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Convenants to insure – By Eliza Brown, Associate Lawyer at Bernard LLP
COVENANTS to INSURE
By Eliza Lynn Brown, Associate Lawyer at Bernard LLP
If 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 they are economically efficient and are currently receiving judicial support.
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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.
An example of judicial consideration of a covenant to insure occurred in the Ontario Court of Appeal in St. Lawrence Cement Inc. v. Wakeham & Sons Limited, (1995), 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, the Court found that the barge/cargo interests could not recover from the tug owner. In essence, while the tug
owner was liable for the damage, they were able to satisfy that liability with the insurance obligation of the barge/ cargo interests.
Covenants to insure cannot easily be overridden by other clauses in a contract. For example, in Kruger Products Limited v. First Choice Logistics Inc., 2013 BCCA 3, the court found that it would “make no commercial sense” for an indemnity provision (requiring one party to compensate the other for its negligent acts) to supersede a covenant to insure. Again, the requirement to indemnify can be satisfied with the other party’s insurance.
While covenants to insure can immunize the party that is to benefit from the insurance placed by the other party, they do not have the same effect on the party burdened with obtaining the insurance. In Lafarge Canada Inc. v. JJM Construction Ltd., 2011 BCCA 453, a charterer agreed to obtain hull and machinery insurance on four barges as part of a covenant to insure. The charterer damaged the barges and then took the position that they were immune from liability because of the covenant. The British Columbia Court of Appeal found that purchasing its own insurance did not grant the charterer immunity from its own negligence. The benefit of a covenant to insure goes only to the non-insuring party under a properly worded covenant, which was in this case, the barge owner. Thus, it was open to the barge owner to recover damages from the charterer beyond those covered by the insurance.
Given the significant economic and legal consequences of covenants to insure, you should carefully scrutinize any contracts you plan on signing, especially if they require you to obtain insurance. You should also advise your insurance broker and underwriters of these covenants as they can impair an underwriter’s ability to recover. Furthermore, if you want to include a covenant to insure in a contract or are being asked to provide such a covenant, you should have the wording reviewed by your solicitors and insurers, or the clause may not have the effect you are looking for. Ü
