More on Covenants to Insure
In a recent blog entry, Covenants to Insure, we summarized the protection afforded when a party (the “beneficiary”) obtains a contractual promise from its counter-party (the “covenanter”) to obtain insurance against specified risks.
In short, the obligation to obtain insurance, known as a “covenant to insure”, operates to prevent the covenanter from successfully suing the beneficiary for losses within scope of the risks that were to be insured against, even if such losses are the result of the beneficiary’s own negligence or breach of contract.
In a recent case, Sanofi Pasteur v. UPS SCS, Inc. (2015 ONCA 88), the Ontario Court of Appeal not only underscored the benefit of covenants to insure, but indicated that such benefit can extend even to third parties. The case also highlights circumstances in which a covenant to insure may not override an indemnity provided by the beneficiary in respect of its negligence.
UPS SCS, Inc. (“UPS”) stored vaccines of Sanofi Pasteur Limited (“Sanofi”) in a dedicated, temperature-controlled warehouse. Sanofi covenanted to insure the vaccines under an all-risks property policy. When the warehouse cooling system malfunctioned, the vaccines became unsaleable. After covering Sanofi’s losses, its insurer brought a claim in Sanofi’s name against UPS and other companies responsible for the cooling system.
The Court of Appeal in general upheld the lower court judge’s ruling in favour of UPS and the other defendants, indicating that Sanofi’s covenant to insure operated as a complete bar to its claim against UPS and the other defendants, even though the other defendants were not parties to the contract between UPS and Sanofi. The covenant signified Sanofi’s assumption of risk of loss in respect of the vaccines, and UPS and Sanofi could be taken as having intended the benefit of such insurance to extend to the other defendants, whose activities were contemplated by the contract.
However, one aspect of the lower court decision was overturned.
In general, a covenant to insure can operate to override an indemnity provided by the beneficiary in favour of the covenanter for the beneficiary’s negligent acts, provided that losses resulting from such negligence fall within scope of the insured risks.
Here a schedule to the contract provided that UPS would be liable for all losses to the vaccines to a maximum of $100,000 and a paramountcy provision provided that the schedule was to prevail to the extent of any conflict with other provisions of the contract. While the lower court judge determined that the covenant to insure overrode the indemnity provided in the schedule, the Court of Appeal held that the covenant and the indemnity were conflicting provisions and therefore the paramountcy provision was invoked. As a result, the indemnity remained enforceable in spite of the covenant and UPS was liable for $100,000, with the remainder of the claim barred as a result of the covenant to insure.
The case illustrates the powerful consequences that can flow from covenants to insure, even to third parties, as well as the interplay between such covenants and indemnities, depending on the precise language of the contract. As the Court declared: “Each contract containing a covenant to insure must be interpreted based upon its own wording”.
beneficiary breach of contract covenant covenantor Indemnity Insurance negligence Ontario Court of Appeal