Canadian Underwriter

Supreme Court will not hear drug company’s appeal of denial of $8.3-million subrogated claim

January 21, 2016   by Canadian Underwriter

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Canada’s highest court announced Thursday that it will not hear an appeal from a vaccine manufacturer that lost an $8.3-million subrogated claim in Ontario against the company storing its drugs. That claim arose from a malfunction in a cooling system that resulted in lost product.

A vaccine manufacturer was unsuccessful in launching a subrograted claim arising from product stored at the wrong temperature. Sanofi Pasteur had an agreement with United Parcel Service Supply Chain Solutions (UPS SCS) requiring Sanofi Pasteur to maintain liability insurance with UPS as an additional insured

Court records indicate that United Parcel Service Supply Chain Solutions (UPS SCS) was storing vaccines made by Sanofi Pasteur in a temperature-controlled warehouse. A master services agreement (MSA) stipulated that the product be stored between 2 and 8 degrees Celsius. On June 1, 2009 the cooler malfunctioned and the temperature dropped to -4.2 Celsius. The vaccines were stored for a weekend at excessively low temperatures and the alarm notification system was suppressed.

As a result, Sanofi alleged the vaccines could not be sold and claimed damages of nearly $8.3 million.

However, Sanofi was required, by its contract with UPS SCS, to maintain product liability insurance of at least $5 million, with UPS SCS named as an additional insured.

That services agreement bars Sanofi-Pasteur from making a subrogated claim, the Court of Appeal for Ontario ruled in February, 2015. Sanofi-Pasteur applied for leave to appeal to the Supreme Court of Canada, which announced Jan. 21, 2016 that it dismissed that leave application awarding costs to defendants.

The court ruling against Sanofi-Pasteur was based in part on a precedent set in 1975, when the Supreme Court of Canada ruled that a landlord cannot sue a tenant over a fire caused by the tenant’s negligence, when the lease agreement requires the landlord to maintain fire insurance. Another case cited was the denial, in 2013, of a $16-million subrogated claim by a paper towel manufacturer arising from a Vancouver-area warehouse fire.

The contract between Sanofi-Pasteur and UPS SCS required Sanofi to maintain general liability insurance of at least $2 million, including “contractual liability coverage for all liability assumed under this Agreement with [UPS] named as additional insured.” Sanofi was also required to have an “all-risk property or stock-transit insurance for the Goods and the personal property of [Sanofi] (or property for which [Sanofi] is legally responsible) in an amount of not less than the full replacement cost thereof, whether such Goods or property are in [UPS’s] facilities or in transit and shall include [UPS] as an additional insured.”

Related: Supreme Court bars $16 million subrogated negligence claim for warehouse fire

Sanofi’s lawsuit was dismissed in 2014 by Mr. Justice Edward Morgan of the Ontario Superior Court of Justice. Justice Morgan ruled that Sanofi “cannot sue SCS for a loss of those goods caused by SCS’s negligence” and that there is “no genuine issue” requiring a trial.

In addition to UPS SCS, named defendants included: Honeywell Ltd., Automation Components Inc., Industrial Technical Services (ITS) Inc., Airon HVAC and Control Ltd. and Enercorp Instruments Ltd.

“Plaintiff’s counsel submits that whatever the meaning of the MSA, it cannot be enforced because it is an unconscionable contract,” Justice Morgan wrote. “With respect, this strikes me as an argument born of despair rather than of reason. As counsel for SCS points out in her factum, the Plaintiff has not referred to a single case in which a covenant to insure has been held unconscionable. The reason for this is self-evident – a covenant to insure operates for the benefit of both parties to the contract, ensuring that the promisee is relieved of liability for the loss and that the promisor will be indemnified for the loss. Given that this is a subrogated action, the Plaintiff has indeed been indemnified; the other half of the covenant’s bargain – relieving SCS of liability – must also be enforced.”

If Sanofi’s lawsuit were to go to trial, Justice Morgan stated that “even if it were found beyond the shadow of a doubt that the damage to the vaccines was caused by an agent of SCS, the trial findings would not impact on the legal effect of the covenant to insure.”

The Court of Appeal for Ontario agreed that the insurance covenant bars Sanofi-Pasteur’s subrogated claim and that effect of that contract could be properly determined on a summary judgment motion. The unanimous decision was written by Madam Justice Alexandra Hoy, with Madam Justice Janet Simmons and Mr. Justice Maurice Tulloch concurring.

Justice Morgan cited a Supreme Court of Canada’s decision, released in 1975, in Agnew-Surpass v. Cummer-Yonge.

Cummer-Yonge Investments Ltd. owned a shopping centre in which Agnew-Surpass Shoe Stores Limited was a tenant. Cummer-Yonge’s insurer pursued a subrogated claim – of $208,648 for the building and $25,105 for loss of rentals – against Agnew-Surpass. A fire – allegedly caused by negligence on the part of Agnew-Surpass – originated at the shoe store. The landlord’s lawsuit was originally dismissed but that ruling was overruled by the Court of Appeal for Ontario, which imposed liability on Agnew-Surpass. Three separate rulings were issued by the Supreme Court of Canada and the outcome was largely in favour of Agnew-Surpass. Two Supreme Court of Canada judges upheld the Court of Appeal for Ontario, three dismissed the lawsuit and four found Agnew-Surpass liable for loss of rentals but not for the building.

The majority found that when provisions of the lease agreement were “read together, they force the conclusion that the lessee is to have the benefit of fire insurance to be effected by the lessor in respect of loss or damage arising from the lessee’s negligence.”

Related: Subrogating Claims in Landlord – Tenant Situations

That decision was part of a “trilogy” of Supreme Court of Canada decisions in the 1970s. The other two cases were Ross Southward Tire v. Pyrotech Products and T. Eaton Co. v. Smith et al.

“The ‘ordinary concept’ of fire insurance does embrace fires caused by negligence and the fact is that the policy taken out by (Cummer-Yonge Investments] did insure against negligence, whether that of the lessee or others,” wrote Mr. Justice Bora Laskin, then Chief Justice of Canada, in 1975 Agnew-Surpass v. Cummer-Yonge.

That passage was quoted in Sanofi Pasteur in 2014. Justice Morgan found that Sanofi Pasteur’s “covenant to insure acts as a bar to liability of the Defendants who were contracted by SCS to service the goods covered by the Plaintiff’s all-risk insurance.”

In Agnew-Surpass, Justice Laskin was writing for himself and the two other judges who would have dismissed Cummer-Yonge’s claim in its entirety. The four judges who allowed Cummer-Yonge’s claim for lost rental income agreed with Justice Laskin’s reasoning on the questions of law and his conclusion, other than on loss of rental income.

The Agnew-Surpass, Eaton and Southward Tire rulings have been quoted in more recent cases, including a British Columbia Court of Appeal ruling, released in 2013, barring a claim by Kruger Products LP against First Choice Logistics.

Kruger – whose products include Cashmere toilet paper, Scottie’s facial tissue and White Swan paper towels – was storing unprocessed paper in a warehouse near Vancouver operated by First Choice. In 2001, the warehouse was destroyed by fire. A B.C. Supreme Court judge allowed the subrogated claim – of about $16 million – after a trial in 2008, ruling that the Supreme Court of Canada’s Eaton trilogy of decisions can be distinguished from Kruger’s lawsuit.

That ruling was overturned, with the appeal court ruling that “where there is in a lease a covenant by a landlord [in this case bailor] to insure, the tenant [in this case warehouser] should benefit from it unless there is something inconsistent with such a result contained in the lease document.”

In Sanofi-Pasteur, the vaccine company’s agreement required it to name UPS SCS as an additional insured, Justice Morgan noted.

In Kruger, the B.C. Court of Appeal “indicated that this type of arrangement reinforces what it called, at para 34, the ‘tort immunity’ flowing from a covenant to insure,” Justice Morgan wrote. “As the B.C. court stated, at para 38, ‘it would make no business sense for each subcontractor to pay premiums to duplicate the comprehensive fire coverage to be obtained by the contractor and there would be no purpose for a covenant on the latter’s part to obtain such insurance if it were not to protect the subcontractors from claims caused by their own negligence.”

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