by: Sylvie Lalonde
Recent litigation relating to an insurer’s obligation to defend an additional insured under a Commercial General Liability (CGL) policy serves as a useful reminder that organizations should carefully review how they transfer or allocate risk when entering into service agreements with subcontractors.
A common way for organizations to mitigate risk when retaining the services of a third party is to include clauses in the subcontracting agreement that impose obligations on the service provider to indemnify the organization and to add the organization as an additional insured on the service provider’s CGL policy. Many organizations have template service agreements that they use over and over again and, with time, such clauses may get overlooked and given little thought to how they will be interpreted or applied if an adverse event occurs. Organizations that have been fortunate enough to avoid an adverse event might even think that such clauses will never need to be relied on. However, if something bad has occurred, it will be too late to amend the contract in an effort to mitigate or reallocate the risk.
The recent decision in National Gallery of Canada v Lafleur et al., 2017 ONCA 688 demonstrates that bad things can and do happen while a subcontractor is on the job and that contractual allocations of risk clauses will be invoked and scrutinized in the event the organization is sued in relation to an accident or other catastrophic event involving the subcontractor. The National Gallery of Canada (the “NGC”) entered into an agreement with Lafleur de la Capital Inc. (the “Subcontractor”) for landscaping and maintenance services at the NGC’s premises (the “Maintenance Contract”). Pursuant to the Maintenance Contract, the Subcontractor was required to add the NGC as an additional insured under its CGL policy (the “Policy”), which was with Intact Insurance Company (the “Insurer”). The endorsement to the Policy added the NGC as an additional insured “but only insofar as [its] Legal Liability arises vicariously out of the operations of [the Subcontractor] in connection with [its landscaping and snow removal services].” The Policy contained a number of exclusions, including exclusions for claims that relate to any obligation of an employer under worker’s compensation laws and for claims that arise from injury to an employee incurred during the course of employment.
In August 2013, Mr. Conrad Lafrenière, an employee of the Subcontractor, was carrying out maintenance work on a vehicle ramp located on the NGC’s premises. A vehicle approached the ramp with the intention of entering the NGC’s underground garage. As the vehicle approached, Mr. Lafrenière stepped back towards the ledge of the ramp and fell several feet down to a lower level. He sustained catastrophic injuries from the fall and died. At the time of the incident, Mr. Lafrenière was performing maintenance work pursuant to the Maintenance Contract between the NGC and the Subcontractor. Two actions were commenced against the NGC by Mr. Lafrenière’s spouse and other family members, who sought damages under the Family Law Act (Ontario).
Relying on the terms of the Maintenance Contract, the NGC brought an application for an order and declaration that the Insurer and the Subcontractor are obliged to provide and fund the NGC’s defence in the two legal actions. The Insurer and the Subcontractor took the position that the underlying actions arose out of a workplace accident, and were therefore excluded from coverage pursuant to the worker’s compensation and employer’s liability exclusions. In the initial application before the Ontario Superior Court of Justice, the judge held that the Insurer had a duty to assume and fund the NGC’s defence. Both the Subcontractor and the Insurer appealed to the Ontario Court of Appeal, who overturned the order and concluded that the lower court judge “did not engage in any analysis of the critical issues that had to be addressed.” The Court of Appeal was of the view that, in deciding whether or not the Subcontractor’s Insurer had a duty to assume the NGC’s defence of the two legal actions commenced by the Lafrenière family, the lower court had not sufficiently analyzed the pleadings, the insurance policy and the Maintenance Contract. The Court of Appeal ordered that the initial Application and the issue of determination of coverage in that case be reheard before a different judge. As at the date of writing, the matter has not been reheard.
Although we do not yet know the outcome of the coverage issue in the National Gallery of Canada v Lafleur case, the fact scenario and contractual relationship between the parties of the litigation should prompt us to carefully consider how risk is mitigated and allocated in service agreements entered into by not-for-profit organizations. Ideally, a service contract will contain adequate provisions that will provide some protection to the organization in the event of a claim that arises out of the work carried out by a subcontractor.
Service Agreements commonly provide that one party (usually the service provider) agrees to indemnify the other (usually the organization retaining the services of the provider). The service provider’s agreement to indemnify might also be coupled with an additional agreement to provide insurance for the organization. Typically, the service provider will require that the scope of the indemnity be limited, for example to incidents that occur within locations serviced by the provider or that arise out of the specified operations of the contractor. As an example, a window washing contractor may agree to indemnify the owner of a building for personal injury claims that are made against the building owner and that arise out of that contractor’s work on the premises. The contractor may also agree to obtain insurance to cover that liability, which can be achieved by having the organization added to the contractor’s CGL policy as an additional insured. The extent of the protection will depend on how the contractual clauses are drafted and, in the case of an addition insured provision, on how the Policy endorsement and exclusions are worded.
Indemnity and insurance clauses are often (and prudently) used together. That is because an indemnity clause, on its own, could be of limited value or of none at all if the indemnifying party has insufficient assets to fund the indemnity or becomes bankrupt. For greater protection against such a risk, it is recommended that service contracts also contain an obligation that the indemnifying party secure insurance coverage for the party to be indemnified. It is not clear from the published reasons of the National Gallery of Canada case whether the Maintenance Contract also contained an indemnity clause, but the presence of the insurance clause enabled the NGC to pursue a remedy that could potentially be an important source of protection and recovery of substantial litigation-related costs for the organization in the event the Ontario Superior Court of Justice rules that the Insurer is required to assume and fund NGC’s defence in the two main actions commenced by the Lafrenière family.
The law relating to indemnities and insurance and how they interact is complex. The manner in which agreements to indemnify and/or insure will be interpreted and enforced will almost certainly depend entirely on the specific facts of each case and the particular wording of the contract. Yet, indemnity and insurance clauses are not always given adequate consideration when service contracts or other commercial agreements are drafted. Precedents and boilerplate clauses are often used by organizations who do not fully understand what they mean or how they will impact the organization in the event of an accident or other adverse incident. Risk managers and other senior staff should ensure that they understand the importance of contractual clauses dealing with insurance and indemnities and how they interact. Particular attention should be given to the scope of the indemnity, the breadth of the insurance and the wording of any applicable exclusions. They should also understand that each contract might require different scope of coverage and protection, and that there is no such thing as a “one-size-fits-all” indemnification or insurance clause. If in doubt about the adequacy of the contracts being used by your organization, you should seek professional advice from your insurers, brokers and/or legal advisors before signing off on them. Giving consideration to how risk is contractually mitigated or allocated early on, and before an agreement is executed, can circumvent needless and very costly litigation or, in the event of litigation, allocate such costs to another party.