The Québec Court of Appeal in Kansa General International Insurance Co. Ltd. (Liquidation de) recently dealt with the impact a change in the scope of the work can have on a supplier’s insurance coverage under a professional responsibility insurance policy.

In this case, an IT supplier entered into an agreement with a client to develop and implement certain IT systems. Problems were encountered and the parties ended up modifying the scope of work in such a way that (i) the obligations of the supplier were thereafter limited to the development of the IT systems, (ii) a fixed cost was established, and (iii) a guaranteed delivery date was set. Despite these changes, the situation did not improve. Ultimately, the client decided to terminate the contract and sued the supplier for damages.

One of the questions raised during the proceedings was whether the client’s claim was covered under the supplier’s insurance policy. The policy dealt with faults, errors and omissions related to professional services it had rendered. The professional services covered under the policy included IT management consultation, IT systems development and technical consultation. Excluded were claims relating to express warranties or cost estimate overruns.

In its analysis, the Court of Appeal found that there was no clear intention to waive claims for past misconduct when the parties entered into the new contract and modified the scope of the work. Therefore, the client could still sue the supplier for damages resulting from acts made before the conclusion of this new agreement.

In this case, it was clear that many of the client’s claims related to the supplier’s consultation and development work. Based on the wording of the policy, the court concluded that the insurer had a duty to defend and indemnify the supplier against those allegations. The insurer did not, however, have to defend or indemnify the supplier on claims that were not covered under the policy — the claims relating to the operation costs of the systems or the failure to meet the deadlines set out in the new contract.

McCarthy Tétrault Notes:

As a supplier, it is crucial that you know the scope of your insurance coverage before engaging in activities that might be potentially be out of scope, particularly when things are not going according to plan.

As a client, you should require evidence of insurance coverage before engaging a new supplier or amending the scope of the work to be provided. You also need to ensure that someone is standing behind your supplier’s indemnification obligations, so that you are able to collect your damages. And should your supplier not deliver as agreed, do not forget to look to initial iterations of your contractual arrangements to build your case from the beginning of the relationship.