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
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
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
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.
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.
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