May 31, 2015 by Michael S. Teitelbaum, partner, Hughes Amys LLP|Michael S. Teitelbaum, partner, Hughes Amys LLP
In Amello v Bluewave Energy Limited Partnership (2014 ONSC 4040), Justice Perell of the Ontario Superior Court of Justice addressed the breach of a covenant to insure. The court held that an oil transport company should not be able to circumvent its obligation to maintain liability insurance and have its oil supplier added as an additional insured in its liability policy. The Court applied a 50% split of defence costs incurred to date and into the future between these two parties.
Amello provides a helpful review of the requirements of withdrawing admissions made in a Response to a Request to Admit. The decision also serves as a reminder that despite the existence of a Pierringer Agreement, a co-defendant is still potentially liable with respect to possible Crossclaims.
On September 17, 2009, oil escaped from a leak in the plaintiffs’ tank maintained by Bluewave, a division of the defendant, Parkland Income Fund. Bluewave was an oil supplier. Extensive damage was caused. The plaintiffs sued Daniel Charles Transport (“Daniel Charles”), a transport company, and Bluewave. Bluewave had subcontracted the oil delivery to Daniel Charles. Parkland was also sued.
A Trucking Services Agreement was entered into by the Plaintiffs and Daniel Charles on October 31, 2008. Daniel Charles would, amongst other things, hold harmless and indemnify Bluewave for costs and legal fees arising from an oil spill. Under the agreement, Daniel Charles was obligated to take out liability insurance naming Bluewave as an additional insured. Daniel Charles took out liability insurance for itself but failed to add Bluewave as a co-insured. The defendants crossclaimed against one another.
Bluewave had its own liability insurance, which responded to the plaintiffs’ claims against Bluewave. Bluewave’s insurer wanted the costs of the defence paid by Daniel Charles; it brought a motion for partial summary judgment seeking such an order.
Daniel Charles brought a cross-motion to dismiss Bluewave’s crossclaim, relying on a Pierringer Agreement. Daniel Charles also sought to withdraw admissions made in a Response to Request to Admit. The court refused to permit Daniel Charles to withdraw its admissions as it had failed to satisfy the requirements for leave to do so. The motion to dismiss Bluewave’s crossclaim was dismissed.
The court granted Bluewave’s partial summary judgment for 50% of the costs of its defence of the Plaintiffs’ claim to date as well as a declaration that Daniel Charles was liable to pay 50% of Bluewave’s future defence costs.
There were three main issues in Amello. First, the court had to determine whether Daniel Charles could obtain leave to withdraw admissions made in a Response to a Request to Admit. Second, it had to address the motion brought by Daniel Charles to have Bluewave’s crossclaim dismissed pursuant to a Pierringer Agreement. Lastly, the court had to decide how to rule on the motion for a partial summary judgment brought by Bluewave for an order requiring Daniel Charles to pay the costs of its defence.
Withdrawal of Admissions
Although not a central issue in this decision, the court denied Daniel Charles’ motion for an order withdrawing admissions made in a Response to a Request to Admit. In it, Daniel Charles had admitted it breached its covenant to maintain Commercial General Liability insurance with Bluewave as a named insured.
Bluewave did not consent to the withdrawal of the admissions The court declined to grant leave to have the admissions withdrawn as the requirements under rule 51.05 were not met. Daniel Charles was unable to meet the second and third requirements under rule 51.05; namely, it did not provide a reasonable explanation or justification for withdrawing the admissions nor did it establish that the withdrawal would not result in non-compensable prejudice.
On March 17, 2014, the Plaintiffs entered into a Pierringer Agreement where they agreed to settle their claim against Daniel Charles. Under this agreement, the plaintiffs also agreed to be responsible for the costs of Bluewave’s defence, and the Plaintiffs would limit their remaining claims against Bluewave to individual or several liability of Bluewave. Based on the terms of the Pierringer Agreement, Daniel Charles argued Bluewave’s Crossclaim should be dismissed.
The court found that Daniel Charles’ argument in this regard was “fallacious” as it disregarded that Bluewave’s Crossclaim was based on Daniel Charles’ liability to indemnify Bluewave for its own liability. As a result, the Perringer Agreement did not operate in the manner contended by Daniel Charles, i.e., to render the Crossclaim “meaningless.” The court explained the effect of the Pierringer Agreement as permitting the plaintiffs to pursue their claim against Bluewave. If the Plaintiffs were successful and obtained a judgment against Bluewave, Bluewave would be able to advance their Crossclaim in order to enforce the Trucking Agreement.
Bluewave brought a summary judgment motion regarding Daniel Charles’ failure to maintain liability insurance for Bluewave. The motion for summary judgment only focussed on damages arising from Daniel Charles’ failure to satisfy the terms of the Trucking Agreement. Under this agreement, coverage would have been obtained to cover the cost of Bluewave’s defence of the plaintiffs’ action.
Daniel Charles made three arguments in this regard. First, it argued the Trucking Agreement was not enforceable. Second, if the agreement was found enforceable, Daniel Charles argued it does not require it to pay for a defence or indemnify Bluewave for its own negligence or mistakes (Daniel Charles alleged Bluewave failed to maintain the Plaintiffs’ oil tank). The third argument advanced by Daniel Charles was that if it is liable to pay for a defence, its liability to Bluewave should be reduced because Bluewave’s defence were being shared by Parkland and its claim for defence costs was privy to equitable contribution between insurers who cover the same risk.
In its analysis, the court acknowledged that as set out in Papapetrou v. 1054422 Ontario Ltd. (2012 ONCA 506) when a party has failed to insure pursuant to a covenant, that party is liable to the party it promised to insure. In this case, the damages award would reflect what should have been obtained under the insurance policy, had the insurance been obtained. The court clarified that this award would include the recoverable defence costs under the liability policy.
In determining what is recoverable, the Court held that the damages in Amello considered the decision in Papapetrou. As outlined in Papapetrou, the quantum of damages in this situation is the amount the insurer of the party who was supposed to become a named insured (party A), is required to spend in defending a claim that the breaching party’s insurer would have been obligated to defend on party A’s behalf.
The court concluded that Daniel Charles was 50% liable for the defence costs incurred to date and 50% of those going forward. In so deciding, the basic principles of contract law were relied on in that the court put Bluewave in the position it would have been in had the contract been performed Justice Perell rejected the argument regarding sharing of defence costs because the costs of defending Bluewave had not been increased by the joint defence.
Justice Perell’s decision is helpful in illustrating how the Papapetrou decision can be applied – by having the party that failed to secure insurance essentially act as if it were the insurer.
In arriving at the 50/50 equitable allocation, no analysis was done by the cou
rt of the “other insurance” clauses to see if they negate each other, thereby resulting in equal contribution, or one policy might be considered excess to the other so that the other would be fully responsible for the defence costs. Ultimately, it appears the court was of the view that a 50/50 sharing of costs was appropriate in the circumstances.
Michael S. Teitelbaum is a partner with Hughes Amys LLP. Ashley Peacock, an associate with Hughes Amys, assisted with this article. Hughes Amys is a member firm of The Arc Group of Canada, a network of independent law firms across Canada.