Article by Sean Tessarolo and Samantha Ip

Jacobs v. Leboeuf Properties Inc., 2018 ONSC 4795

Covenants to insure are common in commercial leases and construction contracts. The insurance covenant is a contract provision that requires a covenantor to obtain insurance against certain perils with the effect that the risk of loss or damage arising from those perils is transferred from the covenantee to the covenantor under the contract. In the event of a loss, the covenantee is released of its liability for the loss and the covenantor is assured that it will be indemnified for such loss. The benefit to the covenantee is often referred to as a waiver of subrogation or tort immunity.

Insurance covenants have been interpreted as extending tort immunity in favour of a covenantee in cases where the loss is caused by negligence, breach of contract,1 gross negligence2 and even intentional conduct.3

In Jacobs v. Leboeuf Properties Inc., 2018 ONSC 4795, the Court determined that a claim for breach of contract and negligence arising from faulty workmanship was barred by the terms of an insurance covenant contained in a construction contract. The plaintiff owned a residential property. The plaintiff contracted with the defendant contractor to, among other things, build a residence. Section 9.1 of the contract required the plaintiff to purchase insurance for the project and to add the defendant as a named insured under those policies:

The Owner shall purchase and maintain in property and third party liability insurance in a form acceptable to the Construction Manager upon the entire Project for the full cost of replacement as of the time of any loss. This insurance shall include, as named insureds, the Owner, the Construction Manager, Trade Contractors, and their Trade Subcontractors and shall insure against loss from the perils of…and damage resulting from defective design, workmanship or material. …

The Court determined that pursuant to s. 9.1 the plaintiff and the defendant contractually allocated the risk of loss or damage resulting from defective workmanship to the plaintiff and the plaintiff’s claim could not succeed on this basis.

Citing precedent from Ontario’s Court of Appeal, the Court held that even if the Plaintiff failed to obtain the insurance contemplated under s. 9.1, the requirement to obtain that insurance acts as a voluntary assumption of the risk of loss caused by perils that would have been insured against. In effect, the “covenant to insure effectively provides an allocation of risks reflected in the price to be paid for the demolition and reconstruction of the plaintiff’s residence.”

In the result, the Plaintiff’s claims in negligence and breach of contract were dismissed.

The decision of Austeville v. Josan, 2016 BCSC 1963, which extended the application of insurance covenants to intentional acts, will be proceeding to appeal this month.

Footnotes

1 Orange Julius Canada Ltd. v. Surrey (City), 2000 BCCA 467

2 Orion Interiors Inc. v. State Farm Fire and Casualty Co., 2016 ONCA 164

3 Austeville v. Josan, 2016 BCSC 1963 (under appeal)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Source: Mondaq

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