|By: I. Jamie Arabi, Litigation Associate|
In Capital Sewer Servicing Inc v Crosslinx Transit Solutions Constructors, the Court of Appeal for Ontario confirmed that covenants to insure do not, as matter of law, mean the covenantor agrees to assume the insured risk. Instead, the contractual relationship must be assessed in the ordinary fashion, with the covenant to insure as merely one of its incidents. The decision serves to remind contracting parties that inferences arising from agreements must be considered with the express provisions and circumstances in mind.
Capital Sewer Servicing Inc and Crosslinx Transit Solutions Constructors were involved in constructing a light rail transit line in Toronto. Crosslinx subcontracted Capital to conduct sewer lining work (the “Subcontract”). When two residents sued both Capital and Crosslinx for property damage following a sewage backup, both parties brought applications to interpret their contract and determine the responsible party.
The Subcontract included terms on this issue in favour of both parties. There was a broad indemnity in favour of Crosslinx, but the Subcontract also incorporated, by reference, a covenant to maintain project wrap-up insurance from the agreement between Crosslinx and the top-level project contractor (the “Construction Contract”). Under that policy, all subcontractors were to be insureds. Capital argued that such a covenant amounts to an assumption of the insured risk.
Both the application judge and the Court of Appeal disagreed. In the appeal decision, Justice Doherty recognized that a promise to insure against a certain risk will typically indicate that the promising party agreed to be responsible for any damages, should the risk arise. While that is typically the case, it is not always the case. Whether this inference can be drawn depends on a review of the entire contract and the factual context.
The Subcontract favoured Crosslinx’s interpretation. For instance, Justice Doherty considered a clause stating that Crosslinx would not incur any liability or obligation under the Subcontract without having recourse against Capital. Further, the Construction Contract’s terms applied with the changes necessary to give full effect to the intent of the parties under the Subcontract. Another provision gave the Subcontract priority over the Construction Contract in the case of a conflict or ambiguity. Capital’s reliance on the Construction Contract, including the insurance provisions, was thus limited.
The key takeaway from this decision is that a covenant by a party to buy insurance does not necessarily mean that the party is assuming the risks insured against. A party that wishes to override assumptions of this kind should include, in Justice Doherty’s words, “strongly-worded” indemnity clauses in the contract. Both courts confirmed that inferences alone only go so far, as courts will assess contracts in their entirety.
 Capital Sewer Servicing Inc v Crosslinx Transit Solutions Constructors, 2022 ONCA 10.
Jamie Arabi is an associate at Theall Group LLP and maintains a broad commercial litigation practice. Jamie is passionate about advocacy and has represented clients at the Superior Court of Justice, the Ontario Court of Justice, and provincial tribunals. Jamie articled at a prominent, full-service firm, assisting on both commercial litigation and transactional matters. Additionally, Jamie worked for an international law firm in Dubai, where he assisted on securities and regulatory matters. During law school, Jamie joined the TradeLab International Economic Legal Clinic. He was also recognized for his contributions to the Lebanese community and served as a director of a not-for-profit cultural organization. Currently, Jamie volunteers for Pro Bono Ontario. Jamie is conversant in Arabic.
For more information, visit https://theallgroup.com/
Photo courtesy of Aditya Chinchure on Unsplash