Introduction
Canadian law has long provided that a contractual obligation to obtain insurance to the benefit of a co-party (called a “covenant to insure”) relieves the benefiting party of liability for losses subject to the contemplated insurance, even where such losses are caused by the party’s own negligence. For this reason, covenants to insure are sometimes said to give rise to “tort immunity” as they may have the effect of shielding a party to a contract from claims arising from its own negligence.
The concept of tort immunity is founded on the basic premise that where parties agree to contractually allocate certain risks through insurance, the making of such a contractual allocation pre-empts negligence claims between them for the risks insured. But what happens when a contract contains both a covenant to insure excluding certain claims in negligence under the principle of tort immunity and an indemnity clause which requires the contracting parties to indemnify each other for losses arising from negligence relating to the performance of the contract? Which clause is subordinate? Can a party seek indemnity for losses arising from the negligence of a co-party where the subject matter of the negligence falls within the scope of the covenanted insurance?
In Catherwood Towing Ltd. v. Lehigh Hanson Materials Limited, 2024 BCCA 348, the Court of Appeal confirmed that covenants to insure will supersede and trump contractual duties to indemnify. Accordingly, parties seeking to have enforceable indemnity clauses in contracts containing covenants to insure will need “express and unambiguous” language articulating the parties’ agreement that the duty to indemnify will supersede and operate notwithstanding the parties agreement to allocate stipulated risks through insurance.
The Court of Appeal’s conclusion was not unanimous: the decision split the Court of Appeal, two to one. Both sets of reasons are discussed further below.
Facts
The facts are relatively straightforward. Lehigh Hanson Materials Limited (“Lehigh”), a barge owner, and Catherwood Towing Ltd. (“Catherwood”), tug owners, entered into a Barging and Towing Services Agreement (the “Agreement”). The key points from the Agreement were as follows:
- Catherwood agreed to be responsible to Lehigh for any damage to Lehigh’s barges caused by Catherwood’s negligence (the “Indemnity Clause”).
- Lehigh agreed to obtain, in a form acceptable to Catherwood, commercial general liability insurance (CGLI) and protection and indemnity insurance (P&II), (the “Covenant to Insure”). The Agreement required that Lehigh be named an additional insured under both policies. It further specified that in the event either party failed to procure the required insurance or the insurance failed, the responsible party would be deemed to be a self-insurer and would pay all the claims that would otherwise be covered by the failed insurance. Notably, there was no express requirement that Catherwood be named as an additional insured or that the insurance contain a waiver of subrogation clause to the benefit of Catherwood.
On two occasions, the barge owned by Lehigh was grounded while under tow by a Catherwood tug. Catherwood conceded that its negligence resulted in the damage to Lehigh’s barge. Leigh sued for damages pursuant to the Agreement.
Lehigh argued that pursuant to the Indemnity Clause, Catherwood agreed to indemnify Lehigh for all losses resulting from Catherwood’s negligent performance of the contract. Catherwood opposed the claim, arguing that Lehigh assumed the risk of loss when it undertook, pursuant to the Covenant to Insure, to insure its barges while under tow by Catherwood’s tugs.
The core question was whether Lehigh’s indemnity claim against Catherwood for losses arising from the negligent barge tow was barred under the principle of tort immunity because Lehigh contractually agreed to place insurance covering the risk of property damage to its barges while under tow by Catherwood.
Supreme Court of British Columbia Decision
Following a two-day summary trial, the B.C. Supreme Court dismissed Lehigh’s claims, finding that Lehigh’s covenant to insure superseded the indemnity provisions of the Agreement. In the Supreme Court’s view, the parties agreed that the risk of damage to Lehigh’s barge was to be addressed by way of insurance under the covenant to insure. The Supreme Court relied on the general principle that, in the absence of clear contractual language to the contrary, a covenant to insure not only obligates a party to obtain described insurance, but also relieves the other party of liability for losses covered by that insurance, even if such losses were caused by its own negligence. Lehigh appealed.
British Columbia Court of Appeal Decision
The majority of the Court of Appeal dismissed the appeal, finding no extricable error of law by the trial judge.
After canvassing the case law dealing with covenants to insure, the Court found that a covenant to insure will generally prevail over a counterparty’s agreement to indemnify, unless there is clear language to the contrary. It is, to use the language of the case law, a superseding clause. In their view, there was no need for Lehigh to include in the Agreement a Covenant to Insure the barge, unless the term was intended for Catherwood’s benefit. The fact that the insurance was to be in a form acceptable to Catherwood was particularly strong evidence of this. The majority further noted that the “clear language” required to rebut the presumption that Catherwood was intended to benefit from Lehigh’s covenant to insure was absent. For the majority of the Court, it was clear that the covenant to insure superseded the indemnity provisions, and Lehigh could not look to Catherwood for the barge’s damages. It rejected Lehigh’s argument that the judge erred by ignoring or failing to give meaning to the Indemnity Clause. It just did not operate in this particular case in the face of the Covenant to Insure.
This did not mean the Indemnity Clause was meaningless or had no purpose. The majority, despite finding no error in the judge’s analysis, went on to interpret the Agreement afresh anyway. The majority reconciled the Indemnity Clause and the Covenant to Insure by envisioning a scenario where the insurance obtained by the contracting party “would not apply” (in other words, in circumstances where the appropriate insurance was placed but did not provide coverage due to, for example, the operation of an exclusion clause in the insurance policy). In those circumstances, the majority reasoned, Catherwood would be responsible for the loss under the Indemnity Clause (and a self-insurance clause). In that situation, both the Covenant to Insure and the Indemnity Clause would have meaning and could be reconciled.
In other words, the Court of Appeal acknowledged that where the insurance placed was in accordance with the contract but did not provide coverage under the circumstances of the loss, the indemnity clause would operate. There is some practical sense to this conclusion in that all commercial parties understand that even the most robust insurance will not provide coverage for every loss. In such circumstances, it is reasonable for parties to agree to address the allocation of such uncovered risk through the use of contractual indemnities.
In dissent, Justice Grauer found the judge had erred in law by interpreting the agreement in a way that rendered the indemnity provisions superfluous. In his view, the surrounding circumstances did not give rise to a presumption that the parties intended tort immunity in the face of express indemnity obligations. Instead, he reconciled the Covenant to Insure and the Indemnity Clause this way: Catherwood’s “undertaking to be responsible for damages to Lehigh’s barges arising from its own negligence effectively carves out from that benefit any loss Catherwood negligently caused to Lehigh’s barges up to the statutory limit of $500,000, beyond which Catherwood would be immune in any event.” Catherwood would benefit from Lehigh’s barges being insured beyond what it could recover from Catherwood and against all other maritime perils, which might otherwise lead to irremediable loss or unseaworthiness of the barges and impair their ongoing business arrangement.
Justice Grauer rejected the idea that the ultimate applicability of the insurance obtained could affect the parties’ allocation of risk in the covenant to insure.
Key Takeaways
The Court of Appeal’s decision confirms the power of covenants to insure to allocate risk and preclude actions in tort for losses covered by the covenanted insurance. With a few words regarding the obligation to obtain insurance, none of which explicitly say that a party is “immune” from tort liability, a party can grant or receive such immunity, which can come as a surprise to some parties. The scope and prevailing power of covenants to insure are not well understood by commercial parties.
The point then is parties should be mindful about the full consequences of contractual obligations to obtain insurance in relation to a specific project or undertaking. If Party A wishes for its counterparty to obtain insurance to protect it and other participants from losses arising from certain risks, but does not necessarily want to waive its ability to seek to recover such losses where they arise from Party B’s negligence, Party A must insist on precise language in the contract making clear the Parties’ intention that duties to indemnify are not ousted by the covenant to insure. An indemnity agreement, by itself and without clear exempting language, will likely not suffice to prevent the operation of tort immunity.
The majority’s commentary may also support an argument that a covenant to insure may not operate where the insurance ultimately obtained, which while compliant with the terms of the contract, does not provide coverage for the loss in question. This type of argument would turn of course on the specific text of the contract, the wording of the insurance policy and the nature and circumstances of the loss. But the Court of Appeal’s acknowledgment that an indemnity clause may operate despite the existence of a covenant to insure where the loss in question is excluded from coverage for some reason not attributable to the covenanting party adds another variable to the otherwise powerful and superseding effects of a covenant to insure.
The dissenting opinion from Justice Grauer shows that this issue is not without controversy. His opinion reflects an insurgent sentiment in some appellate authorities that are not willing to give covenants to insure carte blanche in all cases. The presence of a dissenting opinion may give this case a chance of obtaining leave to the Supreme Court of Canada, which has not considered the issue of tort immunity in several decades and only then in the specific context of commercial leases.
