Covenant to Insure: Two Recent Examples: 2020

The Covenant to Insure: Two Recent Examples 

An issue that comes up repeatedly is the effect of a covenant to insure, most commonly, in a  construction contract or in a lease. The general principle is that where one party covenants in a  contract to insure certain risks (property or liability), this represents an agreement by that party to  assume the risk of loss for the insured subject matter. The other parties to the agreement are entitled  to receive the benefit of that assumption of the risk, and of the insurance obtained, as are  (sometimes) parties who are not privy to the contract, but who the contracting parties intend to get  the benefit of the covenant to insure. This assumption of risk would exist even if the party who was  supposed to get the insurance failed to do so. Such insurance provisions can be a quick and easy way  to get out of a law suit on the basis that some other party agreed to accept the risks of loss. That  being said, a contract must be considered on its own merits: just because a particular contract  contains a covenant to insure does not necessarily mean that the party giving the covenant has  agreed to assume all risk of loss: it is open to a party to agree to obtain insurance, while reserving  rights of recovery as against the other party to the contract in the event of the latter’s negligence.  The devil is in the details. Two recent cases from Ontario illustrate these principles.  

The first case is DCMS GP (Dufferin-Steeles) v. Caribbean Tower Cranes Limited, 2015  ONSC 4125. This is a straightforward construction matter. DCMS was the owner and developer of  a retirement residence. DCMS hired Outspan to supply labour and equipment. Outspan agreed to  provide a construction crane to perform certain work. Under the applicable agreement between  parties, DCMS covenanted to obtain an “all risks property insurance” policy for the project to cover  “trade contractors, sub-contractors and others having an insurable interest in the work, engaged in  or connected with the construction, site preparation and related operations”. DCMS obtained this  coverage. Meanwhile, Outspan hired a sub-contractor, CTC, to provide a crane and operator. CTC  hired Magna and its owner, Perri, to inspect the crane before and after its erection. Magna hired  Lee, a P. Eng, to review and certify the work. In 2009, the crane fell onto the partially completed  residence causing damage. The insurer paid the claim and then sought to recover the losses.  

The action was commenced against CTC, Outspan, Magna, Perri, and Lee. The defendants  crossclaimed against one another. Outspan and CTC moved for an order dismissing the action against them on the basis that, in the contract at issue, DCMS had accepted the risk of loss vis a vis Outspan and CTC. Outspan and CTC also asked that the court dismiss the crossclaims brought  against them by Magna, Perri and Lee. The Court considered several issues, among which were: (i)  did the covenant to insure operate to bar DCMS from claiming against Outspan and CTC; and (ii) in  the event that DCMS was not allowed to sue Outspan and CTC, could Magna, Perri and Lee  nonetheless maintained their crossclaims against Outspan and CTC, each of which was based on a  so-called “independent” cause of action as against Outspan and CTC (rather than being merely  derivative of the main action). 

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The Court found that because DCMS covenanted with Outspan to obtain insurance, it thereby  assumed all risk of damage caused by the insured perils vis-a-vis the parties who were entitled to the  benefit of the covenant. In doing so, the Court accepted that CTC (which was not a party to the  contract with DCMS) was able to satisfy the two part test in Fraser River Pile & Dredge v. Can Dive Services1that (i) the parties to the DCMS agreement intended to extend the benefit of the  covenant to CTC; and (ii) the activities performed by CTC were within the scope of the DCMS  agreement, as it supplied the crane. As such, DCMS was not entitled to commence an action against  either Outspan or CTC. But what about the crossclaims brought by Magna, Perri and Lee? The  Court held that these too must fail. Citing the SCC in Giffels Associates v. Eastern  Construction2, the Court held that it is a precondition for the right to claim over for contribution  that the party being sued (in the crossclaim) be liable to the plaintiff. Since Outspan and CTC could  not be liable to the plaintiff (for the reasons stated above), Magna, Perri and Lee could not claim over as against them, even though they claimed for contribution on the basis of so-called  “independent torts.  

This is not a new development in the law: this jurisprudence has been around for a while. Still,  DCMS provides a nice, and concise statement of the law and the various tertiary issues in this area.  

We get a different result in the ONCA’s decision is Royal Host GP v. 1842259 Ontario.3In this  case, the appellant Royal Host owned a building in which it operated a hotel. The respondent leased  a portion of the building in which it operated a restaurant. A fire broke out in the respondent’s  kitchen causing some damage. The appellant was indemnified by its insurer and the insurer then  commenced a subrogated claim. The respondents argued that even if the fire was caused by their  negligence, the terms of the lease prevented the appellant from bringing the action. The lease  contained a term that provided that the landlord was to “take out and maintain” fire insurance and  the costs of the insurance was to be part of the common expenses paid by the tenants. The lease  also provided for what I will call “limiting language” to the effect that the tenant “is not relieved of  any liability arising from or contributed to by its acts, faults, negligence or omissions.” The  respondents moved to have the claim dismissed, and won at first instance. The motions judge relied  on the trilogy of cases from the SCC from the 1970s (Agnew-Surpass v. Cummer-Yonge, et al)  and found that this trilogy had created a rule of general application. As per the trilogy, the judge held  that, since the landlord covenanted to obtain the insurance, and since the tenant helped pay for the  insurance, the tenant should get the benefit of the insurance which meant that the landlord’s insurer  could not sue the tenant, since an insurer cannot sue its own insured. The motions judge found that  in these circumstances, the limiting language did not create a right of subrogation for the landlord’s  insurer. The ONCA disagreed and found that the SCC trilogy did not create an iron-clad rule which  would overrule the fundamental tenets of contract interpretation, one of which is that you look at  the language of the contract in order to ascertain the intentions of the parties. In this case, the plain  language of the contract provided that, even though the landlord was to buy insurance, the tenant  was not to be relieved of its liability, if any, for negligent acts. In this case, therefore, the parties, in  essence, contracted out of the normal rule, and they are allowed to do that.