In Lehigh Hanson Materials Limited v. Sea Imp Xi (Ship), 2022 BCSC 1556, the court agreed with the defendants ― the Owners and all others interested in the Ship SEA IMP XI, Catherwood Towing Ltd. and John Doe (“Catherwood”) ― that despite Catherwood’s indemnification of Lehigh Hanson Materials Limited for all losses resulting from its negligence, “the risk was allocated to Lehigh under Lehigh’s covenant to insure its barges while under towing by Catherwood,” Justice Simon R. Coval wrote in his reasons.
“In my view the case is a straightforward application of the principles enunciated in the trilogy of the Supreme Court of Canada and the B.C. Court of Appeal in Kruger,” said Gary Wharton, who represented the defendants in the case.
“The provisions of the contract in question were noted to be conflicting in some instances but in reading the contract as a whole, the court determined that the insurance placed by the plaintiff was intended to benefit the defendant,” Wharton said in an e-mail.
In February 2014 the parties signed a barging agreement for Catherwood’s tugs to transport Lehigh’s barges. The agreement “governed both groundings in issue,” according to the decision.
In late 2016, the first barge grounded while under tow by the SEA IMP XI, in the Pitt River in British Columbia, with a “reasonable cost of repairing the damage to the barge” determined to be $372,930. Lehigh did not make an insurance claim for the first grounding, since the costs of repairing the damage to the barge fell below the deductible.
A year later the second barge grounded while under tow by the same tugboat, also in the Pitt River. The “reasonable cost” of repairing the damage arising from the second grounding is in excess of $500,000. Lehigh made an insurance claim for this grounding and received partial compensation for its losses.
The barging agreement “contained cross-indemnities from each party for damages due to their negligence or breach of contract,” the court noted.
There appeared to be no dispute between the parties that the Hull and Machinery (H&M) Insurance contemplated by s. 9.2 of the barging agreement “provided broad coverage for marine ‘perils of the sea,’ which included both the First and Second Groundings,” Justice Coval wrote.
Both parties referred to cases on the allocation of risk in contracts containing an indemnity from one party and a promise to insure from the other.
“The cases consistently take the approach that it is reasonable to infer the parties allocated the risk to the party promising to insure against it unless the contract indicates otherwise,” the judge noted.
He cited Justice Mary V. Newbury’s decision in Kruger Products Limited v. First Choice Logistics Inc., 2013 BCCA 3. In that “leading case,” Kruger had stored its paper products in First Choice’s warehouse. When a fire broke out, which was started by one of the warehouse forklifts, Kruger’s inventory was destroyed.
“The warehousing agreement contained a broad indemnification of Kruger for the warehouse’s negligent acts. It also required Kruger to insure its inventory and name the warehouse as an insured with primary coverage for property damage.”
Justice Newbury found that “the contract allocated the losses to Kruger, under its covenant to insure, rather than to the warehouse under its indemnity. She held that a party’s covenant to insure should be interpreted to benefit the other contracting party unless the contract indicated to the contrary, otherwise no benefit would be conferred by the promise to insure.”
She also referred to the Supreme Court of Canada’s “well-known ‘trilogy’ of cases in the 1970s” ― Agnew-Surpass Shoe Stores Limited v. Cummer-Yonge Investments Ltd., [1976] 2 S.C.R. 221; Ross Southward Tire v. Pyrotech Products, [1976] 2 S.C.R. 35; and T. Eaton Company v. Smith, [1978] 2 S.C.R. 749 ― which concerned covenants to insure in commercial leases.
These cases culminated, she wrote, in the landlord’s promise to insure being “regarded as a ‘supervening covenant’ that prevailed even where the tenant’s negligence had caused the loss.”
In the case at bar, Justice Coval found that in reading the barging agreement as a whole, “the parties allocated to Lehigh the risk of damage to its barges while under towing by Catherwood, despite Catherwood’s indemnity.”
This was indicated by three aspects of the agreement, he wrote:
1) that Lehigh had covenanted to Catherwood that it would obtain the H&M Insurance;
2) that Lehigh’s insurance was required to be “in a form acceptable” to Catherwood; and
3) that “if a party fails to procure the required insurance or the insurance fails for any reason, that party ‘shall be deemed the insurer or self-insurer, and shall accept and pay all claims which should otherwise be covered by the failed insurance and shall indemnify the other party … which would have been covered by that insurance.’ ”
“In my view, this is another clear indication that Catherwood is to benefit from Lehigh’s H&M Insurance,” Justice Coval wrote. “To paraphrase an argument made by counsel for Catherwood, it would make no sense for Catherwood to be liable to Lehigh if Lehigh obtained the requisite H&M Insurance, but for Lehigh to self-insure if it did not.”
Catherwood counterclaimed for costs, but those claims were dismissed and it was awarded costs at Scale B.
“The decision is a caution to solicitors that in drafting insurance provisions in a contract, care must be taken to ensure that covenants are clearly expressed if they are not intended to benefit the other contracting party,” Wharton told The Lawyer’s Daily.
“Where the risk/benefit resides is ultimately a question of contractual construction.”
The plaintiff was represented by Shelley A. Chapelski and Andrew Stainer of Norton Rose Fulbright LLP in Vancouver, who were not immediately available for comment.
The defendants were represented by W. Gary Wharton and Jakub Vodsedalek of Bernard LLP in Vancouver.
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