That Cements It: the Lafarge Cement Case, New Directions From the Ontario Court of Appeal

On December 11, 2002, the Ontario Court of Appeal released its long awaited decision on the insurance issues in Alie et al. vs. Bertrand & Frere, Lafarge Canada. The case provided crucial insight into the application of exclusions and occurrence trigger theories

In addition to being one of the longest and most costly trials in Canadian history, (lasting over 15 months, involving dozens of lawyers), the insurance phase in the Alie et al. vs. Bertrand & Frere, Lafarge Canada case recently decided on by the Ontario Court of Appeal was unique as counsel for the 23 affected insurers made complex and often contradictory arguments on the application of exclusions and occurrence trigger theories.

Bertrand & Frere supplied ready-mix concrete for the construction of about 140 homes in eastern Ontario in 1986, 1987 and 1988. During this period, it used a new material called “fly ash” (supplied by Lafarge), as a partial substitute for cement powder. Subsequently, the foundations with fly ash appeared to be rapidly deteriorating.

At trial, experts from around the world argued over whether fly ash was the cause of the defect. The trial judge found both Bertrand (20%) and Lafarge (80%) negligent. He ruled that the deterioration began shortly after the concrete was poured and increased over time due to the use of fly ash. The scope of the damage was not known to either Bertrand or to Lafarge until 1992.

“FUTURE DANGER”

Bertrand’s insurers submitted that structural defects to the homes did not constitute either “physical damage” or “injury” to property within the meaning of the commercial general liability (CGL) policies. The insurers submitted that the fly ash did not damage any existing property, but was used to create a product with a propensity to fail.

They argued that for most homeowners, the claim was based on the possibility that the foundations would not perform their intended function in the future. Only a few of the foundations in question had actually been replaced by the time of trial. This “future danger” constituted economic loss and not property damage within the meaning of their policies.

Based on the expert evidence, the trial judge ruled that the damage was not solely limited to Bertrand’s product. He concluded that the damage to the foundations resulting from the incorporation of the fly ash, constituted property damage within the meaning of the CGL policies. The Court of Appeal agreed that on principle, a CGL policy is not intended to cover the insured’s own defective product or work. However, it agreed with the trial judge that defects in the foundations constituted property damage within the insuring agreement.

The Court rejected submissions that the trial judge’s ruling on this issue was contrary to the 1995 decision of the Supreme Court of Canada in Winnipeg Condominium Corporation No. 36 vs. Bird Construction. Traditionally, courts have characterized the cost of repairing or replacing defective work and products as “economic loss” on the ground that such cost does not arise from injury to persons or damage to property, apart from the defective work or product itself.

In Winnipeg Condominium, the Supreme Court rejected what is called the “complex structure” theory, which holds that any component part of a complex structure such as a building is such an indivisible part of the whole that any defect in a component part, represents damage to the entire structure. The Court of Appeal felt the Supreme Court had simply “rejected artificial characterizations of the nature of the loss as a basis for determining tort liability”. Accordingly, the court did not find the Lafarge decision to be in conflict with Winnipeg Condominium.

The court also had to deal with a number of different “rip and tear” exclusions contained in the Lafarge policies. There was no standard clause. The trial judge dealt with all policies individually and, in each case, determined whether the language of the specific clause removed Lafarge’s claim from coverage. He found that the “rip and tear” exclusion clauses in only three of the Lafarge excess policies applied to exclude coverage. His finding that the other exclusion clauses were “ambiguous” was upheld on appeal. The Court agreed that each policy must be examined individually to determine whether the language of a specific clause removes a claim from coverage.

PRIOR KNOWLEDGE

Another issue was whether Bertrand was sufficiently aware of the problems with the foundations, and therefore obliged to report them to its insurers between 1987 and 1991. The insurers argued that the policies were void for misrepresentation, since Bertrand was already making inquiries of Lafarge about whether the concrete was defective and the problem widespread.

The Court of Appeal acknowledged that Bertrand might have been too trusting of its supplier, or waited too long to conduct its own investigation of the problems. It agreed with the trial judge, however, that a reasonable person would not necessarily have disclosed those facts to an insurer during the time in question. Such a delay in reporting did not void coverage.

The court appreciated the complex nature of the issues and the care the trial judge took to analyze the numerous policies for Bertrand and Lafarge. The court upheld the trial judge on virtually all issues. One area where the Court of Appeal differed in approach was on the application of the four “occurrence trigger” theories:

Exposure theory;

Manifestation theory;

Injury-in-Fact; and

Continuous or Triple Trigger theory.

These four trigger theories have been applied by the courts to determine when the damage actually took place. Critically, the Court of Appeal noted that the word “trigger” is not a term of art or a term used in the language of the insurance policy. Although these four formulations are referred to as “theories”, the court would not endorse that term as implying anything other than an evidentiary basis for triggering coverage under a policy.

The court observed that on close analysis, each approach was effectively an application of the “injury-in-fact” theory where the court determines, on the evidence, at what point the property damage “in fact” occurred.

The decision in Lafarge suggests that whether the policy has been triggered is determined by the evidence or drawing inferences from the established facts and applying these findings to the policy wordings. Whether or not property damage has occurred during the policy period is a question of fact, or mixed fact and law, but not a question of law alone.

Using the injury-in-fact and triple trigger theories together, the trial judge found that most of the insurers on risk during the 1986 to 1992 policy periods were required to indemnify Bertrand and Lafarge. The exposure of each of those insurers was apportioned on a prorated basis. The Court of Appeal agreed.

WHICH THEORY

A second issue with the trigger theories was whether the type of insurance policy should be determinative of which trigger is applicable. The Court recognized that this issue has arisen because courts have applied different triggers when dealing with first-party indemnity policies and third-party indemnity policies.

It noted a trend in American cases in first-party property claims where there is latent damage, to apply the “manifestation theory”, making the insurer on risk at the time of the discovery solely responsible for indemnity.

On the other hand, in the leading Canadian case, University of Saskatchewan vs. Fireman’s Fund Insurance of Canada, the Saskatchewan Court of Appeal rejected the manifestation theory and determined that, since all of the damage had occurred before it was discovered, the “exposure theory” should be applied. The court found that it was contrary to the intention of the policy that an insurer should be responsible for damage that took place before it came on risk.

The Court of Appeal in Lafarge comments that it is not the type of policy which dictates the appropriate trigger, but rather, the requirements of the policy language read together with the facts of the specific case. Such facts would include when the injury actually occurred, when it was manifest, and how many insurance policies were available and liable to respond.

Despite the similarity of facts in Lafarge and University of Saskatchewan, the Ontario Court of Appeal commented that the latter decision was limited in its application because there had only been one insurance policy potentially at risk. Had there been other insurers on risk for earlier policy periods, it speculated that the Saskatchewan court might well have applied the injury-in-fact or the triple trigger theory.

This is difficult to read into the University of Saskatchewan decision, which clearly rejects the manifestation theory as being inconsistent with both the policy wordings and Canadian jurisprudence. In fact, the Saskatchewan court was of the opinion that the exposure theory was the only theory that could be applied when injury-in-fact could not be determined (as in Lafarge).

The fact that the Supreme Court of Canada declined leave to appeal gives this decision considerable weight. The Court of Appeal also expanded significantly on its earlier reasons in the 1990 landmark decision of Broadhurst & Ball vs. American Home Assurance. Broadhurst & Ball holds that where an excess policy contains duty to defend provisions, and the insurer has potential exposure to respond a claim, the excess insurer should contribute to defense costs. According to the court, if an excess policy contains a clear duty to defend (the court refused to imply a duty), that duty is triggered when the potential exists that a claim will exceed the primary insurance limits.

This potential alone is not sufficient to eliminate the primary insurer’s duty to defend, since there is also the potential that the claim will be entirely covered by the underlying policy. Similarly, the possibility that the claim will exceed the first excess insurer’s limits does not preclude the latter’s obligation to defend, although it may trigger additional obligations by insurers up the layers of coverage. In effect, a trial judge must make a “realistic appraisal” of the chance that an excess policy will be required to indemnify its insured.

DIFFERENT ARGUMENTS

There is an element of social engineering in the court’s suggestion that where several layers of insurance are exposed, the full and early participation of all insurers potentially liable “promotes settlement and expedites the trial process”. The Lafarge decision demonstrates that in complex litigation, the insurance issues can hit a critical mass where they are almost beyond the ability of a court to analyze and comprehend. This is particularly true when the insurers are not represented by a single voice, but argue different interpretations of the same CGL clauses, endorsements, exclusions, and trigger theories.