Member Article

THE FACTS

Ezeflow is a company specialized in the manufacturing of pipe fittings intended for refineries, gas pipelines and offshore drilling platforms. in 1998, ezeflow entered into a contract with genoyer to manufacture 142 pipe fittings to be incorporated into drilling platforms belonging to sable. Kvaerner, in turn, was responsible for installing the fittings manufactured by ezeflow. when connecting the fittings to the platform pipes, Kvaerner noted that there were cracks in the ezeflow fittings. tests then showed that the fittings had sustained an imbalance when the base materials were integrated, which facilitated the spread of the cracks when exposed to heat. one hundred and fourteen (114) of the one hundred and forty-two (142) parts had already been installed when the defects surfaced pressed by the delivery time for the platforms, sable, genoyer and Kvaerner decided to replace the fittings manufactured by ezeflow with a competitor’s fittings. Kvaerner removed the fittings and ezeflow reimbursed the cost of the work ($410,572.80). ezeflow claimed the amount of $410,572.80 paid to genoyer from its liability insurer (“lombard”), which amount represented the cost of the repairs made to the pipes. however, ezeflow withdrew the following from its claim:

(a) the cost of the 142 fittings previously supplied to Kvaerner; and

(b) the cost of removing the fittings

Lombard refused to indemnify and invoked, among other things, that the cost of repairing the pipes did not result from any damage caused by a loss but rather from the removal of the defective fittings and that, consequently, these damages were not covered by the liability insurance policy.

THE INSURANCE POLICY

Ezeflow took out a multi-peril civil liability insurance policy containing, in particular, the following exclusions:
[ibc translation]

“2. exclusions

This insurance does not apply to:
[…]

(i) “property damage” to “your product” arising out of it or any part of it.

(j) “property damage” to “your work” arising out of it or any part of it and included in the “products completed operations hazard”. This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.

(k) “property damage” to “impaired property” that has not been physically injured, arising out of:

                a. A defect, deficiency, inadequacy or dangerous condition in “your product” or “your work”; or

                b. A delay or failure by you or anyone acting on your behalf to perform a contract or agreement in                accordance with its terms.

(l) Any loss, cost or expense incurred by you or others for the loss of use, withdrawal, recall, inspection, repair, replacement, adjustment, removal or disposal of:

1. “your product”;

2. “your work”; or

3. “impaired property”;

if such product, work, or property is withdrawn or recalled from the market or from use by any person or organization because of a known or suspected defect, deficiency, inadequacy or dangerous condition in it.” [emphasis added]

DECISION BY THE COURT OF FIRST INSTANCE

The trial judge concluded that a loss had occurred, which she identified as the “damage to the property of a third person”, that is, the damage to the pipes.  She ruled out the application of the exclusions under the liability insurance policy on the following grounds:

(a) exclusion (i): the claim covers the costs of repairing the property of a third person (genoyer’s pipes) and not the loss of the fittings manufactured by ezeflow;

(b) exclusion (J): it was the welds that were defective, not the fittings;

(c) exclusion (K): by reason of estoppel, this exclusion does not apply because

the insurer did not invoke it at the proper time;

(d) exclusion (l): it is not a case of product removal or product recall because Kvaerner was the one that decided to remove the fittings and not ezeflow.

 

DECISION BY THE COURT OF APPEAL

A. Damages Resulting From the Defect In a Product Manufactured by the Insured

In a split decision, the court of Appeal overturned the judgment of first instance. Although the judges all arrived to the same conclusion, their reasons differ.

The Majority.

Chief Justice robert and Justice rochette were of the opinion that the damage occurred when cracks  appeared in the fittings and not in the welds connecting them to the pipes. this assessment of the facts differed from the trial judge’s.

According to the judges in the majority, the damages did not result from a loss because the appearance of the cracks was not caused by an accident, bad luck or some unforeseen misfortune. the ezeflow fittings were defective and the damages associated with their removal are covered by exclusion 2 (l) of the lombard policy. The cracks appeared when the heat needed to weld the fittings was applied. Thus, it was the welds made when the fittings were manufactured that were defective, and not the welds connecting the fittings to the pipes. the claim thus concerns damages resulting from a defect discovered in the product manufactured by the insured, ezeflow, and not from an accident. the majority applied exclusion 2(l) of the policy based on the following facts: - the fittings were “withdrawn from use” because of their real or suspected defects;

CONCLUSION

This decision clarifies that the sole fact that an insured’s product is defective cannot be considered a loss. liability insurance does not cover monetary claims resulting from defective products where there is an exclusion clause to this effect. only losses and damages resulting from accidents are covered.

The second aspect clarifies that where the insurer fails to raise the appropriate exclusion in its letter of denial and in its defence, it risks having to pay the price for its inadvertence.

Therefore, from the moment a claim is made, the file must be thoroughly studied to ensure that all the grounds of defence are invoked. Furthermore, we recommend that legal advisors be promptly consulted if you believe that an exclusion must be raised. It will therefore be easier to invoke the appropriate grounds at the proper time.