An insurer who covers a previous loss is estopped from denying coverage for a second similar loss, even if an exclusion exists in the policy which would take the loss outside of coverage

Ultramar Ltd. v. Rancur Petroleum Services Ltd., [2005] N.J. No. 98, Newfoundland and Labrador Supreme Court – Trial Division

Ultramar is an owner of a marine terminal which has a number of large fuel storage tanks for petroleum products. The tank in question had a 70-foot diameter and a height of 37 feet and a capacity of 25,000 barrels of petroleum. In June of 2002, Ultramar contacted Rancur Petroleum Services (“Rancur”) to clean the tank. Rancur did the prep work and engaged Crosbie Industrial Services Limited (“Crosbie”) to complete the cleaning. While the tank was being cleaned, gas inside the tank exploded and the tank was ruptured and partially collapsed. It was ultimately determined to be completely destroyed. Ultramar claimed damages for the loss of the tank; costs of dismantling its twisted remains and securing the area; loss of storage capacity; and costs of altering the distribution network and other related costs necessary as a result of the loss of storage capacity.

On the day that the tank exploded, Crosbie’s employees cleaned the tank and removed waste material without any incident. Crosbie’s employees took their lunch break, and were scheduled to hydroblast the tank in the afternoon. While Crosbie’s employees were on their lunch break, Mr. Curlew, the president of Rancur, without advising the employees of Crosbie, closed the tank vents and the manway cover at the entrance to the tank. After lunch, the Crosbie’s employees proceeded with the hydroblasting work, not realizing that the tank vents and manway covers had been closed over the lunch hour. Approximately 20 minutes after the Crosbie’s employees began hydroblasting the tank, an unexplained fire and then a subsequent explosion occurred, causing the damage to the tank and some minor injuries to Crosbie’s employees. Crosbie applied to its insurer, Lombard General Insurance Company of Canada (“Lombard”) for coverage under its policy of insurance. Lombard refused to provide coverage, and refused to defend Crosbie for the action that had been commenced against them by Ultramar. Crosbie then issued a Third Party Notice against Lombard seeking a declaration of an entitlement to insurance coverage, and to have Lombard defend the allegations made against Crosbie pursuant to the policy of insurance.

Crosbie had a commercial general liability occurrence-based policy with Lombard. The policy contained a property damage exclusion clause which noted that insurance does not apply to:

5)   That particular part of real property on which you are a contractor or subcontractor working directly or indirectly on your behalf is performing operations, if the “property damage” arises out of those operations; or

6)    That particular part of any property that must be restored, repaired or replaced because “your work” was incorrectly performed on it …

Lombard refused to cover the loss on the basis that the damages fell outside the scope of the policy. This application dealt with whether Lombard was required to defend Crosbie for the action commenced against Crosbie by Ultamar.

In determining whether Lombard had a duty to defend Crosbie, the court applied the legal principle contained in Halifax Insurance Company of Canada v. Imnopex Ltd. et al, [2004] I.L.R. I-4338, and from the Reasons for Judgment of Iacobucci J. in Monenco Ltd. v. Commonwealth Insurance Co., [2001] 2 S.C.R. 699 (S.C.C.). The court noted that in order to make a determination with respect to whether coverage existed the court must first review the pleadings to determine whether or not the possibility of an obligation to indemnify arises. Where the pleadings give rise to a doubt as to whether the allegations fall within coverage, such doubt is to be resolved in favour of the policy holder. Finally, the court noted that in seeking to determine the “substance” and “true nature” of a claim, the court is entitled to go beyond the pleadings and consider extrinsic evidence. Extrinsic evidence can be referred to when it has been explicitly referred to within the pleadings, and when it would assist the court in appreciating the nature and scope of an insurer’s duty to defend.

Counsel for Lombard relied upon an American case of Jet Line Services Inc. v. American Employers Ins. Co. 404 Mass. 706 (Sup. Ct. 1989), which the court noted dealt with a factual situation nearly identical to the present case. In Jet Line Services, the insured was performing cleaning operations on a storage tank. The Massachusetts court held that the exclusion clause in the commercial general liability policy would extend to damages arising not just from the particular part of any property in which operations were being performed but would extend to the entire portion of the property and damages associated with the entire property. Lombard argued that Jet Line Services provided a clear precedent upon which the law should be excluded from coverage under the policy of insurance.

Crosbie argued estoppel based on Lombard’s dealing with it regarding an incident which took place in Corner Brook, and for which an investigation ensued by Lombard’s adjusters for 16 months until April of 2002. Crosbie stated that following the incident, Lombard never informed Crosbie that the potential claims arising from the Corner Brook incident may not be covered under the insurance policy. The insurance policy issued to Corner Brook by Lombard contained the same exclusion clause as the current policy. The Corner Brook incident involved a similar explosion to a fuel tank. Crosbie relied upon Maracle v. Travellers Indemnity Co. of Canada, [1991] 2 S.C.R. 50 for the proposition that a party relying on the doctrine of issue estoppel must establish that the other party has by words or conduct made promises or assurances which were intended to affect the legal relationship and to be acted on. Furthermore, the representee must establish that in reliance on the representation, he acted on it or in some way that changed his position. The court further noted that although the promise must be unambiguous, the promise could be inferred from circumstantial evidence.

Both Lombard and Crosbie presented affidavit evidence detailing the representation made in the Corner Brook incident. The trial judge determined that Lombard’s conduct in the handling of the Corner Brook incident combined with the statements of their employee to Crosbie during the Corner Brook incident amounted to a representation which would lead a reasonable insured to believe coverage existed for the type of loss in the subject matter of the action that had been commenced against Crosbie by Ultramar. Lombard had taken no steps to inform the insured that no coverage existed. The trial judge determined that Lombard was estopped from arguing that Crosbie was not insured under its policy of insurance due to the manner in which it handled the Corner Brook claim. Therefore, the trial judge determined that Crosbie was entitled to coverage for the loss and for the defence of the allegations made against them by Ultramar.

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