On February 9, 2015, the Ontario Court of Appeal released a significant decision in Sanofi Pasteur v. UPS SCS, Inc., 2015 ONCA 88, which will severely restrict insurers from bringing subrogated claims where their insureds have covenanted to obtain insurance for their property. Furthermore, the Court has extended the protection beyond the parties to the contract.
In Sanofi Pasteur, the Respondent stored the Appellant’s vaccines in a dedicated, temperature-controlled warehouse. As required by the storage contract between them, the Appellant covenanted to insure its vaccines for the full replacement cost under an all-risks policy. Pursuant to the same contract, the Respondent was liable to a maximum of $100,000 solely due to its negligent acts or omissions.
The Respondent’s warehouse cooling system ultimately malfunctioned and the vaccines became unsaleable, causing millions in damages. The Appellant was indemnified by its insurer, who then subrogated itself to the Appellant and sued the Respondent and a number of other defendants involved in the temperature control of the warehouse. In light of the Appellant’s covenant to insure, the Respondent brought a motion for summary judgment to dismiss the Appellant’s action. The motion was granted and the Appellant appealed.
The Court of Appeal upheld the majority of the motion judge’s decision to dismiss the action based on the following:
- The insurance covenant signified the Appellant’s assumption of all risk of damage to the vaccines, which was the very damage for which it sued. The covenant therefore operated as a complete bar to the Appellant’s claim, except for up to $100,000 caused solely by the Respondent’s negligence, as explicitly stated in the contract; and,
- The defendants who were not parties to the contract were entitled to rely on the Appellant’s covenant to limit the claim against them. First, it was implied that the parties to the contract intended to extend the benefit of the covenant to the other defendants as their activities (which were related to the temperature control of the warehouse) were the very activities at which the covenant to insure was aimed. Second, extending the contract to the benefit of the other defendants was common sense, as it would give business efficacy to the transaction and would accord with commercial reality.
The Court of Appeal further upheld the motion judge’s award of costs whereby the Appellant was required to pay the costs of the defendants and half of the costs of the third parties, despite the Appellant not having added the third parties to the action.
The Court of Appeal’s decision in Sanofi Pasteur is particularly significant because it recognizes that a covenant to insure acts as a complete bar to subrogation against not only the contractual beneficiary of the covenant, but to all other parties whose activities relate to the assumed risk. For example, if an owner covenants to insure a construction project pursuant to a contract with a general contractor, the owner is likely precluded from then suing that contractor or its subcontractors (who were not a party to the contract) in the event the project is damaged, even if the damage is a result of the contractor’s or subcontractor’s negligence.