The Court of Appeal has recently published a new decision regarding covenants to insure in Ontario. In Sanofi Pasteur Limited v. UPS SCS, Inc., 2015 ONCA 88, the plaintiff, Sanofi, contracted with the Defendant, UPS SCS Inc. (“UPS”), to store the plaintiff’s vaccines in UPS’s temperature-controlled warehouse. Under this agreement, the plaintiff agreed to obtain “all-risk” property insurance for any damage to the vaccines while they were in storage. Several months after the agreement, UPS discovered the cooler storing the vaccines had malfunctioned, causing the vaccines to be exposed to excessively low temperatures. The vaccines were rendered unsellable, causing Sanofi to suffer a loss of approximately $8.2 million. After indemnifying Sanofi for the unsellable vaccines, the plaintiff’s insurers brought a subrogated action against UPS and several third parties for recovery from the lost vaccines. The defendants named in addition to UPS included the manufacturer of the temperature control system, the supplier and installer of the control system and the contractor who calibrated and tested the system.
In response to this subrogated action, a motion for summary judgment was brought seeking a dismissal of the claim. The defendants argued that the plaintiff’s contractual undertaking with UPS to obtain “all risk” property insurance for the vaccines barred a subrogated action against all of the defendants, including those not party to Sanofi’s contract with UPS that contained the covenant to insure. At the trial court level, the Superior Court of Justice agreed with the defendants and dismissed the plaintiff’s action in its entirety.
The plaintiff appealed the Superior Court’s decision to the Ontario Court of Appeal. A panel of three judges unanimously agreed with the Superior Court and dismissed the appeal. In its decision, the Court of Appeal affirmed that the defendants not party to Sanofi and UPS’s agreement were entitled to rely on the covenant to insure to bar the plaintiff’s claim. The Court of Appeal held that the covenant to insure was evidence of Sanofi’s intention to bear the burden of any loss from the storage, and having accepted this risk, could not also have intended to allocate the risk to third parties whose work comes within the scope of the contract. Specifically, the Court stated the following at paragraph 61:
The fact that the Insurance Covenant specified that insurance is to be maintained in an amount ‘not less that the full replacement cost thereof’ also indicates that the parties intended all persons involved in the very activities contemplated by the Agreement and whose negligence is alleged to have caused the fortuitous loss to have the benefit of the Insurance Covenant (…) Having allocated this risk to itself (…) it cannot at the same time have intended to allocate the risk to persons who permitted UPS to provide the storage services contracted for.
When applying the traditional two-pronged, third party beneficiary test in its analysis, the Court of Appeal found that the parties intended to extend the benefit of the covenant to insure to the other defendants. In the Court’s opinion, the activities of these other defendants were the very activities that the covenant to insure intended to address, as stated in paragraph 72:
The Other Defendants were “involved” in the storage of the appellant’s vaccines and monitoring the temperatures in the cooler. They were persons who provided the products and services necessary to permit UPS to provide the temperature-controlled storage services under the Agreement.
The Court of Appeal further supported its decision to extend the benefit of the covenant to insure to third parties by holding that this finding is consistent with the commercial reality of Sanofi’s agreement with UPS. The Court noted that Sanofi was a sophisticated pharmaceutical company able to assess its risks and the financial consequence of damage to the vaccines while in storage. According to the Court, to hold UPS, or the other defendants, liable for this damage is not consistent with the commercial reality and would hold companies liable that did not bear the risk of damage.
Sanofi has currently sought leave to appeal this decision to the Supreme Court of Canada.