Wrap Up Insurance and Tort Immunity


Wrap Up insurance serves an important function on construction projects, providing uniform liability coverage for contractors and subcontractors.  If a general contractor agrees to secure the wrap naming the subcontractors, does this covenant to insure give rise to tort immunity i.e. relieve a subcontractor from its negligence and/or obligation to indemnify for losses caused by the subcontractor.  The Ontario Superior Court considered this issue recently in Crosslinx Transit Solutions Constructors v. Capital Sewer Serving Inc., 2021 ONSC 1091.

On February 21, 2018 a sewage backup damaged two properties near a light rail construction project in Toronto.  Capital Sewer Servicing Inc. (“Capital”) was a subcontractor working on the project at the time.  The property owners commenced actions against Capital as well as the contractor that retained Capital, Crosslinx Transit Solutions Constructors (“Crosslinx”).

The agreement between Capital and Crosslinx (the “Subcontract”) contained a typical indemnity clause that Capital shall indemnify and hold Crosslinx harmless from and against claims caused by or arising out of the performance of Capital’s work.  Crosslinx relied on this provision in support of its position that Capital had a duty to defend Crosslinx in the underlying actions and to indemnify Crosslinx for all legal and other costs paid to date.

Capital refused on the basis that the parent company of Crosslinx agreed, in its contract with the province (the “Head Contract”), to obtain a wrap up liability policy that covered all subcontractors on the project including Capital.  Capital relied on the law of tort immunity arising from covenants to insure and took the position that the Crosslinx agreement to secure insurance by way of the wrap up operated as an assumption of liability i.e. an assumption by Crosslinx of the risk of loss or damage caused by the peril to be insured against, being third-party liability to the property owner in this case. On this basis, Capital argued it had no obligation to indemnify or defend  Crosslinx.

Capital relied heavily on the fact that the Subcontract specifically incorporated by reference the terms of the Head Contract and the obligation on the part of Crosslinx to secure a wrap up liability policy.  The court held that the principle of tort immunity arising from covenants to insure must be read and applied in the context of the words of the agreement between the parties, here specifically the Subcontract.  It was correct that the Subcontract incorporated the terms of the Head Contract but it did so specifically “with the changes necessary to give full effect to the intent of the parties as set out in this Subcontract, and subject to the express terms and conditions hereof.”  The court found that the provisions of the Subcontract took precedence over the Head Contract and the indemnity in the Subcontract took precedence over the provisions relating to the wrap up policy in the Head Contract.

The court held that it is well-established law that courts must interpret contracts in a way that gives meaning to all of its terms and avoids interpretations that render one or more terms ineffective.  To adopt Capital’s interpretation would strip Capital’s contractual indemnity in favour of Crosslinx of almost all utility.  The court upheld Capital’s obligation to indemnify and hold Crosslinx harmless. Further, the court highlighted Capital’s own covenant in the Subcontract to insure against its own negligence and said that, on its own argument, Capital agreed to assume liability for its own negligence and therefore could not hide behind the wrap up.

The decision highlights that even where there is a covenant to insure that may appear to give rise to tort immunity, the contract terms as a whole must be applied in relation to each other and a sole covenant may not necessarily govern.  Here the subcontractor’s cross-covenants to indemnify and hold harmless and insure against its own negligence, could not be ignored or overwritten by the wrap up covenant. The long-standing principle of tort immunity must be applied in conjunction with, and cannot overwrite, fundamental principles of contractual interpretation.

The decision also highlights the importance of the priority of documents provisions in construction contracts.  Here the Subcontract provided that in the event there was a conflict within the Subcontract documents, then the various documents should be read in a particular priority.  The Subcontract ranked ahead of the Head Contract and, as such, the indemnity provisions relied on by Crosslinx ranked in priority.

The decision points out that when drafting indemnity provisions, contracts must be reviewed carefully to ensure that insurance obligations assumed by certain parties do not trigger a tort immunity defence that is otherwise not intended.  The authors regularly advise clients with respect to construction contracts and specifically regarding insurance for construction projects.