The BC Court of Appeal handed down reasons for judgment yesterday (January 9, 2013) in the most recent case related to covenants to insure: Kruger Products Limited v. First Choice Logistics Inc., 2013 BCCA 3 (“Kruger”) on appeal from the trial decision (2010 BCSC 1242).
The facts of Kruger are relatively straightforward: Kruger, also known as Scott, owned both unfinished and finished paper products that were stored in a warehouse operated by the defendant First Choice Logistics Inc. (“FCL”). Due to known issues with the forklifts used in the warehouse, a section of paper caught on fire, which, in turn, ignited a stack of paper rolls. The fire quickly became too large to control and, ultimately, the entire warehouse and all of its contents was destroyed by the fire. A subrogated claim was brought by Scott’s insurer against FCL.
One of the grounds of appeal related to the trial judge’s finding of causation. The Court of Appeal upheld the decision in that regard; FCL breached its standard of care and caused the loss.
The bulk of the Court’s analysis focused not on the facts of the case, but on the question of law regarding covenants to insure. This aspect of the case is also of the most relevance to those in the insurance industry.
At trial, it was found that the parties entered into a Warehouse Management Agreement that contained a covenant by Scott to maintain general liability insurance, tenant’s legal liability insurance, and insurance of its inventory and property within the warehouse. Scott further covenanted to add FCL as an additional insured under all insurance policies it maintained. As a further point, it was noted that the Warehouse Management Agreement stated that, “all insurance policies contemplated hereunder shall constitute and respond as primary coverage to any insurance otherwise available to Scott”.
Despite the covenant to insure above, the trial judge found that the subrogated action against FCL was not barred. He distinguished landlord-tenant cases (such as the famous trilogy of Agnew-Surpass Shoe Stores Ltd. v. Cummer-Yonge Investments Ltd.  2 S.C.R. 221, Ross Southward Tire Ltd. v. Pyrotech Products Ltd.  2 S.C.R. 35, and T. Eaton Co. v. Smith  2 S.C.R. 749) and construction project cases from Kruger, which involved a bailor and bailee. Because, in the trial judge’s reasoning, a warehouser such as FCL does not have an insurable interest in the goods it stores, very clear and specific language would be needed for a covenant to insure to override that warehouser’s contractual duty not to act negligently. That explicit wording being absent in Kruger, the trial judge found that the covenant to insure did not affect FCL’s indemnification to hold Scott harmless from FCL’s negligence.
The Court of Appeal reversed the decision of the trial judge with respect to the covenant to insure. J.A. Newbury, writing on behalf of a unanimous Court of Appeal, found that a warehouser does have an insurable interest in the property it stores because of the possibility of liability should something happen to that property. In any event, the Court of Appeal found that an insurable interest is not necessary where a covenant to insure is designed to benefit a party against whom a subrogated claim is brought. In Kruger, Scott was responsible for paying the insurance premiums stemming from the covenant to insure. Although in previous cases, such as those in the trilogy above, the negligent party paid the insurance premiums, the Court of Appeal found this difference to be unimportant. Support for the finding that the covenant to insure was for the benefit of FCL was found in the parties’ express acknowledgment that the insurance referred to would respond as primary coverage.
J.A. Newbury also addressed a policy concern raised by the trial judge: that allowing tort immunity in situations such as Kruger would effectively encourage carelessness. J.A. Newbury disagreed with the trial judge’s reasoning, and in this writer’s opinion, one can easily appreciate that there are numerous reasons why simply being protected from liability does not mean that a party will act carelessly. In addition, it was noted that insurance covenants give certainty to the parties that make such covenants. Rather than relying on a party’s financial ability to pay should its negligence cause a loss to occur, a party making a covenant can be certain that an insurer will answer should such a situation arise.
As a final point, J.A. Newbury noted that if the covenant to insure did not give rise to tort immunity for FCL, there would be no benefit to the provision whatsoever.
For insurers, the decision in Kruger may be viewed as a further restriction on the ability to make subrogated claims. It is important for insurers to know of the contents of contracts signed by its insureds. Where an insured has covenanted to name another party as an additional insured, it is likely that that party will be protected from a subrogated claim brought against it. This is true regardless of whether or not the insured actually informs the insurer of the promises it made to insure, and regardless of the negligence of the party that caused the loss.
It is conceivable that our courts could reach a different conclusion in different circumstances (i.e. one involving a very narrowly worded covenant to insure), but it appears that tort immunity based on covenants to insure is an expanding rather than contracting sphere.
Defences arising from covenants to insure occupy a very technical area of insurance law and one that is not well understood by many in the industry. Readers who wish to view a more detailed analysis can access a paper on the topic on our website at www.cwilson.com/publications/insurance/tort-immunity.pdf. This paper was cited by the Court of Appeal in Kruger.
If you have any questions about this case or any other insurance law matter, please contact any member of Clark Wilson’s Insurance Practice Group.