Covenants to Insure


Two cases, the first out of the BC Court of Appeal and the second from the Alberta Court of Appeal, provide a useful refresher on the law of tort immunity arising from covenants to insure, as well as highlighting the far reaching nature of such immunity.

In the 1970s, the Supreme Court of Canada issued a series of cases (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 – commonly referred to as “Trilogy”) in which the Court held that a landlord’s covenant to insure relieves a tenant from liability for losses caused by the tenant’s negligence. That principle, however, has been extended beyond tenancies to many other sorts of commercial contracts, which include covenants by one or both parties to obtain insurance.

Lafarge Canada Inc. v. JJM Construction Ltd., 2011 BCCA 453 is such a case. Lafarge chartered four barges owned by JJM. The charter agreements (or “charter party” as they are otherwise known) each included provisions providing that Lafarge would keep the barges in good condition and be responsible for any damage. Lafarge was also required, at its sole expense, to obtain insurance on the barges, on which JJM Construction was to be named an additional insured. The policy also included a condition requiring joint instructions from Lafarge and JJM before any payment would be made for any claim.

The barges were returned by Lafarge to JJM in a damaged state. While JJM repaired some of the damage at its own expense, it did not have sufficient funds to repair the remaining damage. As a result, it made a claim under the policy procured by Lafarge. While the insurer agreed to pay approximately $54,000 for the repair costs, Lafarge would not accept the assessment.

The parties agreed to arbitrate Lafarge’s liability for the damages not covered by insurance. Within the arbitration proceedings, Lafarge brought a motion to dismiss JJM’s claim on the basis that Lafarge’s covenants to insure barred the claim. The arbitrator dismissed Lafarge’s application on the basis that the Trilogy cases were inapplicable and awarded JJM $650,000 in damages. Lafarge appealed the arbitral award to the BC Supreme Court and lost. It then appealed to the Court of Appeal.

Lafarge argued before the Court of Appeal that the thrust of the Trilogy cases is such that a party that pays for insurance is entitled to tort immunity for its own acts, regardless of which party is responsible for obtaining the insurance. The Court disagreed, and distinguished the Trilogy cases (and a number of other subsequent cases cited by Lafarge) on the basis that those cases each involved tenants contributing money towards the landlord’s insurance (as opposed to the tenants purchasing their own insurance). Those cases did not, the Court held, “support the broad proposition that a tenant’s covenant to purchase its own insurance precluded the landlord from recovering damages from the tenant”. This is because such covenants run to the benefit of the landlord or lessor, not to the benefit of a tenant or lessee. The Trilogy cases, the Court concluded, do not apply where “the very party that covenanted to insure seeks to shelter behind the existence of the insurance in denying responsibility for damage caused by its own acts”. As a result, the Court of Appeal dismissed the appeal.

Howalta Electrical Services Inc. v. CDI Career Development Institutes Ltd., 2011 ABCA 234 is a more traditional tort immunity case involving a landlord and tenant. The landlord’s building, occupied by a tenant, was destroyed by fire. The fire was not alleged to have been caused by the tenant but by contractors who had worked on the building. The insurer who insured the building paid the landlord for the loss and then commenced a subrogated action against the contractors. However, the tenant, and an employee of the tenant, were also named as defendants on the basis that the tenant breached the lease by failing to alert the landlord of the existence of a fire. When the tenant pointed out that it had paid a portion of the fire insurance premiums as required under the lease, the insurer discontinued its subrogated action against the tenant but continued the action against the contractors. In the meantime, however, the contractors issued third party proceedings against the tenant, seeking contribution and indemnity, under Alberta’s Tort-Feasors Act (similar to BC’s Negligence Act). The tenant applied to have the third party proceedings struck but was denied by the trial court. The tenant then appealed.

Under the Tort-Feasors Act (as is the case with the Negligence Act – as recently confirmed by the Supreme Court of Canada in R. v. Imperial Tobacco Canada Ltd., 2011 SCC 42), a party can only be liable for contribution if it is also liable to the plaintiff directly. However, the contractor took the position that that principle did not protect the tenant and its employee because it only barred contribution from tortious liability. To the extent that the tenant and its employee could still be liable to the landlord in breach of contract, the contractors argued that the condition precedent in the Tort-Feasors Act (that the tortfeasor “who is or would, if sued, have been liable in respect of the same damage”) had not been satisfied and therefore, the third party proceedings survived.

The Court of Appeal ruled in favour of the landlord, holding that the contractors claim for contribution and indemnity could not succeed because of the complete immunity enjoyed by the tenant as against the landlord. The tenant could not be liable to the landlord, in tort or otherwise, under the terms of the lease and thus the appeal was allowed and the contractors’ third party claim struck.

These two cases illustrate two important points: 1) immunity can lurk in almost any kind of commercial contract, not just leases between landlords and tenants; and 2) immunity can be far reaching and can protect a party not only from claims by a plaintiff but also claims for contribution and indemnity by third parties. For these reasons, it is important that in property damage case involving commercial agreements between the parties, the contracts (the insurance clauses in particular) should be carefully reviewed to determine whether any tort immunity defence may come into play.