ARTICLE
29 October 2024

Tortfeasor Covered: Victim's Covenant To Insure Supersedes Indemnification Clause

Catherwood Towing Ltd v Lehigh Hanson Materials Limited, 2024 BCCA 348 highlights the effect of a covenant to insure within a commercial contract...
Canada Litigation, Mediation & Arbitration

Catherwood Towing Ltd v Lehigh Hanson Materials Limited, 2024 BCCA 348 highlights the effect of a covenant to insure within a commercial contract, including the interaction with other provisions within that commercial contract such as an indemnity clause.

Background

The case of Catherwood arose when a barge owned by Lehigh was grounded and damaged on two separate occasions while under tow by tugs owned and operated by Catherwood. The case turned on the interpretation of a Barging and Towing Agreement that was in effect at the time of both groundings, and more specifically the interplay between Article 7.3 and 9.2(c) of the Agreement. In Article 7.3, the tug owner Catherwood agreed to be responsible to Lehigh for any damage to Lehigh's barges caused by Catherwood's negligence, and in Article 9.2(c), Lehigh agreed to obtain, in a form acceptable to Catherwood, Hull and Machinery Insurance covering Lehigh's barges. At issue was whether Lehigh's covenant to insure relieved Catherwood from indemnifying Lehigh for the damage Catherwood caused to the barges.

Trial

During a two-day summary trial, Lehigh argued under Article 7.3 Catherwood agreed to indemnify Lehigh for all losses resulting from Catherwood's negligence and that Catherwood did in fact operate its tows negligently, causing damage to Lehigh's barges. Catherwood meanwhile argued that Lehigh assumed the risk of loss when it agreed under Article 9.2(c) to insure its barges while under tow by Catherwood's tugs.

Relying on Kruger Products Limited v. First Choice Logistics Inc., 2013 BCCA 3, the judge concluded that Lehigh's covenant to insure superseded the indemnity provisions of the Agreement. Kruger involved a similar fact scenario to Catherwood, albeit within the warehousing context. In Kruger, the BCCA held that, in the absence of contractual language to the contrary, a presumption arose that the covenant to insure took precedence over the indemnity clause, relieving the party who undertook the indemnity from losses otherwise subject to the indemnity, even if those losses are caused by its own negligence.

In finding for Catherwood, the judge at first instance found the Agreement did not contain clear and express language to conclude the parties intended to oust the effect of the covenant to insure, which was presumptively for the benefit of Catherwood. At the end of the summary trial, the judge found the Agreement allocated the risk of damage to its barges to Lehigh while under tow by Catherwood and dismissed Lehigh's claims.

Appeal

On appeal, Lehigh argued that the judge committed an error of law by taking an approach that gave Article 7.3 no meaning within the Agreement as a whole.

Citing an older case that informed the BCCA's own decision in Kruger, Economical Mutual Insurance Co. v. 1072871 Ontario Ltd., [1998] 20 R.P.R (3d) 154, the BCCA reiterated the general proposition that a covenant to insure supersedes an agreement by a party to indemnify for losses attributable to its negligence. Similar to the judge at first instance, the BCCA found the Agreement contained no clear language that the covenant to insure was not intended to prevail over the agreement to indemnify. In making its decision, the BCCA noted that there was no reason for Lehigh to covenant to insure the barge in a form acceptable to Catherwood unless the parties intended Catherwood to benefit from same.

In addressing Lehigh's primary argument on appeal, the BCCA noted both the covenant to insure and the indemnity clause could be given effect without altering the general proposition reflected in Economical. For instance, the Court provided a hypothetical scenario: a loss occurred due to the negligence of Catherwood, and the insurer discovered the terms of the policy obtained by Lehigh were not followed and refused to pay out that policy. In that scenario, Catherwood would be required to indemnify Lehigh for the loss, in which case the covenant to insure and indemnification clause would both be given full effect.

As a result, the BCCA dismissed Lehigh's appeal.

Take-Away

Catherwood and the underlying cases of Kruger and Economical have not been considered in Alberta and it remains to be seen if Alberta courts adopt their line of reasoning. However, in the wake of Catherwood, insurers should keep in mind Canadian courts will generally confer the benefit of the insurance policy to the other party to the agreement, even if the loss was caused by the negligence of that other party, absent clear and express language to the contrary.

Additionally, insurers should be cautious where an agreement contains both a covenant to insure and indemnity clause. Without additional language regarding the interaction between the two clauses, the indemnity clause does not effectively limit the insurer's liability.

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Brownlee LLP is a member of the Canadian Litigation Counsel, a nationwide affiliation of independent law firms .

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