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An agreement to obtain insurance against a particular peril does not necessarily mean that the party obtaining the insurance has assumed all responsibility for that peril. Rather, Courts will read the contract as a whole, in light of the factual matrix, in order to ascertain the meaning of the disputed contractual provision.¹ The existence of a covenant to insure against a risk by one party will not displace a counterparty’s obligation to indemnify against that risk if the contract is sufficiently clear on that point. That was the Court of Appeal’s conclusion in Capital Sewer Servicing Inc v Crosslinx Transit Solutions Constructors, 2022 ONCA 10.

The decision represents a significant clarification on the interplay between indemnity obligations and covenants to insure in construction and other commercial contracts.

The parties in the dispute were Crosslinx Transit Solutions Constructors (“Crosslinx”),²  the construction contractor on the Eglinton Crosstown LRT project in Toronto, and Capital Sewer Servicing Inc. (“Capital”), an experienced sewer servicing subcontractor retained by Crosslinx. In February of 2018, a sewer backup incident occurred while Capital was conducting sewer bypass work near Avenue Road. The backup resulted in flooding which damaged three nearby commercial properties. The property owners sued Crosslinx, Capital, and other parties up the contractual pyramid. Crosslinx demanded that Capital honour its express indemnity obligations in its subcontract agreement and provide a defence and assurance of indemnify for Crosslinx in respect of the legal actions. Capital refused to do so, arguing that a covenant by Crosslinx in its prime contract to take out a project wide insurance policy effectively displaced or extinguished Capital’s express indemnity obligation in the subcontract. The parties brought competing applications for interpretations of the subcontract.

The parties’ dueling positions stemmed from two groups of provisions in the subcontract.

Crosslinx argued that the language of the subcontract was abundantly clear that the parties had intended to allocate all risk of expense or loss to Capital in any way related to its work. Crosslinx relied on provisions that stated that it shall “not incur for its own account and without recourse to [Capital] any obligation or liability” relating to the subject matter of the subcontract, and that Capital “shall be liable for, and shall indemnify and hold harmless [Crosslinx] from and against, all Claims” arising under or relating to the subcontract.

Capital argued that these provisions were effectively nullified by a provision in the subcontract that gave it the benefit of commercial general liability insurance required to be obtained by Crosslinx’s upstream contractual counterparty (known as “Project Co”).  Capital’s position was that this covenant to insure by Project Co (which was incorporated by reference into the subcontract) amounted to an agreement to assume the risk of damage for all perils Project Co’s insurance might cover. Capital relied on a series of well-known cases from the Supreme Court of Canada (“SCC”) and Ontario Court of Appeal (“ONCA”) (Agnew-Surpass v Cummer-Yonge, [1975] 2 SCR 221; T Eaton Co v Smith et al, [1978] 2 SCR 749; Ross Southward Tire v Pyrotech Products, [1976] 2 SCR 35; and Madison Developments Ltd v Plan Electric Co (1997), 36 OR (3d) 80 (CA), leave to appeal refused, [1997] SCCA No 659) where the courts held that a covenant to take out fire insurance by a landlord amounted to an assumption of risk for any damage caused by fire, even where the fire was the result of a tenant’s own negligence. Capital argued that these cases stood for a rule that where a party has covenanted to obtain insurance, they have assumed the risk of loss should the risk insured against arise.

The applications were heard by Koehnen J. of the Ontario Superior Court of Justice (Commercial List), who found in favour of Crosslinx. Koehnen J. considered the line of case law relied on by Capital, but found that it did not establish a hard and fast rule of risk apportionment which would override basic principles of contractual interpretation. In light of the very clear language in the subcontract indicating that the parties intended for Capital to assume all risks relating to its work, Koehnen J. ordered Capital to indemnify and hold Crosslinx harmless from all costs and damages arising in relation to the property damage claims.

On appeal by Capital, the ONCA agreed with Koehnen J. that there is no “legal rule that a party’s covenant to insure against a risk must mean it was intended that the party’s undertaking to insure assumed the risk of the harm insured against.” Each contract containing a covenant to insure must be interpreted according to its own wording in order to ascertain the intent of the parties. In the circumstances of this case, the ONCA accepted that a reading of the subcontract as a whole reasonably led to the conclusion that Capital had agreed to indemnify Crosslinx for all risk and costs associated with the property damage claims. 

The ONCA’s decision is in line with the SCC’s reasoning in Corner Brook (City) v Bailey, 2021 SCC 29, where it held that the long-standing “Blackmore Rule” applicable to the interpretation of contractual releases should be discarded in favour of the interpretive principles set out in Sattva Capital Corp v Creston Moly Corp, 2014 SCC 53. The modern rule of contractual interpretation is that a court must “read the contract as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of the formation of the contract.” The Capital Sewer decision reflects this principle and is part of a growing trend in the judicial interpretation of contracts to move away from entrenched “rules of thumb” in favour of a more flexible interpretive framework.