Contractual Covenants to Insure

October 17th, 2014 by

Michelle Stephenson, Summer Law Student

A recent Ontario Superior Court decision has clarified the significance of a contractual “covenant to insure”. In Sanofi Pasteur Limited v. UPS SCS, Inc. et al. the plaintiff had contracted with one of the defendants to store their vaccines in the defendant’s warehouse. The vaccines were to be kept between 2 and 8 degrees Celsius. The contract also included a clause where the plaintiff was to obtain all-risk insurance that would cover up to the entire replacement cost of the goods if they were damaged.

Due to negligence on the part of the defendants, the vaccines were over-cooled and rendered unsellable; the plaintiff sued for the replacement cost of the vaccines.

Ultimately the court held that, based on the case-law, the plaintiff’s covenant to insure signified the plaintiff assuming the full risk of the damage for which it was suing. The plaintiff was not only barred from suing the UPS SCS, but also the other defendants who were not parties to the contract, against whom the plaintiff alleged wrongdoing.

It was held that were the covenant to insure to be interpreted to still allow the defendant to be sued, there would be no benefit to the other party of it being included in the contract. It only makes sense business-wise if such a covenant serves to place all risk for said damage on the partying contracting to obtain the all-risk insurance.

Additionally, according to the contract, UPS SCS was to be added as an additional insured; a factor which was found to enforce their “tort immunity” as there would be no purpose in such a covenant, if not to protect the other party (UPS SCS) from claims caused by their own negligence.

The situation was analogized to that of a landlord’s contracting to obtain insurance against fires; this not only protects the tenant from being able to be sued for their own negligence causing fire damage, but the landlord also undertakes to cover negligence by third parties. As such, the remaining defendants were similarly off the hook. The Court of Appeal has “specifically held that the contractual allocation of risk embodied in a covenant to insure extends to all claims related to the manifestation of that risk”, which includes potential defendants who were not party to the agreement.

The result of this analysis was the dismissal of the plaintiff’s claims against all the defendants by way of summary judgment. This case clearly demonstrates that where a party to a contract agrees to obtain all-risk insurance for the goods in question, they cannot then turn around and attempt to sue for damage to those goods when the damage should be covered by that insurance. This serves as a lesson to potential plaintiffs in what they may or may not wish to agree to in a commercial contract, in order to have enforceable rights down the road, as well as demonstrating the benefits to some contractual parties of obtaining such a covenant from the other party when entering into an agreement.

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