The Court of Appeal Reconciles Conflicting Indemnity and Covenants to Insure: There is no Legal Rule that a Covenant to Insure necessarily bars Litigation

The Court of Appeal Reconciles Conflicting Indemnity and Covenants to Insure: There is no Legal Rule that a Covenant to Insure necessarily bars Litigation

The Court of Appeal’s latest word on tort immunity is a good reminder of the importance of proper contractual interpretation, particularly where covenants to insure and indemnity obligations conflict with each other. Tort immunity refers to both covenants to insure and waivers of subrogation that prevent one party (or its insurer through a subrogated action) from pursuing another as a consequence of the pre-loss bargain set out in their contractual relationship. Ever since the Supreme Court of Canada’s “Tort Immunity Trilogy”,[1] the tort immunity doctrine provides that a contractual covenant to secure insurance can relive a party from liability for that party’s own negligence. The key consideration is who assumed which risks.

In Capital Sewer Servicing Inc. v. Crosslinx Transit Solutions Constructors, 2022 ONCA 10, the Court of Appeal found that an assumption of risk does not automatically follow from a covenant to insure against that risk, as a matter of law.

The underlying claim was made by property owners alleging damage from a sewage backup during construction on the sewer system near the Avenue Road Station in Toronto, as part of the Eglinton Crosstown Light Rail Transit Project. Both Crosslinx Transit Solutions Constructors (the “Contractor)” and Capital Sewer Servicing Inc. (the “Subcontractor”) were sued. The Contractor brought an Application for a declaration that the Subcontractor had to indemnify and hold it harmless. The Subcontractor brought a Cross-Application for a declaration that it had no obligation to indemnify or defend the Contractor.

The legal dispute was between the conflicting covenant to insure and indemnity provisions: while the Subcontractor had agreed to indemnify the Contractor for all claims, the Contractor had a covenant to insure through a wrap-up liability insurance policy, which covered the Subcontractor as a Named Insured.[2]

The Application Judge found in favour of the Contractor. The subcontractor’s indemnity agreement took precedence over the covenant to insure because the subcontract (with the indemnification clause) took precedence over the general construction project contract (with the covenant to insure). The Application Judge noted that the Subcontractor had also agreed to secure insurance against its own negligence, which meant that it had assumed the risk of loss or damage caused by its own negligence. As the Subcontractor was obliged to indemnify and hold the Contractor harmless, the Subcontractor’s duty to defend the Contractor was also triggered.

The Court of Appeal affirmed the Application decision, but went further. Although the factual matrix included at least three contracts in addition to the Primary Wrap-Up Commercial General Liability Insurance Policy, the insurance covenants favoured the Subcontractor, while the indemnity provisions favoured the Contractor. However, the Court of Appeal engaged directly with the Tort Immunity Trilogy and the doctrine that if the Contractor undertook to provide insurance for a peril, it assumed responsibility for any damages caused when the peril occurred.

The Court of Appeal opined this was not necessarily true. Generally, a covenant to insure will mean that the party agreeing to obtain the insurance is responsible for any damages, should the risk occur. The Court denied that this was a “free-standing legal principal of contractual interpretation”, though. It is instead an example of contractual interpretation in action. The tort immunity bar turns on the particular facts of each case. It can only be applied in light of the contract as a whole in the factual context of the particular circumstances. The contractual language and the context are the relevant considerations, and govern.

In denying there is a legal rule that covenants to insure bar litigation, the Court affirmed that each case will turn on the unique wording of the subject contract(s). Additionally, prior cases are of limited value, unless the same or similar wording in both the prior case and the one under consideration are being interpreted.

The Court of Appeal found the Application Judge was correct that the insurance covenant did not mean the risk of loss was on the Contractor. Additionally, the Application Judge’s conclusion that the “hold harmless” language in the indemnity clause imposed a duty on the Subcontractor to defend the Contractor against the claims brought by the property owners was reasonable.

Takeaway

The doctrine of tort immunity is a very powerful one. If applicable, it may shorten, streamline or entirely eliminate litigation. The Court of Appeal’s caution, though, is that it can only apply on a case-by-case basis. Its applicability will turn on the specific contractual language used in the provisions, the wording of the contract(s) read as a whole, and the factual context. Proper contractual interpretation is crucial. Interestingly, neither the Appellate nor the Application decision touched on the defence obligations under the Primary Wrap-Up Commercial General Liability insurance itself.

Insurers should consider whether the doctrine of tort immunity might apply in their commercial lines property and liability claims.

[1] These cases are Agnew-Surpass Shoe Stores Limited v. Cummer-Yonge Investments Ltd., [1976] 2 S.C.R. 221; Ross Southward Tire v. Pyrotech Products, [1976] 2 S.C.R. 35; and T. Eaton Company v. Smith, [1978] 2 S.C.R. 749 (the “Tort Immunity Trilogy”).

[2] There is more to the factual context, but the key insurances covenants were that “the Wrap Up Insurance is primary without right of contribution of any other insurance carrier by any Named Insured” and that the Contractor “shall, at its own expense, obtain and maintain the following insurances . . . (b) ‘Wrap Up’ Commercial General Liability”. The Subcontractor, on the other hand, had agreed in its subcontract that is “shall be liable for, and shall indemnify and hold harmless [the Contractor] from and against, all Claims… to the extent caused by or arising out of the performance, non-performance or breach of this Subcontract including any failure of Subcontractor to perform and observe its obligations under this Subcontract, or any act or omission, whether or not negligent.. except only to the extent caused solely by the wrongful act or neglect of [the Contractor].”

Insights & Commentary

When Cryptocurrencies and Insurance Policies collide – The D&O Securities Exclusion in the Blockchain Age - photo
  • Publications

When Cryptocurrencies and Insurance Policies collide – The D&O Securities Exclusion in the Blockchain Age

During the fall of 2020, when Ontarians were hunkering down for the second COVID-19 pandemic wave, the Ontario Superior Court of Justice released its decision in Kik Interactive Inc. v. AIG Insurance Company of Canada[1]. The Court was tasked with interpreting whether the respondent insurer’s securities exclusion worked to preclude coverage for cryptocurrency sales to … Continued

by

One Year Later: Looking Back at Louis v Poitras - photo
  • Publications

One Year Later: Looking Back at Louis v Poitras

In January 2021, the Ontario Court of Appeal released Louis v Poitras,[1] the now definitive case on striking civil jury trials during the COVID-19 pandemic. Poitras was the culmination of the onslaught of motions to strike civil juries due to prejudice arising from pandemic-related delay. In a concise and strong decision, the Ontario Court of … Continued

by

Conducting Virtual Examinations - photo
  • Publications

Conducting Virtual Examinations

COVID-19 and the public health response to the global pandemic has had a significant impact on the conduct of civil litigation in Ontario and elsewhere.  The Ontario Superior Court of Justice has encouraged all regions to adopt virtual proceedings wherever possible.  It has requested that counsel and parties accommodate requests made by opposing counsel or … Continued

by

Discovering a Policy Breach Late in Litigation: Trial Lawyers Association of British Columbia v Royal & Sun Alliance Insurance Company of Canada 2021 SCC 47 - photo
  • Publications

Discovering a Policy Breach Late in Litigation: Trial Lawyers Association of British Columbia v Royal & Sun Alliance Insurance Company of Canada 2021 SCC 47

In the recent decision, Trial Lawyers Association of British Columbia v Royal & Sun Alliance Insurance Company of Canada, the Supreme Court of Canada considered the application of promissory estoppel in the insurance context. Specifically, the Court considered whether an insurer was estopped from denying coverage because it had already provided a defence, before it … Continued

HRTO Update:  Denying Services to a COVID-19 Positive Patient is not Discriminatory - photo
  • Publications

HRTO Update: Denying Services to a COVID-19 Positive Patient is not Discriminatory

In the recent decision of Jacobs v. MyHealth Centre, 2021 HRTO 1009, the Human Rights Tribunal of Ontario (“HRTO”) concluded that the denial of services to a patient who was presumptively positive with COVID-19 did not amount to discrimination under the Ontario Human Rights Code (“the Code”) Background Facts The Applicant, Steven Jacobs, attended the … Continued

All News