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LEGAL REPORT: INSURANCE LAW Court tells insurers to lie in the bed they make Quebec ruling means insurance companies must make possible reasons for denying claims clear at the outset. affixing the pipes together. An analysis was done on the elbows that found they were prone to cracking due to heat. The proj- ect owners demanded the elbows be replaced with those made by Ezeflow's competitors. In order to replace the elbows, the pipes had to be cut at the welding, or chamfer, points. The pipes would then have to be rebeveled in order to affix the new elbows. Ezeflow made an insurance claim for the cost of rebeveling the pipes and for the cost of the replacement elbows. It later dropped its claim for costs of the replacement elbows. Lombard denied the claim on four main points of the insur- ance policy, essentially saying damage that was caused to the pipes was due to the voluntary replacement of the elbows by Ezeflow. One clause in the insurance agreement that was not cited as a reason to deny the claim was the "impaired property" clause, basically saying damage caused by defective property would not be covered. The case was taken to Quebec Superior Court and on Oct. BY K E LLY HARRIS T he Quebec Court of Appeal's ruling in Lombard Canada Ltd. v. Ezeflow Inc. should serve as a cautionary tale for insurers when denying claims. The case was focused on whether damage caused during the removal of defective products is covered under general com- mercial liability. However, the effect of the ruling may force insurers to provide a laundry list of all the reasons for denial of a claim or risk losing an ability to argue specific clauses of an insurance agreement during a court challenge. Ezeflow Inc. manufactures metal pipe fittings for drilling platforms. The company had been contracted to supply pipe- elbows for oil-drilling platforms to be used in England and the Sable Energy Project off the coast of Nova Scotia. Ezeflow had general commercial liability insurance through Lombard Canada Ltd. After the Ezeflow elbows were fastened on pip- ing on the rigs, cracks were found on the longitudinal welds 24, 2006, Justice Chantal Corriveau ruled in favour of Ezeflow, saying the damage was caused through an occurrence dur- ing the welding process attaching the elbows to the pipes, and awarded the company $410,572. Lombard appealed the case to the Quebec Court of Appeal. In the ruling, available only in French, the court ruled in favour of the appellant. Chief Justice J.J. Michel Robert said the cracks in the Ezeflow elbows happened as a result of welding and not as an occurrence — product damage from a "misadventure or unforeseen mishap," as the company argued. Ezeflow argued the damage was caused by an accident or occurrence. "In the contrary, nothing in the evidence suggests that the appearance of cracks in fittings at their welding pipes, or caused by any bad luck or misfortune," said Robert. "Indeed, the cracks that have appeared in the longitudinal welds as a re- sult of the use of heat on the circular welds to connect the pipes cannot, in this case, the result of a mishap or an unexpected misfortune, constitute an accident. Thus, contrary to the trial judge, I am of the view that the damage does not result from an accident or disaster." In the appeal court ruling, Robert agreed with the trial judge say- ing the "impaired property" exclusion could not be used, as it was not introduced as a reason for denial at the outset of the action. www. C ANADIAN Law ye rmag.com FEBRU AR Y 2009 37 ILLUSTRATON: HUAN TRAN