemnity policies and third party liability policies.
 
...
 
"[104] This divergence of view on the applicable trigger for first party policies suggest that it is not the type of policy which dictates the appropriate trigger, but rather, the requirements of the policy language together with the facts of the specific case, including the evidence of when the injury actually occurred, when it was manifest and how many insurance policies are potentially available and liable to respond."

The Court of Appeal upheld that decision, stating as follows:

"[140] The conditions and timing of the trigger of any insurance policy to cover and respond to a loss are governed by the language of the policy. In this case, the policy language in the CGL third party liability policies in issue will trigger coverage, from the timing point of view, when damage is suffered within the policy period. As a result, the injury in fact theory is the one that corresponds with that language...
 
"[141] If the injury in fact is found to have occurred at the date of exposure to the hazard, at the date of manifestation of the damage, or on a continuous and progressive basis, one might refer to the application of the exposure, manifestation or continuous trigger theories as descriptive of the timing of the damage as it actually occurred. However, the most straightforward and accurate nomenclature in each case is injury in fact."

"[142] If the full extent of the damage has become a certainty at a point in time before it is discovered, the injury in fact has occurred by that point in time. Consequently, the fact that there may be further deterioration after that point does not trigger any policies in place after that point, because the damage is already complete. It will be a matter of evidence at the trial as to when the damage becomes complete. The point when the full extent of the damage becomes known is the manifestation date. In this case, there was no evidence acceptable to the trial judge that the damage was complete before the experts did conclusive testing in 1992. Therefore that date was accepted as the date when the damage became complete."

So insureds may be effectively self-insured for one or more years toward the end of the time on risk, and therefore have to contribute to defence costs and indemnity (i.e. settlement or judgment). In the Alie case, because it was not possible on the evidence to determine how much damage occurred during any particular policy period, the Court upheld the trial judge's apportionment of the damage on a pro rata basis throughout the effected policy periods.

PAYMENT OF DEFENCE COSTS BY EXCESS INSURERS

The Court of Appeal also made some very important rulings with respect to the exposure of excess insurers to contribute towards the defence costs of insureds confronting claims that might exceed primary policy limits. The ruling may lead some excess insurers to urgently review their policy wording.

The Court reviewed several different types of excess policy wording and the "duty to defend" language in such policies, including:

• umbrella/excess wordings where the duty to defend was limited to "occurrences covered under this policy but not covered by underlying policies";
   
• policies that "followed the form" of the underlying coverages;
   
• policies where the excess insurer was given a discretion to associate with the defence of the underlying claims; and
   
• policies which expressly excluded any duty to defend.

• any excess insurer obligation to contribute to defence costs has to be found within the policy wording;
   
• the mere fact that the underlying claim may trigger indemnity under the excess policies is not by itself sufficient to require contribution;
   
• but if the excess coverage is exposed and the policy contains language requiring the excess insurer to defend, then contribution is required;
   
• a claim based on an event covered by a policy but alleging damages beyond the limits of that policy is not covered by that policy; rather, it is only "partly" covered by that policy;
   
• "where a claim alleges a harm that is covered by both the primary policy and excess policy, but seeks damages in excess of the limits of the primary policy, then that claim may or may not be covered by the primary policy. The potential that the primary policy will not fully cover any damages awarded is, in our view, enough to trigger the excess insurer's duty to defend" and hence contribution to defence costs is required;
   
• the word "may" is generally given a permissive meaning but it can also have a mandatory meaning in certain contexts; in the context of the excess insurer's discretionary ability to defend claims, the language is ambiguous and must be construed against the insurer i.e. if the claim exceeds policy limits, the language is to be construed as though the excess insurer's duty to defend (and therefore contribute) is triggered; but,
   
• if the excess policy expressly excepts any duty to defend, then the Court will not rewrite that policy so as to require contribution towards defence costs.

The outcome of the case was that the defence costs were divided amongst the seven policy periods and then equally apportioned amongst the primary and excess insurers during each period. Only one excess insurer "escaped". The reasons in the Court of Appeal case can be accessed on the Ontario Courts website.

Readers interested in the subject of contribution between insurers can also access an exhaustive paper on the subject on Clark Wilson LLP's website.

For further information with respect to this and other issues of insurance law and practice, feel free to contact either of the co-chairs of Clark Wilson LLP's Insurance Law Practice Group, Nigel P. Kent (npk@cwilson.com; 604-643-3135) or Neo J. Tuytel (njt@cwilson.com; 604-643-3180).