Legal Blog

Insurance (4)

We keep discussing insurance because it keeps rearing its ugly head. In earlier years, the courts seemed to indicate that a party who had an obligation to insure against a risk also bore the risk. It now seems that this is not so. This was made readily apparent in Capital Sewer Servicing Inc. v. Crosslinx Transit Solutions Constructors, a 2022 decision of the Ontario Court of Appeal.

Damage

Owner entered into a contract with the general contractor to complete work on the Eglinton light rail project. General subcontracted the work on the sewer system. At approximately the same time as that sub was working in an area, two properties adjacent to the area experienced the joys of a sewage backup. The property owners brought an action against both sub and general.

General demanded that sub honour its obligations under the subcontract to indemnify general; sub refused to do so, relying on a provision in the prime contract requiring general to obtain a “wrap up” commercial general liability policy covering the owner and all its subs as named insureds. General had indeed obtained that liability policy, which was stated to be primary, and the clause in the prime contract requiring it to do so had been incorporated by reference into the subcontract.

Law

Sub argued that a covenant to insure against a particular peril constituted an assumption of the risk of harm or damage that the peril might cause and, accordingly, because general undertook to, and did, provide the requisite insurance, it assumed responsibility for any damages caused when the harm insured against actually occurred.

The court had this to say about that argument:

“In many, if not most circumstances, a promise to insure against a certain risk will lead to the logical conclusion that the party undertaking to insure against the risk had agreed to be responsible for any damages should the risk ensue. That conclusion does not however reflect a free-standing legal principal of contractual interpretation but is an example of how the contractual intention of the parties is determined through an objective consideration of all of the circumstances. An undertaking to insure leads to the reasonable inference that the parties intended that the party promising to insure would undertake the risk to be insured against. However, that inference can only properly be drawn after a reading of the contract as a whole in the factual context of the particular circumstances. The language of the contract and the context control the interpretation of the contract, including any insurance covenant in the contract. There is no legal rule that a party’s covenant to insure against a risk must mean it was intended that the party undertaking to insure assumed the risk of the harm insured against.”

Given that statement of law, the court had to review all of the relevant provisions of the subcontract to determine their effect on the parties’ positions.

Relevant Terms

The subcontract had a number of relevant terms:

• The parties agreed that it was their mutual intent that general, on its own account, could not incur any obligation or liability relating to the subcontract work without recourse to sub.
• Sub was to obtain and maintain specified insurance coverage. That coverage paralleled the liability insurance that general had to maintain under the prime contract. The general was to be an additional insured for liability arising out of sub’s operations. Under that insurance, whichever party was responsible for the matter giving rise to the claim was to be responsible to the same extent for payment of any deductible.
• Subject to changes necessary to give full effect to the parties’ intent as set out in the subcontract, the subcontract incorporated the terms of the prime contract by reference to form part of the subcontract. By this clause, but subject to the parties’ intent set out elsewhere in the subcontract, general’s obligation to provide primary wrap-up insurance was incorporated into the subcontract.
• When prioritising the importance of the various contract documents in case of a conflict or ambiguity, the subcontract was listed five tiers ahead of the incorporated prime contract.
• The subcontract required sub to indemnify and hold general harmless from any claims by third parties arising out of sub’s performance under the subcontract or any act or omission of sub, negligent or not. The indemnification did not apply if general caused the damage by its own wrongful act or neglect.
• Sub indemnified general for any deductible general had to pay regarding any project-specific insurance policy (e.g. the wrap-up policy) if the insurance was triggered as a result of sub’s performance.

Interpretation

In effect, there was a conflict between (i) the very specific terms of the subcontract regarding indemnification and insurance and (ii) the terms of the prime contract, incorporated by reference, regarding wrap-up liability insurance.

The application judge, with whom the Court of Appeal agreed, held that sub had to indemnify general for the following reasons:

• The mutual intent clause stated that general would not incur for its own account and without recourse to sub any obligation relating to the subcontract work.
• Sub was obliged to obtain its own liability policy. Why would sub have this obligation unless sub bore the risks against which it was to insure?
• Sub had to indemnify and hold general harmless.

Primary Policy

We could not fully understand from either the reasons of the application judge or the Court of Appeal, why the parties were fighting between themselves; after all, they were both insured under the primary wrap-up policy.

The application judge noted that the issues did not involve a claim by one insurer against another to determine a priority of their respective policies. It was just a claim based on contractual indemnity.

The Court of Appeal was a little more forthcoming. It stated:

“It is important to bear in mind that the nature and scope of Capital’s (sub’s) entitlement to recover from the Primary Wrap-Up Insurer any amount paid or payable to Crosslinx (general) under the indemnification provision was not before the application judge. It may be, as counsel for Crosslinx submitted in oral argument, that for practical purposes this application is about responsibility as between Crosslinx and Capital for amounts, such as deductibles, that are not recoverable under the insurance coverage.”

From this statement, we assume that sub probably had a valid claim against the insurer of the primary wrap-up policy, but that the real fight dealt with the deductible, which may have been substantial, under that policy.

Duty to Defend

Not only did general want sub to indemnify it, it also wanted sub to defend it in the action that the property owners brought against them. The application judge again relied on the “hold harmless” aspect of the indemnification. He reasoned that once sub had to hold general harmless against all liability, this included defending general against a claim. The Court of Appeal held that his interpretation was reasonable and allowed it to stand. Accordingly, sub had to appoint and pay for counsel to defend general in the action.

Upshot

With this case, we now know that identifying the party who must insure against a risk does not determine which party actually bears the risk. The answer to that question depends upon the relevant aspects of the contract that shed light on the question.

 

Image courtesy of GregReese.

Written by Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.