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
The Court of Appeal upheld the majority of the motion
judge's decision to dismiss the action based on the
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
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