Pacific Chemicals Pte Ltd v MSIG Insurance (Singapore) Pte Ltd and another

• Judge: Choo Han Teck J
• Judgment Date: 02 October 2012
• Neutral Citation: [2012] SGHC 198
• Citation: [2012] SGHC 198
• Docket Number: Suit No 285 of 2010 (Summons No 805 of 2012)
• Published date: 12 November 2012
• Hearing Date: 17 April 2012
• Plaintiff Counsel: Philip Ling (Wong Tan & Molly Lim LLC)
• Date: 2012
• Defendant Counsel: Elaine Tay Ling Yan and Wong Ying Shuang (Rajah & Tann LLP)
• Court: High Court (Singapore)
• Subject Matter: Contract,Insurance,Property Insurance,Words and Phrases

Choo Han Teck J:

The Plaintiff is a company incorporated in Singapore. It manufactures and trades in petrochemical and related products including phthalic acid (“PA”) which it manufactures at a plant at 36 Tuas Road (“the Plant”). PA is an industrial chemical needed in the manufacture of flexible PVC products, alkyd resin, dyes, pigments and unsaturated polyester resin. The Plaintiff sells PA in both its molten and solid forms. The 1st Defendant is a Singapore-incorporated insurance company while the 2nd Defendant is a company incorporated in Japan that is registered as a general insurer in Singapore under the Insurance Act (Cap 142, 2002 Rev Ed). The Plaintiff entered into a Fire Industrial All Risks Insurance Policy (Policy No MSD/FIAR/06-001865) (“the Policy”) with the 1st and 2nd Defendants (collectively referred to as “the Defendants”) as co-insurers. The 1st and 2nd Defendants were liable under the Policy in the proportion of 70% to 30% respectively. The Policy was issued on 3 May 2006 and covered, inter alia, loss and damage to property of the Plaintiff. The period of coverage was from 1 April 2006 to 31 March 2007. An endorsement to the Policy (Endorsement No MSD/FIAR/06-001865-02) (“the Endorsement”) dated 7 June 2006 was also issued and applied with effect from 1 April 2006 to 31 March 2007.

The hearing before me concerned a trial on preliminary issues of law. The Plaintiff filed its Writ of Summons on 23 April 2010 to claim an indemnity under the Policy for two incidents which occurred at the Plant. On 21 February 2012, the Plaintiff applied by Summons No 805 of 2012 (“Sum 805/2012”) for a trial on preliminary issues of law under O 33 r 2 of the Rules of Court (Cap 322, R 5, 2006 Rev Ed). The Defendants consented to Sum 805/2012. The preliminary issues to be tried before me are set out verbatim as follows: Whether, on a proper construction of item 2(ii) of [the Endorsement] under the [the Policy], both issued by the 1st and 2nd Defendants on 7 June 2006 and 3 May 2006 respectively, the Defendants are not liable to indemnify the Plaintiff for any loss or damage to the catalysts in the reactor tubes of the Plaintiff’s [PA] Reactor D-14, under the circumstances pleaded at paragraphs 8 to 13 of the Statement of Claim (Amendment No 1) filed on 1 March 2012; Whether, in the circumstances of the present case in which a cold shut down of the Plaintiff’s PA plant was implemented and having regard to:- the factual observations made in the reports rendered by the experts and/or consultants and/or advisors engaged by the Defendants; the agreed facts as set out in Schedule I annexed [to Sum 805/2012]; and the agreed factual assumptions as set out in Schedule II annexed [to Sum 805/2012]: the loss, destruction and/or damage arising from the solidification of the molten PA which was in the PA storage tank T-501 on 7 June 2006 (“the Residual PA”) can be said to: constitute “unforeseen and sudden physical loss or damage”, so as to be covered under Section I of the Policy; and/or be caused by or arise from “change in temperature” or “inadequate operation of...heating system”, so as to be excluded from coverage by virtue of General Exclusion 4(d) of the Policy. the loss, destruction and/or damage arising from the implosion of the Tank can be said to: constitute “unforeseen and sudden physical loss or damage”, so as to be covered under Section I of the Policy; and/or be caused by or arise from “change in temperature” or “inadequate operation of...heating system”, so as to be excluded from coverage by virtue of General Exclusion 4(d) of the Policy. Whether the PA in the Tank constitutes “property being worked on”, so that the loss, destruction and/or damage caused by the solidification of the Residual PA is excluded from coverage under the Policy by virtue of sub-clause (k) under the heading “Property Excluded Under Section I” of the Policy.

Two incidents occurred at the Plant that became the subject of this Suit. I now refer to the first incident. Crude PA is manufactured in the Plaintiff’s PA Reactor D-14 (“the Reactor”) in the Plant. After the crude PA is purified and distilled, it is transferred and stored in the PA storage tank T-501 (“the Tank”) which is heated at 150ºC to keep the PA in a molten state. Dr J H Burgoyne & Partners (International) Ltd (“Burgoynes”), a firm instructed by the Defendants’ loss adjusters, Cunningham Lindsey (Singapore) Pte Ltd (“Cunningham”), to investigate the two incidents, observed in a report dated 1 August 2006 that nitrogen gas was continuously introduced into the Tank to displace the oxygen moisture in the Tank and prevent formation of acids. The nitrogen gas left the Tank through a vent line (which was a steel pipe of about 2” in diameter at the roof of the Tank) and it was then ventilated into the atmosphere. On 8 May 2006, a cooling circuit control valve in the Plant malfunctioned. The Reactor overheated and shut down automatically. The Reactor contained 9,733 tubes filled with catalysts, specifically aluminium carriers containing vanadium pentoxide. The catalysts were exposed to excessive heat, melted and were damaged. According to the Plaintiff, investigations were carried out on the Reactor and the Plant with the assistance of PA Consultants GmbH, a company specialising in PA operations. The Plaintiff claimed that on 22 June 2006, Dr Supot Kalanon (the Plaintiff’s representative), PA Consultants GmbH, Cunningham and Burgoynes agreed that the tubes should be drained of catalysts and refilled. The Plaintiff entered into an agreement dated 18 September 2006 with Hudson Delphi Engineering & Construction Pte Ltd (“Hudson”) to drain and refill the tubes. The Plaintiff paid Hudson S$1,952,116.90 for this work. The Plaintiff now claims an indemnity for the amount paid to Hudson and business interruption costs, less US$600,000 (being an interim payment made by the Defendants to the Plaintiff without admission of liability).

I turn now to the second incident. Although production of the crude PA ceased after the first incident, the Plaintiff continued to purify and distil the crude PA that was already produced. The purification and distillation process was completed and most of the purified molten PA was transported out of the Plant by 31 May 2006. The Plaintiff then decided to implement a cold shut down of the Plant. Before doing so, the Plaintiff had to transfer the molten PA in the Tank to a tank truck with a heating facility to keep the molten PA from solidifying. It was not disputed that the molten PA could not be discharged completely from the Tank because of the location of the outlet from the Tank, and it was expected that some molten PA would be left in the Tank (ie the Residual PA). The maximum amount of Residual PA was expected to be no more than 100 metric tonnes. The parties agreed that the Residual PA could only be removed by lowering the temperature in the Tank to below 131ºC to solidify the molten PA. The PA flakes would then be dug out manually from the Tank and sold. The equipment gauge reflected the amount of Residual PA in the Tank as 100 metric tonnes. The Plaintiff relied on the reading on the equipment gauge and turned off the heating system of the Tank on 4 June 2006. However the equipment gauge malfunctioned and the actual amount of Residual PA was 476 metric tonnes instead of 100 metric tonnes. The solidified Residual PA was dug out and sold. The Plaintiff now claims, inter alia, the difference in the proceeds it could have obtained if the additional 376 metric tonnes of Residual PA was extracted before the cold shut down and sold in molten form rather than solid form. Molten PA fetches a higher price per unit than solidified PA.

The Tank was also damaged. On 7 June 2006, the Plaintiff turned off the entire heating system of Tank including the heating system for the vent line in implementing the cold shut down. It is assumed for present purposes that the heating system of the Tank could not be shut down partially so as to keep the heating system for the vent line operating. The gases within the Tank contracted as they cooled. Under normal circumstances, the vent line would have allowed gas to be drawn into the Tank to prevent negative pressure from being generated within the Tank during the cooling process. However, due to the shutting down of the heating system of the Tank, the temperature in the vent line dropped below the melting temperature of PA vapour. PA vapour in the Tank and vent line solidified and blocked the vent line. Excessive negative pressure thus built up inside the Tank and it buckled inwards. The Plaintiff now claims the costs of dismantling and repairing the Tank.

The Defendants claim that they are not liable to indemnify the Plaintiff for loss and/or damage to the catalysts in the 9,733 tubes because such loss and/or damage is excluded under item 2(ii) of the Endorsement. The Endorsement provides that:

The Policy is extended to include any unforeseen and sudden physical loss destruction or damage (hereinafter called Damaged or Damage) to Property Insured necessitating repair or replacement due to causes such as defects in casting material, faulty design... or any other cause not specifically excluded hereinafter.

Item 2(ii) of the Endorsement states:

2. The Insurer(s) will not indemnify the Insured for:

...

ii) loss of/or damage to belt, ropes, wires, chains, rubber tyres, dies or exchangeable tools, engraved cylinders, objects made of glass, felts, sieves or fabrics, operating media eg lubricants, fuels catalysts.

Other than a bare denial at paragraph 5 of the Plaintiff’s Reply and Defence to Counterclaim (Amendment No 2) filed on 26 March 2012, the Plaintiff did not dispute the Defendants’ argument that damage to the catalysts was excluded by item 2(ii) of the Endorsement. Before me, Mr Ling submitted that the Endorsement did not apply because it was issued after...