The doctrine of tort immunity, simply stated, provides that a party to a commercial contract with another party may, in certain circumstances, be shielded from the consequences of its own negligence. The circumstances in which tort immunity may apply fall into two broad categories: covenants to insure and waivers of subrogation.
Covenants to Insure
Covenants to insure are frequently found in commercial contracts such as leases, rental agreements, or construction contracts. A common example is the commercial lease, where typically a landlord will covenant to place fire insurance. The tenant may or may not be required under the terms of the lease to pay the premiums, and may or may not be required to purchase its own insurance coverage in addition to that purchased by the landlord.
In circumstances where a landlord has covenanted to insure against certain risks (such as fire), courts have held that, as a general rule, the landlord (and the landlord's property insurer) are barred from pursuing a claim against the tenant, even though the loss was caused by the tenant's negligence.
This principle was established in a trilogy of Supreme Court of Canada cases decided in the late 1970s, all involving commercial leases.1 These decisions established that a landlord's covenant to insure the premises is for the benefit of the tenant and will immunize the tenant from any claims which were or should have been insured pursuant to the covenant. The same is true even if the landlord had not expressly covenanted to place insurance, but the tenant paid the premiums for the insurance placed by the landlord (typically as additional rent). The policy reasoning behind these decisions is based on the principle of allocation of risk through contract. In agreeing that the landlord would place (or that the tenant would pay for) insurance, the parties must be taken to have agreed that the risk of any loss relating to that insurance would not be borne by the tenant but rather would be borne by the landlord (and its insurer). To find otherwise would deprive the tenant of any benefit of the covenant to insure contained in the lease, or where the tenant has paid for the insurance, any benefit from having paid the premiums for that insurance.
Accordingly, tort immunity in the context of covenants to insure falls into two categories:
- the parties have expressly agreed that one party will obtain insurance coverage against the loss or damage which is sought to be recovered; or,
- the parties have agreed that one party will pay (and does pay) the premiums in relation to insurance against the loss or damage which is sought to be recovered.
It is important to note that tort immunity arises on the basis of the contractual agreements between the parties, not on the basis of the wording of the insurance policy. The fact that the insurance may not have been placed at all, or did not include the appropriate coverages, does not operate to rebut or displace the operation of the doctrine. In one case in Ontario involving a construction contract,2 the general contractor failed to place the appropriate 'all-risks' property insurance as contemplated by the contract. A flood occurred at the project, which was admitted to have been caused by the negligence of a sub-contractor. There was no insurance to cover the loss, and so the general contractor claimed against the sub-contractor for damages caused by the flood. The sub-contractor successfully defended the claim on the basis that the general contractor had covenanted to insure against risks of flood: therefore, the sub-contractor was immune from liability for its own negligence. The Court of Appeal found that, notwithstanding that the insurance had not in fact been placed and therefore the claim was not a subrogated claim by an insurer, the general contractor's covenant in the contract to insure against risks of flood was sufficient to invoke the doctrine of tort immunity for the benefit of the sub-contractor.
Although the doctrine of tort immunity arising from covenants to insure most commonly arises in the context of landlord and tenant relationships, the Courts have applied the doctrine in the context of other commercial relationships, most notably in construction contracts.3
It is important to note that the benefit of a covenant to insure will often be extended to employees of the contracting parties. In one case involving a construction subcontract, the Ontario Court of Appeal ruled that a covenant to insure against fire "implicitly intended the benefit of the fire insurance to extend to the employees" of the subcontractor, and therefore both the subcontractor and its employees were immunized from a subrogated claim.4 In two relatively recent cases, the British Columbia Court of Appeal similarly held, in the context of commercial leases, that there was an implied intention to extend the benefit of a covenant to insure to the employees of tenants.5
In all cases, the paramount question is what the contractual language indicates about the intention of the parties as to who was to bear the risk of the loss that ultimately materialized. Although there is a presumption that the beneficiary of a covenant to insure will be immunized from liability, courts have noted that it is possible to rebut this presumption, but only by using "quite clear" language.6 It is therefore important to examine the overall language of the contract to determine the parties' intentions.
In the recent decision of Krueger Products Limited v. First Choice Logistics,7 the B.C. Court of Appeal affirmed the rule that if there is a covenant to insure contained within a contract between the subrogating plaintiff and the defendant, to the benefit of the defendant, the defendant will be able to rely on the covenant to insure as a bar to the subrogated claim.
It is also important to note that the doctrine of tort immunity applies to shield the party who is the beneficiary of the covenant to insure; tort immunity will not apply where the party seeking to shelter itself under the doctrine was the party who in fact covenanted to obtain the insurance. This issue arose in a recent B.C. Court of Appeal case involving damage to barges which the owner had chartered to another party.8 The charter party agreement required the charterer to obtain insurance against damage to the barges. The charterer proceeded to add coverage for the barges to its own existing insurance policy and paid the premiums for that coverage. The insurer declined to cover the entire repair costs, so the owner sued the charterer. The charterer took the position that under the terms of the charter party agreement, the risk of damage to the barges passed to the owner and therefore the owner's claim was barred on the basis of tort immunity. The Court of Appeal rejected this argument, finding that the tort immunity cases did not apply in situations where the very party that covenanted to insure sought to shelter behind the existence of that insurance in denying liability for damage caused by its own negligence.
Waiver of Subrogation
Tort immunity can also arise through a waiver of subrogation. Unlike covenants to insure, waivers of subrogation revolve around the language of the insurance policy. The waiver of subrogation cases generally fall into one of two categories:
- the party being pursued in the subrogated action is either a named or unnamed insured under the policy that responded to the claim; or,
- the policy contains an express waiver of subrogation.
In cases falling under the first category, the courts will generally fi nd that any subrogated action is barred on the basis of the well-established principle that an insurer cannot subrogate against its own insured.9 Many of the cases in this category arise in the context of construction projects, where an owner or general contractor has obtained a course of construction or builders risk policy. Such policies typically include contractors, sub-contractors and trades as insureds.
When attempting to determine whether a particular party qualifies as an insured, the starting point is of course the insuring agreements and the definitions contained within the policy itself. In cases involving course of construction policies, the courts have generally included as insureds those parties without whose contributions to the project were necessary for its completion.10
It is also common for the subrogation provisions in an insurance policy (particularly property policies) to contain an express waiver of subrogation against various parties. These parties are typically also named or additional insureds under the policy, but this is not necessarily so in all cases.
In some cases, the insurance provisions in an agreement between the parties may stipulate that the policy to be obtained by the party covenanting to provide insurance shall contain an express waiver of subrogation. In such cases, it is clear that the parties intended that any subrogation rights would be waived, and tort immunity will apply.
As with covenants to insure, the benefit of a waiver of subrogation may be extended to sub-contractors or employees of the named insureds. In other words, a non-party to the insurance contract may nonetheless enforce a waiver of subrogation clause. This principle was upheld by the Supreme Court of Canada in a case that arose out of the sinking of a barge that was under charter to another party at the time of the loss.11 The barge owner's insurance policy contained a clause that included charterers as an additional insured under the policy. The policy also contained a waiver of subrogation against any charterer of the barges. The insurer took the position that the charterer was not entitled to the benefit of the waiver of subrogation clause as it was not a party to the insurance contract and had not paid any premiums for it. The Court rejected this argument, finding that the policy had an express reference to the charterer as an additional insured in the waiver of subrogation clause, and therefore it was clear that the intention of the parties to the insurance contract was to waive any rights of subrogation against the charterer.
Generally speaking, the doctrine of tort immunity will apply where:
1. The contract between the parties contained a covenant to insure whereby:
a. one of the parties contracted to insure against the loss that ultimately materialized; or
b. one of the parties agreed to pay for insurance to cover the loss that ultimately materialized.
2. The insurance policy that has responded to the loss or damage:
a. includes the party against whom subrogation is sought as either a named or unnamed insured; or,
b. contains an express waiver of subrogation rights against the party against whom subrogation is sought.
1 Agnew-Surpass Shoe Stores Limited v. Cummer-Yonge Investments Ltd.,  2 S.C.R. 221; Ross Southward Tire Ltd. v. Pyrotech Products Ltd.,  2 S.C.R. 35; and T. Eaton Company v. Smith,  2 S.C.R. 749.
2 Active Fire Protection 2000 Ltd. v. BWK Construction Company Limited (2005), 45 C.L.R. (3d) 278 (Ont. C.A.).
3 See, for example, Active Fire Protection, supra; Madison Developments Limited v. Plan Electric Co. (1997), 152 D.L.R. (4th) 653 (Ont. C.A.).
4 Madison Developments, supra.
5 Orange Julius Canada v. City of Surrey (2000), 79 B.C.L.R. (3d) 199 (C.A.); North Newton Warehouses Ltd. v. Alliance Woodcraft Manufacturing Inc., 2005 BCCA 309.
6 North Newton, supra.
7 2013 BCCA 3
8 Lafarge Canada Inc. v. JJM Construction Ltd., 2011 BCCA 453.
9 Commonwealth Construction Company Limited v. Imperial Oil Ltd.,  1 S.C.R. 317.
10 See, for example, Commonwealth Construction, supra; Sylvan Industry v. Fairview Sheet Metal Works (1994), 89 B.C.L.R. (2d) 18 (C.A.); Madison, supra; Active Fire Protection, supra.
11 Fraser River Pile & Dredge Ltd. v. Can-Dive Services Ltd.,  3 S.C.R. 108.
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