Nfld Court Of Appeal Narrows the "Work Performed" Exclusions in CGL Policy

Back in October we told you of a B.C. Supreme Court decision which applied the “work performed” exclusion to deny coverage for a claim under a CGL policy arising from damage inflicted on certain boiler tubes during cleaning operations.

Now, in a very similar case, the Newfoundland Court of Appeal has reached exactly the opposite conclusion based on perceived ambiguity in the same exclusions. The Court also made two further rulings on "coverage by estoppel" and solicitor-client costs in coverage cases which should be of concern to the insurance industry as a whole.

In Lombard Insurance v. Crosbie Industrial Services a fuel oil storage tank was destroyed by an explosion which occurred while the tank was being cleaned by the insured subcontractor. Crosbie denied any negligence in its workmanship caused the fire/explosion and, when confronted with a denial of coverage by its CGL insurer Lombard, issued third party proceedings in the lawsuit to enforce coverage and the duty to defend.

The insurer had denied coverage based on the "work-performed" exclusions which provide that the policy does not apply to "property damage" (as defined) to:

• that particular part of real property on which you ... are performing operations, if the "property damage" arises out of those operations; or
• that particular part of any property that must be restored, repaired or replaced because "your work" was incorrectly performed on it.

The Newfoundland Court of Appeal ruled that neither exclusion applied to the circumstances of the case, reasoning as follows:

• the policy extends coverage for "property damage" caused by an "occurrence";
• an "occurrence" is defined to mean "an accident";
• in this case, the explosion and resulting damage to the tank clearly constituted "an accident" and hence "an occurrence" within the insuring agreement in the policy;
• the exclusions make no reference to any "occurrence" or "accident" and begs the question whether there is a distinction properly drawn between damage resulting from an "occurrence" and damage from "operations" or "incorrectly performed work";
• while the exclusions may preclude coverage for certain types of poor workmanship comprising what is commonly known as "business risks", a catastrophic failure of the sort which occurred in this case was clearly an "occurrence/accident" and could not be said to fall into the category of excluded business risks;
• the failure of the exclusion to address the linkage between an accident and business risks creates ambiguity which requires a narrow interpretation of the exclusion and the triggering of a duty to defend in the present case.

It is difficult to reconcile the B.C. Supreme Court decision and the Newfoundland Court of Appeal ruling. In the first case, the Court held that the damage to the boiler pipes was clearly accidental but was nonetheless outside coverage by virtue of the above exclusions. The Court of Appeal decision, on the other hand, seemed to be swayed by the catastrophic nature of the loss which it thought should be covered under a CGL policy even if it arose out of poor workmanship.

Coverage by Estoppel

In a perhaps more startling ruling, the Newfoundland Court of Appeal also held that Lombard Insurance was estopped from denying coverage by virtue of its handling of a similar incident a couple of years earlier. Again, an explosion occurred while Crosbie’s employees were cleaning the inside of another large petroleum storage tank. As a result of that explosion the tank was destroyed and Crosbie reported the incident to Lombard as required by the notice provisions of the policy. Lombard undertook an investigation into the incident and established a reserve for the anticipated liability claim. One of its adjusters concluded that the resulting liability claim would likely be covered due to the sudden and accidental nature of the event.

Lombard did not actually tell Crosbie that any resulting liability claim would indeed be covered. Nor did it tell Crosbie that it had established a reserve in anticipation of such a claim. Nonetheless, the Newfoundland Court of Appeal held that Lombard’s handling of this earlier incident amounted to a representation to its insured that coverage would exist for this type of loss and therefore prevented Lombard from later denying coverage for a similar incident. The reasoning was as follows:

• the doctrine of "estoppel" can apply where a person’s silence or inaction amounts to a "representation", and this occurs in circumstances where there is some sort of duty owed to make a disclosure or take certain action;
• insurance policies are complex and difficult for the average person to understand . . . insurers’ representatives are trained to understand these complexities and it is reasonable to impose upon them a duty to provide information and advice;
• in the context of CGL coverage, the insured providing notice of an occurrence or loss is an important first step which leads to the insurance company undertaking at least a preliminary assessment of the incident;
• in the absence of any advice from the insurer that the incident was not covered or that the coverage might be questionable, it is reasonable for the insured to assume coverage was indeed available, were a liability claim to ultimately ensue;
• in the circumstances, the insurer’s failure to advise of coverage difficulties amounted to a "representation by silence" that the claim would be covered;
• if Crosbie had been told that coverage did not exist for this type of loss, it would have posed significant challenges for its business and it would have taken action to seek alternate insurance; and
• in the result, because Crosbie relied on Lombard’s representation by silence, Lombard was “estopped” from denying coverage for a similar incident at a later date.

Perhaps this particular case is distinguishable on its own unique set of facts. However, if the Court’s observations regarding the doctrine of estoppel by representation are broadly received with favour by the courts, then there is a clear lesson here for the claims industry: if upon notice of an occurrence from the insured, there is the possibility of coverage difficulties for any claim that might later result, then the insurer must advise the insured of these difficulties or run the risk that silence will result in coverage for similar claims in the future.

Solicitor-Client Costs

In duty to defend cases, where the insured is successful in enforcing coverage against the insurer, it is quite common for the resulting judgment to require the insurer to reimburse the insured for all solicitor-client costs it had incurred in defending the underlying claim.

But what about the costs of the coverage proceedings against the insurer? Should they also be on a solicitor-client basis or on the lesser “party and party” basis just like all other commercial lawsuits.

The Court of Appeal ruled that where the coverage enforcement is taken by way of third party proceedings in the underlying lawsuit itself, if the insured succeeds in enforcing the insurer’s duty to defend, then the costs of the third party enforcement proceedings should be on the higher, solicitor-client basis.

The Court held that where there is coverage for the underlying liability claim, the insured is entitled to a defence by their insurer without expense to them. Even though there is no specific provision in the policy requiring the payment of solicitor-client costs in coverage enforcement proceedings, nonetheless the "unique nature of that contract" gives rise to an exception to the rule that solicitor-client costs will not usually be awarded.

Again, taken broadly, the ruling in this case could arguably stand for the proposition that all successful coverage enforcement claims should result in an award of solicitor-client costs against the insurer. The insurance industry no doubt hopes that this does not in fact become the prevailing view in the Courts of other Provinces.

The reasons in Lombard General Insurance Company of Canada v. Crosbie Industrial Services Ltd. are available at: http://www.canlii.org/nl/cas/nlca/
2006/2006nlca55.html

Readers with any questions regarding the judgment are welcome to contact Nigel Kent by phone (604.643.3135) or by e-mail (npk@cwilson.com).