The Lawyers Weekly - January 13, 2012

DONALEE MOULTON

A recent decision from the Court of Appeal for British Columbia floats a clear message to lawyers across the country involved with covenants to insure: be careful what you write.

“If you are a solicitor drafting a contract containing a covenant to insure that is designed to immunize your client if things go bad, read this decision before finalizing the wording and warn your client that covenants to insure have limitations,” said Mike Adlem, a partner with Gowling Lafleur Henderson LLP (Gowlings) in Vancouver who represented the respondent, JJM Construction Ltd.

If you are negotiating a contract for someone that does not want a covenant to insure to provide immunity, read this decision and include “notwithstanding” wording, he added, noting finally, “If you are a barrister retained by one of the parties or one of their insurers after the subject matter of the contract has been damaged, read this decision and consider early on, whether there is a covenant to insure that provides any immunity.”

Lafarge Canada Inc. v. JJM Construction Ltd., [2011] B.C.J. No. 2114, concerned four identical charter parties under which the charterer, Lafarge Canada Inc., agreed to obtain insurance on barges owned by JJM Construction Ltd. When the barges were returned damaged, Lafarge’s insurer declined to cover the entire repair costs. JJM then sought to recover the shortfall from Lafarge.

Lafarge took the position that

If you are a solicitor drafting a contract containing a covenant to insure that is designed to immunize your client if things go bad, read this decision before finalizing the wording and warn your client that covenants to insure have limitations.

“

mike adlem, istockphoto.com

under the terms of the charter party the risk of damage to the barges passed to JJM and, therefore, the construction company’s claim was barred by what is sometimes referred to as “tort immunity.” That argument did not hold water.

“The arbitrator, the Supreme Court, and the Court of Appeal ruled that JJM could sue Lafarge because the leaser promised to obtain the insurance on their own behalf,” noted Michael Thomas, a partner with Harper Grey LLP in Vancouver.

“The decision clarifies the
extent of tort immunity in a
leasing or rental contract,” he
added. “It is not a two-way
street. For tort immunity to
apply, care should be taken to
ensure that the leasor promises
to obtain insurance for damages
to the leased property. This
applies equally to commercial
leasing documents as it does to
tenancy agreements.”
In this case, Lafarge, as the
hirer, agreed to name JJM as a
joint insured under a pre-
existing policy, instead of requir-
ing the construction firm to self-
insure.

approach, noted Neo Tuytel, senior counsel with Bernard & Partners in Vancouver, who represented Lafarge Canada Inc., “but, as this case demonstrates, any saving on premiums could come at a very substantial cost to the hirer’s over-all management of business risks.

“So corporate risk management in Canada has just got a bit more complicated, along with the law of insurance covenants and tort immunity,” he added.

For its part, the court looked at the applicability of three cases from the Supreme Court of Canada: Agnew Surpass Shoe Stores Ltd. v. Cummer Yonge Investments Ltd., [1975] S.C.J. No. 74; Ross Southward Tire Ltd. v. Pyrotech Products Ltd., [1975] S.C.J. No. 62; and T Eaton Co. v. Smith, [1977] S.C.J. No. 125.

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An oddity in

Insurance Law

Lawddities Caveat emptor

Lawddities

A couple from Michigan may have gotten a good deal on a 2006 Ford SUV—or so they thought at first. Three months after the purchase, something didn’t quite smell right.

Ruben and Margarita Salais filed a lawsuit against Suburban Ford of Sterling Heights, alleging the SUV they bought once held a dead body.

When the couple sent the car
back to the dealership, they
were told to deal with their
insurance company. During an
investigation, not only did State
Farm Insurance detect that the
smell was of “human origin” but
that the vehicle had previously
been used as a rental and had
been stolen and recovered three
times, according to detroit.
cbslocal.com.

The dealership claimed no
responsibility arguing that the
smell wasn’t there when the car
was sold. According to the
couple, the smell wasn’t as
noticeable when they bought
the car due to the cold weather
but it got worse over time.