Contractual Risk Transfer: A Review of Recent Authorities on Additional Insured Endorsements, Covenants to Insure and Subrogation Bars

NOTE: The decision of Justice Morgan in Sanofi Pasteur Limited v. UPS SCS, Inc. et al., 2014 ONSC 2695 (CanLII), discussed in this post, was upheld in the Court of Appeal: 2015 ONCA 88 (CanLII).

Also, the decision of Justice Metivier in Deslaurier Custom Cabinets Inc. v. 1728106 Ontario Inc., 2014 ONSC 5148 (CanLII) was reversed by the Court of Appeal on April 4, 2016.

I had an “additional insured” problem come up on a file lately. (Well, to be honest, they come up all the time.) Anyway, I took a look at the recent authorities and realized that it had been a while since I’d written on this (or really, any) subject. So, to try to make up for my delinquency, I’m posting this somewhat lengthy discussion of recent cases dealing with additional insureds and the related subjects of covenants to insure and subrogation bars, in the hope that this one post will count for four or five of the usual length.

Diligent readers who wade through this post will find a nugget of what I think is an important development in the law of apportionment of fault, tucked away in one of the decisions dealing with covenants to insure. Although really, this is simply another aspect of the larger topic of contractual risk transfer.

PART I.               Additional insureds

Great Atlantic & Pacific Co. of Canada Ltd. v. Economical Mutual Insurance Co., 2013 ONSC 7200 (CanLII)

This was a decision of Madam Justice Patricia Hennessy. A & P sought reimbursement from Economical Mutual Insurance for its expenses in having successfully defended a slip and fall action brought against it by some customers.

Economical was the insurer of a floor maintenance company (“CBSG”) with which A & P had contracted. CBSG had agreed to have A & P included as an additional insured in its liability insurance policies. And that was done in the CGL policy that had been issued to it by Economical.

According to Justice Hennessy’s reasons, “[t]he Certificate at issue describes A & P as an additional insured pursuant to the Policy, ‘but only insofar as their [sic] legal liability arises vicariously out of the negligent operations of the named insured.’ CBSG was the named insured.”

I have observed in previous posts (see “Recent ‘additional insured’ decisions continue confusing Ontario jurisprudence”) that in many Ontario cases dealing with “additional insured” issues, there appears to be no recognition of the fact that it is not the certificate, but the additional insured endorsement that creates the coverage. As an American commentator said, in a passage reproduced more fully in my earlier post, “A certificate of insurance is a form confirming the existence of the named insured’s coverage. It is merely proof that the named insured has insurance. It is not, by its terms, a contract of insurance.”

However, in this case, although reference was made to the Certificate of Insurance, Justice Hennessy also referred to the wording of the actual Additional Insured Endorsement. Her reasons in fact make clear the danger of relying on the certificate: the wording of the certificate and the endorsement was different. The former purported to restrict coverage to legal liability to A & P that arose “vicariously out of the negligent operations of [the named insured]”. The endorsement did not refer to vicarious liability nor to the “negligent” operations of the named insured, only to its “operations”.

Rather bizarrely, in this case, Economical Mutual itself tried to rely on the certificate, rather than the endorsement, as the basis for its denial of coverage. The reasons do not indicate whether the insurer tried to argue that the certificate should prevail over the endorsement but if that argument was advanced, it did not succeed.

Justice Hennessy found that “the Policy is determinative”. (Of course, in this case, that was the result that the additional insured, A & P, desired. What would have happened if the wording of the certificate and the endorsement had been reversed, such that the broader coverage appeared in the certificate? I would think that A & P could then have made a strong argument that Economical would be bound to provide the coverage that it would have falsely represented, in the certificate, to have been extended. A certificate of insurance should not be permitted to narrow the grant of coverage in the endorsement itself, but principles of estoppel might permit the coverage to be broadened by the certificate.)

Economical argued that “the Statement of Claim makes allegations directly against A & P for its negligence as an occupier and that there is no claim that A & P’s liability stems from the acts of CBSG”. As a result, it reasoned, A & P’s liability did not arise from the operations of CBSG and no coverage was afforded.

Justice Hennessy rejected the insurer’s submission. She analyzed the allegations that had been made in the statement of claim and found that they triggered a duty to defend:

[49] The respondent argues that the claim against A & P is with respect to their duties as an occupier.  That may have been a question put to the jury. But it does not diminish the substance and true nature of the factual basis of this claim. It is a simple slip and fall alleged to have occurred as a result of the negligent janitorial operations. A & P had contracted out the janitorial operations and the contractor, CBSG, had added A & P as an insurer with respect to commercial general liability arising out of these operations.

[50]           The authorities do not require an analysis of the legal foundation which may give rise to damages, i.e. occupier liability or vicarious liability arising from the negligence of the individual operator.  The focus of the assessment must be the facts alleged in the Statement of Claim.  The coverage provisions should be construed broadly (Halifax Insurance at para. 34).

[51]           I do not have any trouble finding that the plaintiff is alleging damages as a result of unsafe conditions left by the floor cleaning operator. The true substance of this claim, giving a fair reading to the entire pleadings, is that the plaintiff alleges that she slipped and fell on the floor in close proximity in time and place to the floor cleaner who was operating floor cleaning equipment and who left the floors in a slippery and hazardous condition. The allegations against A & P claim a breach of their obligation to ensure that the floors are safe and that the floor cleaners do not cause unsafe conditions.

Unfortunately, Her Honour’s reasons do not provide guidance as to how to interpret the phrase, “arising out of the operations of the Named Insured”. So, on that issue, the decision would have to be viewed as very much limited to its facts.

The one case in which Great Atlantic & Pacific v. Economical Mutual has been cited (to date) is actually a British Columbia decision: Hardie v. Kamloops Towne Lodge Ltd., 2014 BCSC 955 (CanLII). That case does address the issue of interpreting the phrase, “arising out of the operations of the named insured” in some depth. (I have noted, in previous posts, that the B.C. case law on the issue of additional insured coverage is much better developed than that in Ontario.)

The court in Hardie cited a decision of the British Columbia Court of Appeal, Vernon Vipers Hockey Club v. Canadian Recreation Excellence (Vernon) Corporation, 2012 BCCA 291 (CanLII), 2012 BCCA 291 on the issue of how the phrase, “arising out of the operations of the named insured” should be construed:

52.      I conclude that the contractual term “arising out of the Named Insured’s operations” … imposes a causal requirement greater than a simple “but for” test. Borrowing from the cases discussed above, the phrase “arising out of” should be construed as requiring “an unbroken chain of causation” and a connection that is more than “merely incidental or fortuitous.”

54.      In my view “operations” is a word of sufficiently broad meaning as to include the creation of a situation, or circumstance, that is connected in some way to the alleged liability. It does not necessarily imply an active role by the named insured in creation of the liability event. Operations can include the occupation and use of premises or other “passive” conduct that might not be included within the meaning of the word “activities”, as the latter term was used in Saanich.

The Vernon court’s interpretation of the phrase, “arising out of” has been accepted in Ontario by Justice Timothy Ray, albeit in a different context: Gardner v. Maritime Life Assurance Company, 2013 ONSC 919 (CanLII).

So, when the issue finally is addressed by an Ontario court, I would think that the Vernon interpretation is likely to be accepted. Based on my experience, such a liberal interpretation might surprise some insurers in the province, who sometimes take a rather restrictive view of the meaning of “arising out of the operations of the named insured”.

University of Waterloo v. Scottish & York Insurance et al., 2014 ONSC 1125 (CanLII)

In this decision of Gordon J., some of these same issues arose. The named insured had entered into a contract with the University of Waterloo Student Federation for the supply of inflatable amusement rides. The plaintiff in the underlying action slipped and fell near one of those rides. The contractor’s insurer (Scottish & York) issued a certificate of insurance that read as follows:

It is hereby agreed that University of Waterloo Canada Day Celebrations, Student Life Centre and University of Waterloo Federation of Students are added as additional insured, but only with respect to liability arising out of operations of the named insured.

There was no mention in the reasons of any endorsement to the policy having been issued, but there is also no indication that the issue was even considered.

In three sentences, Justice Gordon interpreted the language of the certificate:

The policy of insurance, identified in the certificate of insurance, provides coverage for bodily injury claims resulting from the negligence of Checkers [the named insured]. The policy, as confirmed in the certificate, does not provide coverage for the negligence of the university. The university has coverage under its insurance policy.

With respect, the fact that the university had its own coverage is hardly the point. That is almost always true in these cases and, if not an irrelevant consideration, is close to being one. (Although the decision of Justice Paul Perell in Amello v. Bluewave Energy Limited Partnership, 2014 ONSC 4040 (CanLII) (discussed below), might constitute authority to the contrary.)

Also, the conclusion that “the policy, as confirmed in the certificate, does not provide coverage for the negligence of the university” seems a bit of a leap, given that the certificate did not say that. Assuming that there was no endorsement (an inquiry that should always be made), the question that should have been asked (and answered) is how to interpret the phrase, “arising out of operations of the named insured”.

The same allegations of negligence were made against both the university and the contractor, with the allegation that they were jointly and severally liable.

Justice Gordon refused to order the contractor’s insurer to undertake the defence of the university. It is difficult to reconcile this decision with that of Justice Hennessy in Great Atlantic & Pacific. And if the Vernon interpretation of “operations” had been applied (“It does not necessarily imply an active role by the named insured in creation of the liability event”), the result would probably have been different.

Sinclair v. Town of Markham, 2014 ONSC 1550 (CanLII)

This decision of Justice Edward Belobaba is the latest case to have dealt with the issue of additional insureds. It was another slip and fall fact situation. The plaintiff sued the Town of Markham and the municipality’s winter maintenance contractor. Markham was an additional insured under the contractor’s liability insurance policy with Northbridge General Insurance Corporation and it brought third party proceedings against Northbridge.

In this case, as in so many others, the Northbridge policy limited the additional insured coverage on the basis that Markham was insured “only with respect to the legal liability arising out of the operations of the first named insured” [the contractor].

Northbridge brought a motion under Rule 21.01(1)(a), seeking a determination of the following issue: “Does Northbridge General Insurance have a duty to defend the City of Markham, and if so, what is the extent of this duty?

The dispute turned on the meaning of the “arising out of” provision in the additional insured provision in the policy. Northbridge argued that it could not be liable because the statement of claim did not allege that the plaintiff’s fall had taken place on a sidewalk for which the contractor was responsible or that it had been the result of ice or snow.

However, in this case, the plaintiff had provided particulars of her claim and had, in those particulars, alleged that the fall had been caused by “ice and snow build up” on what Justice Belobaba said was “obviously a sidewalk”.

For that reason, Justice Belobaba concluded that a duty to defend was “engaged” and turned to a consideration of the extent of that duty (bearing in mind that Markham was only insured by Northbridge for liability “arising out of the operations” of its contractor).

Justice Belobaba did not discuss how the phrase, “arising out of”, should be interpreted. Instead, he looked at the allegations that were being made by the plaintiff. His Honour concluded that six allegations of “various manifestations of negligence in failing to provide a safe walking area, failing to warn about unsafe conditions in this area and hiring incompetent employees”, all of which had been made against both the Town and the contractor, “clearly” fell within coverage because those allegations “could potentially arise out of or relate to the acts or omissions (i.e. ‘the operations’) of the contractor”.

The other three allegations related to negligence in the inspection and reporting of unsafe conditions. The Town’s contract with the contractor imposed certain inspection and reporting obligations on the latter, so these allegations too were found to be within coverage.

As a result, since all of the allegations were found to have arisen, at least potentially, from the operations of Northbridge’s named insured, they were all covered. Justice Belobaba ordered Northbridge to fund the defence of the Town in full. Unfortunately, this decision, like most Ontario cases, does not help us in understanding how the ubiquitous phrase, “arising out of the operations of the named insured” should be interpreted.

PART II.             Covenants to insure

Papapetrou v. 1054422 Ontario Limited, 2012 ONCA 506 (CanLII)

 Although this case is not all that recent any more, it is the latest significant statement from the Court of Appeal in the area of additional insureds. In this particular case, there was a breach of a covenant to insure, which is why I have included it in this section of the post.

This was another slip and fall case. The Cora Group, the property manager of the building at which the plaintiff claimed to have fallen had contracted for snow removal and winter maintenance with Collingwood Landscape Inc. Pursuant to the contract between the two, Collingwood was to have named The Cora Group as an additional insured in its commercial general liability insurance policy, but failed to do so.

The plaintiff said that she had fallen on black ice at the property. She made various allegations of negligence against both Collingwood and The Cora Group.

In the order appealed from (made by Madam Justice Jane A. Milanetti), Collingwood had been ordered to assume the defence of The Cora Group and to indemnify it against the plaintiff’s claim.

On appeal, it was conceded that the order for indemnity was premature (as such an order can usually be made only after findings of fact have been made at trial). The Court of Appeal allowed the appeal with respect to the balance of the order (the defence portion) but ordered that Collingwood pay for the defence of The Cora Group, “save for any costs incurred exclusively to defend claims that do not arise from Collingwood’s performance or non-performance of the service contract”.

So, the Court determined that ordering Collingwood to undertake the defence of The Cora Group was not appropriate, that the remedy was in damages. I think that its decision on that aspect of the case was correct.

However, ascertaining the quantum of damages is a more challenging task and the Court’s approach on this issue was not very satisfactory.

The Court of Appeal recognized that to measure what had been lost through breach of the covenant to insure, it would be desirable to look at the coverage that would have been provided, had the covenant been honoured. But because the covenant had been breached, there was no policy to review:

The difficulty in this case is that the terms of coverage for The Cora Group as an additional insured were not included in the insurance contract. Accordingly, the terms of the intended insurance coverage must be discerned from the insurance obligation and the indemnity provision in the service contract. [paragraph 37]

In other words, since it was not possible to look at a policy setting out the terms of coverage that would have existed if the additional insured endorsement had been issued, the damages would have to be assessed based on an interpretation of the agreement between Collingwood and The Cora Group.

In my view, this conclusion was also the correct one: the issue is one of breach of contract, so to determine what the plaintiff lost, the language of the contract should be considered.

What is interesting about the Court of Appeal’s analysis is that in assessing the damages, it did not look merely to the covenant to insure but to the more general provisions of the contract and, in particular, an indemnity agreement in favour of The Cora Group. And there, for reasons discussed below, I think that the Court of Appeal went astray. Absent special circumstances, such as ambiguity in that part of the underlying contract, it ought to have looked only at the covenant to insure .

The Court noted that “the scope of Collingwood’s obligation to indemnify under the service contract was limited to ‘claims…based upon, incidental to or arising out of the performance or non-performance of the contract by the Contractor’”. [paragraph 38]

In this case, the covenant to insure itself was worded very broadly. It obliged Collingwood to “include the Owners as an additional insured” on the policy. Apparently, there was no language limiting coverage to liability “arising out of the operations of the named insured”, as we often do see in such covenants.

This is significant because the Court of Appeal concluded that “the quantum of damages is the amount The Cora Group must pay to defend claims for bodily injury arising out of the manner in which Collingwood performed or failed to perform the service contract.” That conclusion was based upon the wording of the indemnity agreement in the underlying contract, not that of the covenant to insure. The former was considerably more restrictive than the latter.

The Court seems to have assumed that “Collingwood’s obligation does not extend to paying for the cost of defending independent claims against The Cora Group that Collingwood’s insurer would not have been required to defend on The Cora Group’s behalf”. [paragraph 42] But that is not necessarily the case. If Collingwood’s insurer had issued an additional insured endorsement that conformed precisely to the wording of the covenant to insure, The Cora Group would simply have become an “additional insured”, with no limitations on the coverage. It would have been entitled to be defended even against its own negligence.

Perhaps the Court of Appeal inferred (although not explicitly) that the wording of the indemnity agreement informed the scope of the obligation to insure, limiting the latter to liability arising out of the manner in which Collingwood performed or failed to perform its obligations under the service contract. It would have been helpful if a more explicit link had been drawn between the two because an indemnity agreement and a covenant to insure are two quite separate methods of contractual risk allocation. That is not to say that they are unrelated, but they are capable of existing independently so if a link is to be drawn between them inferentially, it would be desirable to set out how that link is to be drawn.

So, here, the Court of Appeal said:

[49] With a view to the limits of coverage, the “true nature” of the claims in the action are best classified as allegations concerning (i) negligent maintenance due to Collingwood’s performance or non-performance of the service contract (which may include claims under the Occupiers’ Liability Act with regard to obligations which have been delegated to Collingwood); (ii) negligent conduct on the part of The Cora Group extending beyond Collingwood’s obligations under the contract; as well as (iii) a statutory cause of action under the Occupiers’ Liability Act extending beyond those obligations delegated to Collingwood under the contract. The duty to defend only extends to allegations that can be classified as falling under the first category of claims. [Paragraph 49, emphasis added]

In my view, the conclusion drawn in the last sentence of the quoted passage is wrong (or at least, it is not necessarily true without an intermediate analysis, tying the duties in the indemnity agreement to those in the covenant to insure, an analysis which was not undertaken by the Court of Appeal).

The analysis should come to one of contractual intention. If an unrestricted covenant to insure is given, then unless there is a basis in the agreement for linking that contractual obligation to a separate part of the contract (the indemnity agreement), effect should be given to the covenant to insure.

This principle is set out in, albeit not in these precise circumstances, in The Additional Insured Book, Donald S. Malecki, Jack P. Gibson (7th ed., 2013): “Indemnity provisions operate independently of the indemnitor’s insurance, which may or may not cover the risks assumed by the indemnitor.” (at p. 58)

Likewise, in a 2003 article on the IRMI website (“International Risk Management Institute, Inc.”), Joseph Postel commented on some Illinois cases that had held that additional insureds were entitled to full coverage (including, in one of the cases, for the additional insured’s own negligence), where the wording of the additional insured endorsement was broad while the wording of an indemnity agreement between the additional insured and the named insured was narrow:

[T]he court rejected attempts by the insurer to limit its additional insured coverage to what the extrinsic contract required, when the additional insured endorsement provided more coverage. In J.A. Jones Constr. Co. v Hartford Fire Ins. Co., 645 NE2d 980 (Ill App 1995), the court held that the additional insured was entitled to coverage for his own negligence, even though his contract with the policyholder entitled him only to coverage arising out of the policyholder’s negligence, because the additional insured endorsement provided coverage for the additional insured’s own negligence. In Mobil Oil Co. v Maryland Cas. Co., 681 NE2d 552 (Ill App 1997), the court held that the additional insured was entitled to the full limits of the policy, even though its contract with the policyholder required much lower limits. (“How Does An Extrinsic Contract Impact Additional Insured Coverage?”, Joseph P. Postel, (July, 2003), IRMI Online)

The difference is that those authors were speaking of the situation where the covenant to insure has been discharged, i.e., the coverage is in place. In Papapetrou, the covenant was breached and the coverage never came into existence. Still, I would argue that the principle should be the same: in the ordinary case, the scope of the obligation to insure should be inferred from the grant of coverage itself (the additional insured endorsement), not from the indemnity agreement. Where the covenant to insure has been breached, what the additional insured was entitled to receive should be ascertained from that covenant and again, not from any indemnity agreement that might also exist between the parties.

Sanofi Pasteur Limited v. UPS SCS, Inc. et al., 2014 ONSC 2695 (CanLII)

This case was decided by Justice Morgan. The issue, as framed by His Honour, was the following:

[D]oes the Plaintiff’s covenant to insure signify its assumption of risk of the very damage for which it sues, and therefore provide a complete answer to the Plaintiff’s action?

Rather amusingly, the judge answered the question in the next paragraph:

A substantial amount of time and resources have been devoted to this question. All four sets of Defendants seek summary judgment dismissing the Plaintiff’s subrogated insurance claim as well as each other’s cross-claims, a voluminous evidentiary record has been filed, and a veritable library of case law has been submitted by the various parties. While I appreciate and respect the large-scale efforts by all counsel, there is a short answer to the central question posed above: yes.

However, in the course of coming up with that answer, Justice Morgan made a finding that I consider to be of major significance, that flew somewhat under the radar. It is discussed below. (This is the “nugget” that I referred to at the beginning of this post.)

The claim involved the loss of some vaccines, having a value of $8,259,934.48, alleged to have been caused by the defendants.

The covenant to insure (on a first party basis) between the parties in this case read as follows:

10.2 Client Insurance

[The Plaintiff] shall maintain in effect during the term of this Agreement and for a period of two (2) years after termination of this Agreement:

 c)  all-risk property or stock-transit insurance for the [vaccines] and the personal property of [the Plaintiff] (or property for which [the Plaintiff]is legally responsible) in an amount not less than the full replacement cost thereof, whether such [vaccines] or property are in the SCS’s facilities or in transit and shall include SCS as an additional insured.

His Honour reviewed the law in the “tort immunity” cases, but was of the view that the authorities were crystal clear that the plaintiff, having covenanted to insure its own property, could not then sue for loss or damage to that property. The action was dismissed.

What was perhaps even more interesting about this case was that the action was not only dismissed as against the one party with whom the plaintiff had entered into a covenant to insure, but against all defendants. (There were four groups of defendants.)

This finding appears to have been made on two bases. First, “the contractual allocation of risk embodied in a covenant to insure extends to all claims related to the manifestation of that risk. This includes SCS’ co-Defendants, even though they are not parties to the agreement in which the covenant to insure is contained” (paragraph 31). So, in other words, the plaintiff having entered into the covenant to insure meant that it had assumed the risk of loss or damage to its property, not just as against the other contracting party, but as against the world.

Secondly, the court said, “SCS [defendant with which the plaintiff contracted to obtain insurance] cannot be exposed through the back door by virtue of contribution and indemnity claims by its co-Defendants when it has protected itself against liability through the front door by means of its contract with the Plaintiff.” (paragraph 36, emphasis added) This is the nugget that I have referred to. It was a second basis for dismissing the plaintiff’s claim.

This statement is reminiscent of a case decided 14 years ago: PDC 3 Limited Partnership v. Bregman + Hamann Architects, 2000 CanLII 22399 (ON SC), a decision of Madam Justice Chapnik. There, the plaintiff had claimed more than $10 million as a result of problems with the roof of Terminal 3 at Pearson Airport. The architects, Bregman + Hamann, had contractually limited its liability to $250,000. None of the other defendants had such a provision in their contracts. Two of the unprotected defendants moved under rule 21.01(1) for a determination of the following question:

1. Whether joint tortfeasors may claim contribution from another joint tortfeasor in an amount in excess of the contractual limit of damages agreed to between the plaintiff and that joint tortfeasor, pursuant to s. 1 of the Negligence Act.

2. Whether the plaintiff who has accepted a contractual limitation of liability of one tortfeasor is prevented from recovering from the other tortfeasors, the excess damages caused or contributed to by the fault or neglect of the tortfeasor protected by the contractual limitation.

Justice Chapnik answered the first question in the negative for the following reasons:

[38] B + H and Scott purchased and paid for their partial immunity as a condition of their relationship with the plaintiff. In my view, to have B + H and/or Scott now fixed with liability to make contribution in amounts exceeding the limitation for which it expressly contracted, would defeat the purpose of the limitation provision and fundamentally alter the intention of the parties and the allocation of risk negotiated by the plaintiff and B + H and Scott. It would also confer a gratuitous benefit on the co-defendants.

[39] To entitle the defendants to full contribution from B + H and Scott would produce an equally absurd result as was remedied in the case of London Drugs. Certainly, if B + H and Scott were found to be the only tortfeasor liable for damages to the plaintiff, recovery would be governed by the terms of the contract.

[40] I find, therefore, that the remaining defendants are limited by virtue of the $250,000 provision in the contract to that maximum amount of recovery as contribution from B + H and Scott.

The second question was answered in the affirmative:

[49] In my view, the contract limited the plaintiff’s entitlement in respect of damages caused or contributed to by B + H and/or Scott to $250,000. That was the intention and the bargain. The plaintiff cannot now circumvent its own agreement by claiming contribution from the other co-defendants.

[50] The answer to question 2 then, is “yes” — a plaintiff who has accepted a contractual limitation of liability in respect of one tortfeasor is prevented from recovering from the other tortfeasors the excess damages caused or contributed to by the fault or neglect of the tortfeasor protected by the contractual limitation.

However, the Court of Appeal reversed Justice Chapnik’s decision. Not because the ruling was wrong but because the court considered that the question should not have been decided on a motion:

[11] Important issues of law are normally decided based on a full factual record, which allows the trial judge to make findings that form the basis for the legal analysis and conclusions. For example, in this case, the court may need to ascertain, based on the evidence, the reasonable expectations of the parties.

[12] It is not clear, based on the pleadings and the agreed statement of facts, whether, and to what extent, the evidence that will be led at trial will become important or be necessary in deciding the two legal questions put forward on this motion. However, it is premature for the court to conclude that the evidence will be neither relevant nor determinative. This is particularly so where both legal conclusions involve important pronouncements of the law interpreting s. 1 of the Negligence Act and in circumstances which will have precedential value.

Nowadays, in the wake of Hryniak, the Court of Appeal would almost certainly have arrived at a different conclusion. There is simply no reason to hold a trial in order to decide the issues that were before Justice Chapnik. (Frankly, there probably wasn’t any reason to do so in 2001 either.) But Justice Morgan in Sanofi Pasteur, has not waited. In the single sentence that I have highlighted above (but one that, in my view, was not obiter dicta), he reached the same conclusions as did Justice Chapnik in PDC3. (Perhaps the “voluminous evidentiary record” and “veritable library of case law” filed in Sanofi Pasteur would have satisfied even the 2001 Court of Appeal…)

And there is no reason to restrict the reach of that sentence to covenants to insure. There would not appear to be any reason that other contractual limitations of liability would not receive the same treatment.

As I said at the outset, the proposition endorsed by Justice Morgan is simply another form of contractual risk transfer; the interesting wrinkle is how it can affect non-contracting parties.

Amello v. Bluewave Energy Limited Partnership, 2014 ONSC 4040 (CanLII)

This decision of Justice Paul Perell considered the effect of a covenant to provide third party liability insurance rather than the first party insurance that was the subject of Sanofi Pasteur. The result was somewhat different.

The claim arose from an oil spill. The fuel supply company (“Bluewave”) had contracted with the delivery company (“Daniel Charles”) for the latter to obtain liability insurance and to have Bluewave named as an additional insured.

Daniel Charles obtained insurance with State Farm Insurance but despite the provision in the contract between the two, Bluewave was not named as an additional insured.

Bluewave did have its own liability insurance.

Justice Perell stated the principle in cases involving covenants to insured:

When a party has breached a covenant to insure, that party is liable to the party it promised to insure for an award of damages reflecting what would have been payable under the policy of insurance, had the insurance been obtained. This award will include the defence costs that would have been recoverable under such a liability policy. [paragraph 68]

His Honour then found that Daniel Charles had breached the covenant to insure. So far, so good.

He then turned to the quantification of the damages flowing from that breach. And it is this aspect of the decision that is, I think, problematical.

He began with the following statement of the law:

The quantum of damages payable for breaching an obligation to insure defence costs is an award equivalent to the defence costs that would have been paid by an insurer.

An insurer or a party who fails to procure the insurance it promised is only required to defend allegations within the scope of the insurance policy, covenant to insure, or hold harmless agreement. The party does not have to pay the costs of any uncovered claims unless the same costs are incurred in defending both the covered and uncovered claims. [paragraph 81, emphasis added]

So, the question is, what defence costs would the insurer have paid, if the coverage had been placed? (This is really the same question that had arisen in Papapetrou, discussed above.)

The problem is, that is a very difficult and perhaps impossible question to answer.

Judging from the highlighted portion in the quoted passage, Justice Perell appears to be suggesting that it is necessary to consider the extent to which the allegations in the underlying claim are “within the scope of the insurance policy, covenant to insure, or hold harmless agreement”.

If we stop there, what does “within the scope of the insurance policy” mean? Of course, these cases arise from the fact that, ex hypothesi, there is no insurance policy to look at. (Well, there typically is an insurance policy, but not one that has been endorsed with “additional insured” protection in favour of the party with whom the named insured contracted.) So, what policy language are we to look at in order to determine what the coverage would have been, had the insured’s contract been honoured.

The Court of Appeal adverted to this problem in Papapetrou, supra. Recall that after finding that breach of a covenant to insure gave rise to a remedy in damages, it said:

[36] The quantum of such damages is the amount The Cora Group will be required to pay for a defence of the claims Collingwood’s insurer would have been obliged to defend on The Cora Group’s behalf had Collingwood fulfilled its contractual obligations.

[37] Ordinarily, the scope of this obligation would be determined by the terms of the insurance contract (in particular, the additional insured endorsement). The difficulty in this case is that the terms of coverage for The Cora Group as an additional insured were not included in the insurance contract. Accordingly, the terms of the intended insurance coverage must be discerned from the insurance obligation and the indemnity provision in the service contract.

Exactly. With no policy to refer to (the coverage not having been implemented), it cannot be said exactly what that policy would have said.

As I have said in my discussion of Papapetrou, it would be possible to examine the covenant to insure which must necessarily exist. That is not all that helpful in establishing what the notional insurance policy would have said, had the coverage been granted: it frequently happens that the covenant to insure and the additional insured endorsement (when one is issued) do not mesh. That is not surprising: the covenant to insure is typically entered between lay people (or companies) and the insurer that is going to have to provide the coverage is not consulted. Usually, insurers will have standard-form additional insured endorsements that will be used when they are asked to provide that coverage. I do not recall ever having seen a case in which any attempt was made to tailor that coverage to what was contained in the covenant to insure. Thus, the two documents (covenant to insure and additional insured endorsement) are likely to diverge, sometimes markedly.

Also, as we have seen in other cases, it commonly happens that even when additional insured coverage is provided, the insurer fails to issue an endorsement. Or if it does, the endorsement conflicts with a certificate of insurance that it or its broker issues.

Referring to the covenant to insure was the approach that the Court of Appeal endorsed in Papapetrou (see paragraph 37 of that case: “the terms of the intended insurance coverage must be discerned from the insurance obligation and the indemnity provision in the service contract”), but without any apparent recognition of the possibility or even likelihood that the covenant to insure and that additional insured endorsement issued in fulfillment of that covenant might very well not have matched up, even if everyone had done what they were supposed to.

To the extent that the additional insured endorsement falls short of providing the coverage contemplated by the covenant to insure, of course, the additional insured can still take the position that there has been a breach of the latter, entitling it to damages. In my view, that would be the correct approach.

Justice Perell’s other suggestion for assessing damages was that the “hold harmless agreement” be looked at. This is also what the Court of Appeal did in Papapetrou. And as I said in my discussion of that case, unless there is some problem in interpreting the covenant to insure itself, such that the language of the hold harmless or indemnity agreement assists in its interpretation, there is no reason to refer to it.

In this case, Justice Perell did say that he “would not apportion the damages awarded on account of any uncovered claims because, if any, they appear to overlap with the covered claims. There does not appear to be any discrete uncovered claims that would require a separate defence.” [paragraph 84] However, it is not clear how he would have determined which claims were, even arguably, “uncovered”.

Instead, he invoked another concept, that of “equitable contribution”, to resolve the case. Citing Family Insurance Corp. v. Lombard Canada Ltd. 2002 SCC 48 (CanLII), 2002 SCC 48, he said:

[I]t is a principle of insurance law that where an insured holds more than one policy of insurance that covers the same risk the insured is entitled to select the policy under which to claim indemnity, subject to any conditions to the contrary in the insurance contract. The selected insurer, in turn, is entitled to contribution from all other insurers who have covered the same risk and may sue in its own name to recover a portion of the loss.

[88]           The other insurer must pay its fair share of the defence costs in accordance with the equities of the particular case.

[89]           In the case at bar, if Daniel Charles Transport had kept its contractual promise, Bluewave, which was insured by Liberty Mutual, would have held a second policy of insurance covering the costs of defending a claim. Had both policies of insurance been available, then the principle of equitable contribution would have been triggered and the defence costs would have been shared.

[90]           The purpose of a damages award for breach of contract is to use money to put the innocent party in the same financial position it would have been in had the contract been performed. Had Daniel Charles Transport honoured its promise, there would have been two insurers with a duty to defend and the principle of equitable contribution would have been available to either one of the insurers. [footnotes omitted]

On that basis, he ordered that Daniel Charles reimburse Bluewave for 50% of past and future defence costs.

In my opinion, it is incorrect to invoke equitable contribution in these circumstances. The Supreme Court also said, in Family v. Lombard, that “[i]n accordance with the general principles of contract interpretation, the exercise is properly one of determining the parties’ intentions”.

Although the issue does not seem to have been argued in the Bluewave case, I think that a strong case can be made, that a covenant to insure and adding a party as an additional insured are evidence of an intention (by both the insured and its insurer) that that policy be primary and that therefore, there is no basis for equitable contribution to be ordered. If that approach were taken, then there would not be “overlapping coverage” to .

The issue has been litigated in the United States and, in fairness, there are decisions going in each direction.

The authors of The Additional Insured Book (7th ed., 2013), discuss the issue and the conflicting case law. However, they make it clear that in their view, there should be no contribution by the additional insured’s own insurer:

When the reasons for requiring additional insured status are considered, disputes over other insurance seem unfair to additional insureds. After all, one of the reasons of requesting additional insured status is to obtain a certain amount of primary protection as the first recourse under the liability policy of the named insured. [at p. 108]

I agree. The use of covenants to insure (both on a first and third party basis) is a mechanism of contractual risk transfer. It does not make any sense to me, to imagine that a covenant to insure, in a third party situation, means equitable contribution with the additional insured’s own insurer. What if the additional insured happens not to have its own insurer? Is it then in breach of some obligation owed to the named insured from whom it obtained the covenant to insure?

Thus, I think that it would have been more appropriate, in this case, to order Daniel George to reimburse Bluewave for all of its defence costs. However, it appears that this aspect of construing covenants to insure will have to await another case to receive an airing.

PART III.             Subrogation bars

Rochon v. Rochon, 2014 ONSC 2337 (CanLII)

This was a decision of Madam Justice MacLeod-Beliveau, rendered in April, 2014. It is not exactly an “additional insured” case, but deals with a related question: whether an insurer can advance a subrogated claim against an unnamed insured under its policy. Her Honour referred to a 2005 case of mine, Lacombe v. Don Phillips Heating Ltd. (2005), 30 C.C.L.I. (4th) 257 (Ont. S.C.J.), decided by Master Robert Beaudoin (as he then was), in support of her conclusion that no such claim can be made.

The finding is particularly interesting because in Deslaurier Custom Cabinets Inc. v. 1728106 Ontario Inc., 2014 ONSC 5148 (CanLII), another recent case that is discussed below, Madam Justice Monique Métivier seems to have come to the opposite conclusion: “Courts have held that insurers, in certain circumstances can bring a subrogated claim against an additional insured.” She acknowledged that no Canadian authority had been cited to her in support of that proposition, but it appears that neither the Rochon nor Lacombe cases were brought to her attention either.

Rochon arose out of a fire at the home of the nominal plaintiffs. It was alleged to have been caused by their son, who had been working on his car in their garage.

Grenville Mutual, the homeowners’ insurer, paid their claim of $148,581.65 and then brought this subrogated action in the name of the homeowners against their son. (The claim included an additional sum of $8,000, which was an uninsured loss.)

The son had automobile liability insurance with Economical Mutual and it had been agreed that if liability were found against the son, Economical would indemnify him.

Much of the decision dealt with whether the cause of the fire had been proven. Her Honour found that it had been established, on a balance of probabilities, that the fire was the result of the son’s negligence.

However, she nevertheless dismissed Grenville’s subrogated claim, on the basis that the son was its unnamed insured and therefore, could not be sued by the insurer. Her Honour based her finding that the son had been an unnamed insured on the definition, in the Grenville policy, of “You and “Your” (“the person(s) named as Insured on the Declaration Page and, while living in the same household, his or her spouse, the relatives of either or any person under the age of 21 in their care”).

In addition to the Lacombe case, referred to above, Justice MacLeod-Beliveau cited Imperial Oil Ltd v. Commonwealth Construction Co., 1976 CanLII 138 (SCC), [1978] 1 S.C.R. 317, Grey & Bruce Mutual Insurance Co. v. MacKinnon Plumbing & Heating, [2010] I.L.R. I-4940 (Ont. S.C.J.) and Murphy (Guardian ad litem) v. Beaton 1992 CanLII 4595 (NS SC), (1992), 114 N.S.R. (2d) 187 (S.C. (T.D.)) The latter case contained an even more unequivocal statement that subrogated actions by insurers against their own insureds are impermissible:

No right of subrogation can arise in favour of the insurer against its own insured, since by definition subrogation arises only with respect to rights of the insured against third persons to whom the insurer owes no duty…No right of subrogation arises against a person who holds the status of an additional insured, whether by the terms of the policy or the operation of a statute.

In light of the Deslaurier case though, this proposition may still be unsettled in Ontario. However, there is another case to be heard shortly (December, I understand) in which the issue will be squarely addressed, so stay tuned.

This entry was posted in CGL, Risk Transfer. Bookmark the permalink.