November 11, 2019

The triggering event in occurrence-based coverage – the Court of Appeal upholds the theory

The continuous trigger theory still prevails in occurrence-based coverage according to a recent judgment of the Court of Appeal.

The theory adopted can result in different insurance policies being triggered when the damage extends over more than one insurance period

The theory suggests that an occurrence-based policy is triggered when the damage occurs, regardless of whether it is the first occurrence of the damage or its continuation. It is generally distinguished from the injury-in-fact theory, which focusses on the first moment of the occurrence of the damage as the triggering event, and from the manifestation theory, which is concerned instead with the appearance of the damage in question.

This debate, which may appear academic, is particularly significant in insurance coverage litigation. In fact, the theory adopted can result in different insurance policies being triggered when the damage extends over more than one insurance period. 

Background and trial judgments

The yellowing of window spacers and the presence of chemical condensation led the Court of Appeal to consider the trigger theories in Groupe Royal inc. c. Crewcut Investments Inc., 2019 QCCA 1839.

Between 1996 and 2000, three companies supplied extruded polymer spacers used to manufacture sealed glass units to Multiver, a company specialized in glass manufacturing, and to Bocenor, specialized in windows and doors. The premature deterioration of the spacers resulted in the aforementioned defects in the glass units. Consequently, hundreds of thousands of units had to be recalled and replaced by Multiver and Bocenor. The sellers and manufacturers of the glass units then sued the suppliers of the defective spacers.

In a two-phase trial process, the Superior Court first found the suppliers and the manufacturer of the spacers solidarily liable for the defects. Next, the Court apportioned liability equally among the suppliers.

In the second trial, concerning the quantification of damages, the Court ruled on the action in warranty brought by one of the suppliers against Lombard, its liability insurer, for damage that occurred between July 1, 1995, and March 30, 2004. The supplier had another liability insurer for the period from March 30, 2004, to March 30, 2008, on the same conditions. The Superior Court found that it was impossible to determine the exact moment when the damage occurred. It applied the continuous trigger theory and apportioned the damages on a pro rata basis for the coverage periods in question.

Judgment of the Courf of Appeal

First, the Court of Appeal confirmed that the application of the continuous trigger theory was appropriate in this case. In the circumstances, the damage started to occur when the spacer was incorporated into a sealed glass unit and continued while the unit was incorporated. The damage did not start when the owner of the unit noticed the yellowing or the appearance of condensation. The Court of Appeal added that the opposite argument would have the effect of turning the date of loss into the date of the occurrence of damage, which is contrary to the definition of property damage in the policy.

The Court of Appeal also rejected the suggestion that the starting point should be calculated individually for each of the defective products. Because of the abundance of units returned (134,865), the Court accepted that it would have been unreasonable to proceed in that way. In the absence of case law on the issue, the solution of using the time when the spacer was first manufactured was [translation] “effective and consistent with the principle of proportionality.”

Next, the Court of Appeal found that the burden of proof was not met to modify the finding of fact that the damage occurrence period ended in March 2008. The Superior Court had found that because the rapid degradation of the spacer had been established, it was not appropriate to apportion the damages after that date.

In light of this decision, it seems that the Court of Appeal has a favourable view of the use of the continuous trigger theory by trial judges to facilitate the apportionment of damages over several insurance periods in cases where it is difficult, if not impossible, to identify the precise moment when the damage occurred.

The Court of Appeal also suggested that even when the theory applies, is not absolutely necessary to determine the starting point of continuous damage on an individual basis when the exercise proves to be extremely laborious. In such cases, proportionality should guide trial judges.