Covenant to Insure Barred Insurer from Bringing a Subrogated Claim Against Covenantee

A plaintiff’s covenant to insure the defendant signifies the assumption of risk of damage for which it sues. This covenant barred the plaintiff’s insurer from bringing a subrogated claim against the covenantee defendant for the damage. Notwithstanding a lack of contractual privity, the covenant also barred the plaintiff from bringing a subrogated claim against the other defendants on the basis that the plaintiff’s claim was derivative of the same incident and the same damage as the claim against the covenantee.

Sanofi Pasteur Ltd. v. UPS SCS, Inc., [2014] O.J. No. 2076, April 30, 2014, Ontario Superior Court of Justice, E.M. Morgan J.

The insured, Sanofi Pasteur Ltd. (“Sanofi Pasteur”) was a vaccine manufacturer who entered into a contract with the defendant UPS SCS, Inc. (“SCS”) pursuant to which SCS agreed to store certain vaccines belonging to Sanofi Pasteur in a temperature controlled environment. The contract stipulated that Sanofi Pasteur would maintain all risk property insurance for the vaccines in an amount not less than the full replacement cost and shall include SCS as an additional insured. The insured also agreed to waive any consequential or indirect damages for losses.

The temperature control in SCS’s storage facilities failed, destroying the vaccines. Sanofi Pasteur’s insurer brought a subrogated property damage claim for the damage to the vaccines against SCS, the supplier and installer of the temperature control system, and the contractor who calibrated and tested the temperature control system. The defendants brought a summary judgment motion, taking the position Sanofi Pasteur’s covenant to insure signified the assumption of risk of the very damage for which it sues, and therefore provided a complete defence to Sanofi Pasteur’s action.

Accepting the analogy drawn in Madison Developments Ltd v. Plan Electric Co (1997), 36 OR (3d) 80 at para. 9, the court found that this type of claim is similar to a covenant by a landlord to obtain fire insurance for leased premises. The court held that Sanofi Pasteur was barred from bringing the action against SCS.

Although the contract also required SCS to maintain commercial general liability insurance, the court held that this was aimed at damage and injury to third parties and not for damage to the plaintiff’s property.

The court also held that the same covenant to insure also precluded Sanofi Pasteur from maintaining an action against the other defendants, who were not privy to the contract. This was because the claim against these defendants was derivative of the same incident and the same damage as the claim against SCS. The contractual allocation of risk embodied in a covenant to insure extends to all claims related to the manifestation of that risk, and includes the other defendants despite the fact that they are not parties to the agreement in which the covenant to insure is contained. In support of this proposition, the court adopted the decision of Williams-Sonoma Inc. v. Oxford Properties Group Inc., 2013 ONCA 441.

This case was originally summarized by Kora V. Paciorek and originally edited by David W. Pilley of Harper Grey LLP.

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