Canada: Third Party Liability Insurance: Quebec Superior Court Rules On Continuous And Progressive Damage And Pro Rata Apportionment Among Successive Insurers

On June 12, 2014, Michel Richard, J.C.S., issued a judgment of more than 250 pages ("landmark judgment"1) in matters pertaining to the problem of pyrrhotite. More than 800 home owners and 18 business owners were claiming compensation totalling $200 million for the replacement of the foundations of their buildings.

The owners claimed that the foundations and other concrete structures had to be replaced because pyrite and pyrrhotite were present in the granulate used to make the concrete.

Justice Richard ruled, for the most part, in favour of the applications for compensation of the owners of the affected buildings and apportioned liability among the principal defendants according to the role they played, i.e. among the general contractors/concrete formers, concrete mixers, the quarry and the geologist.

Each party found liable had had a successive string of both primary and excess liability insurers since the early 2000s. One of the key questions was which insurers should pay compensation and in what proportion.

Justice Richard determined that the compensation payable in a case of continuous and progressive damage should be apportioned among the insurers on a pro rata basis in accordance with the coverage periods of the various applicable insurance policies issued by each one. For example, if the damage occurs over a 10-year period and an insurer covers the financial consequences of liability of its insured for 2 years, the insurer will be responsible for paying 20% of the compensation.

It is important to note that, as part of his analysis, the judge first found, based on the expert evidence taken, that the damage was progressive and continuous and that its first manifestation corresponded to the date the foundation was poured.

Justice Richard had to draw on Canadian and American common law to allocate the compensation payable among the successive insurers of a common insured because the Civil Code of Québec and Quebec case law do not provide any rule for doing so.

The judge determined that the method of allocating compensation on a pro rata basis according to coverage periods should be used for the following reasons in extensio:

  • It is the fairest and most predictable, equitable and efficient way to take into account the obligation in solidum between insurers and the potential subrogatory actions among them, as it is consistent with the principles of Quebec law regarding obligations and insurance;
  • moreover, Canadian common law and especially American doctrine, which is more highly developed in this area, confirm that the preferred method to use is pro rata allocation according to coverage periods and, in fact, is the method used by most U.S. jurisdictions;
  • the insurers will thus be compensated for the damage sustained and the insurers will assume their responsibility, each on the basis of the duration of the coverage provided, which respects the logic of the insurance contract;
  • in view of all the facts in the matter, the court will eliminate any possibility of subrogatory (and other) actions between insurers, without, however, "overcompensating" the insured, if it determines immediately and equitably the apportionment of liability required by Article 469 CCP in the matter of joint and several liability using the pro rata method.

Without explicitly saying so in his ruling, Justice Richard applies the "Continuous Trigger Theory," known in Canadian and American common law, to arrive at a pro rata allocation. According to this theory, all policies in force between the time of exposure to the event giving rise to the damage (insertion of pyrrhotite in concrete mixes) and the occurrence of the "event" are triggered. In the case at issue, the parties admitted that the occurrence of the event corresponded to the date when cracks visible to the naked eye appeared in the foundations.

This theory may be distinguished from three other theories that are used in common law to determine the applicable policy or policies (trigger theories) and that Justice Richard could have chosen to apply, namely:

Trigger Theories

Principles and examples of application in pyrrhotite cases

Exposure Theory

The policy triggered is the one in force at the time of exposure to the event giving rise to the damage, i.e. when the pyrrhotite was incorporated into the concrete mix for the pouring of the foundations.

Manifestation Theory

The policy triggered is the one in force at the time the damage manifests for the first time, i.e when bulging and cracks appear in the concrete foundation.

Injury-in-fact Theory

The policy triggered is the one in force at the "occurrence" of the damage, when the chemical reaction causing microcracks in the concrete occurs, for example.

Footnotes

1. Deguise c Montminy, 2014 QCCS 2672.

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