In The Provident Bank v. Wells Fargo Bank Northwest, released today, the Court of Appeal considered whether a party’s covenant to insure had the effect of relieving the party to whom the covenant was allegedly given, from liability in negligence.
The facts of the case are a bit complicated, but for purposes of this summary, we can simplify quite a bit. One party, Chell, stored an airplane with another, Maxwell. Some parts of the airplane went missing while in Maxwell’s possession. Maxwell claimed that it had entered into an oral agreement with Chell, whereby Chell was to insure the airplane. Chell did, in fact, insure the plane, although there was considerable doubt as to whether there had ever been a covenant to insure given by it to Maxwell.
The issue before the Court of Appeal was whether this supposed covenant to insure protected Maxwell from liability to Chell (or its successors) in negligence, for the damage to the airplane while it was being stored by Maxwell. The Court held that even if Chell did agree with Maxwell, that Chell would insure the plane, that agreement did not protect Maxwell from tort liability.
Justice Karen Weiler, writing for the Court, said: “Where the only purpose of obtaining insurance is to protect the wrongdoer, the court will imply a waiver of any claim in negligence on the basis that the insurance otherwise lacks ‘substance.'” She contrasted those sorts of cases with this one, where “the purpose of obtaining the insurance was not to protect Maxwell”.
On the facts, Chell had borrowed considerable sums on the security of the airplane and the Court of Appeal concluded that protecting the interests of Chell’s creditors was a reason for it to take out insurance. This, in turn, meant that the covenant to insure had a purpose or “substance” that was unrelated to Maxwell. It was therefore unnecessary to infer that Chell, by agreeing with Maxwell to obtain insurance (if it did so agree), had waived any right to sue Maxwell for negligence in having lost the parts to Chell’s airplane. (There had, of course, been no express waiver given to Maxwell by Chell.)
Pretty dry stuff, admittedly. But the Court of Appeal referred to some well-known cases that deal with waiver of subrogation in various circumstances (typically, lessor-lessee) and arising from the same sort of covenant to insure. The Court of Appeal held that in those sorts of situations, the covenant to insure would have no “substance” if the person giving it (or its insurer) could still pursue a claim against the person to whom it was given. In other words, the Court felt that in the waiver of subrogation types of cases, the sole reason for the covenant to insure was to protect the person who ends up causing the injury. Therefore, a waiver of the right to sue had to be inferred, for the covenant to have “substance”.
On the facts of this case, there were other reasons for Chell to insure the airplane and so, the alleged covenant to insure did not necessarily imply a waiver of the right to sue.