Canada: Is It Ever Too Late To Rely On A Covenant To Insure?

In the recent case of 1642279 Ontario Inc. v. SCE Construction Management Inc.¹, the Court considered the issue of whether, in a construction contract dispute, the defendant ought to be permitted, on the eve of trial, to amend its pleading to rely on a covenant to insure as a bar to the plaintiff's action.

Construction and commercial contracts typically include a covenant to insure, obliging one party to obtain insurance on all or part of the subject matter of the contract. The law in Ontario is clear that when one party to a construction contract contracts with another party to provide insurance to cover damage to a project, the party which is obliged to purchase insurance fully assumes the risk of damage to the project.

In this particular case, 1642279 Ontario Inc. (the "Owner") contracted with SCE Construction Management Inc. ("SCE") for the construction of a medical clinic. The applicable contract called for the Owner to maintain insurance protecting the interest of and indemnifying SCE against any liability which the owner might incur as a result of damage to, or injury sustained by, any portion of the project. The Owner brought an action against SCE and others in connection with alleged negligence in the selection and installation of cladding on the medical clinic. On the eve of trial, SCE brought a motion to amend its statement of defence to plead that the Owner's action was barred as a result of the covenant to insure contained in the contract. Moreover, as the Owner had failed to purchase the required insurance, SCE claimed indemnity from the Owner for its defence costs and any damages which may be apportioned against it in the action.

Master Short ultimately granted leave to SCE to amend its statement of defence. None of the arguments of prejudice put forward by the Owner were accepted. Regarding an allegation that the amended pleading would increase damages and remedial costs, the Court held that any additional cost for replacing the building's cladding could be mitigated by undertaking immediate repairs, and that the damages of $4 million claimed in the statement of claim would more than cover any excess damages incurred. Master Short also held that any prejudice as a result of the delay in the scheduled trial date could be compensated through costs and was thus not sufficient to merit refusing an amendment to SCE's pleading.

The Owner further alleged that prejudice would arise from its resulting inability to sue SCE's principal, Ross Gilmore, who had previously been released from the action. However, looking to past precedent, the Court held that this alleged loss did not result in prejudice as "the inability to pursue a claim against a defendant against whom the claim had previously been discontinued has been held to not be prejudice to a plaintiff in a motion by a defendant to amend its statement of defence to plead a potentially fatal defence".² Moreover, looking to the terms of the contract between the Owner and SCE, the Court noted that Ross Gilmore was an agent of the contracting party, SCE, and was thus entitled to the same protection as SCE.³

In a final attempt to demonstrate prejudice, the Owner asserted that an amendment to SCE's pleadings to include reliance on a covenant to insure would compromise its ability to sue a third party, principally, their legal counsel. According to the Owner, SCE's proposed defence would restrict the remaining defendants, and one way to recover such a loss would be by an action against their original counsel for responsibility in drafting the agreement, especially as it relates to the language dealing with insurance.⁴ Master Short, however, found that the Owner knew of the possibility of a change in defence and continued to work with its lawyer after that event. As Master Short noted, "[the] Owner then had the opportunity to investigate further and to turn their minds to the issues that the covenant to insure might present for them".⁵

This case highlights the importance of a covenant to insure in the context of a construction contract. Such covenants essentially bar the insured from recovering damage or loss from third parties in connection with the subject matter undertaken to be insured. Not only do these covenants protect the covenantee, but they may also extend to other parties whose activities are related to the assumed risk. Parties to commercial contracts will be wise to keep this in mind in their future dealings.

Footnotes

[1] 1642279 Ontario Inc. v. SCE Construction Management Inc., 2015 ONSC 638.

[2] Ibid, at para 62.

[3] Ibid, at para 68.

[4] Ibid, at para 73.

[5] Ibid, at para 78.

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