COVENANTS to INSURE By Eliza Lynn Brown, Associate Lawyer at Bernard LLP
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f something goes wrong on your tug and tow operation and your customer’s barge or vessel gets damaged, do you have to pay up? If you have the right wording in your contract, you can know the answer to that question before an accident happens.
A contractual clause can create what is known as a “covenant to insure.” These covenants require just one of the parties to a contract to obtain insurance to cover both parties for certain losses that may arise. For example, a vessel owner may obtain hull insurance for the benefit of both themselves and a tug owner. As covenants to insure allow parties to avoid overlapping insurance policies
More importantly, properly drafted covenants to insure protect the party that doesn’t get insurance from being held liable for covered losses. This includes losses that are caused by negligence. Consider for example a covenant to insure that requires a barge owner to obtain cargo insurance for the benefit of both the barge owner and the tug owner. If the tug owner in that scenario damages the cargo on the barge, the barge owner (and its underwriters) will not be able to recover their losses from the tug owner. The tug owner will be immune from liability. Even if the party required to place the insurance fails to do so, they will be barred from recovery as it is the contract that creates the covenant, not the actual insurance.
they are economically efficient and are currently receiving
An example of judicial consideration of a covenant to
judicial support.
insure occurred in the Ontario Court of Appeal in St. Lawrence Cement Inc. v. Wakeham & Sons Limited, (1995),
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26 OR (3d) 321. There, a tug was towing a cement barge when the tow line parted. The barge drifted into shallow water and ran aground. The tug owner was found to be negligent as they failed to inspect the tow line, prepare a comprehensive emergency plan, or ensure the tow was equipped for such an emergency. The barge and cargo were a total loss with damages assessed at $1.9 million. Because the barge owner was responsible for insurance on the barge and its cargo for the benefit of the tug owner,
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the Court found that the barge/cargo interests could not recover from the tug owner. In essence, while the tug
