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Beware Of Limitation Defences On Duty To Defend Application: Enforcing The Insurance Covenant

The duty to defend application in Brookstreet v. Economical, 2018 ONSC 80 arose from a slip and fall that occurred on the applicant hotel’s premises. In the underlying action, the plaintiff sued the hotel and the hotel’s winter maintenance contractor which was hired to provide snow and ice removal services under a contract drafted by the hotel. Under the contract, the contractor was to obtain general liability insurance coverage for its operations, and to have the hotel added as an additional insured under that policy. The contractor was also to provide proof of insurance prior to the commencement of the term of the contract. The contractor obtained the required insurance but failed to add the hotel as an additional insured. When the hotel was sued by the plaintiff, the hotel brought an application seeking a declaration that the contractor and the contractor’s insurer defend the hotel on the basis of the contractor’s failure to comply with the insurance clause of the contract.

The Court found the application was improperly brought against the insurer given the absence of a privity of contract between the hotel and the insurer. Simply put the hotel had no claim against the insurer for the contractor’s failure to ask that the hotel be added as an additional insured by the insurer.

Further, although the Court found that the contractor was the appropriate party to respond to the application, the Court held that the contractor’s failure to have the hotel named as an additional insured was a breach of contract claim which was statute barred.

The Court concluded that it was "logical and reasonable" that a property owner like the hotel would have made inquiries regarding its status under the insurance its contractor was contractually bound to obtain upon learning of a potential claim. In this case, the plaintiff fell on December 29, 2012 and the hotel notified its own insurer on January 2, 2013. The hotel’s insurer then notified the contractor of the fall on January 15, 2013 and requested that the contractor put its insurer on notice of the claim. The hotel’s insurer attended at the premises to conduct an investigation in relation to the claim on January 16, 2013. However, it was not until 4 years later on January 9, 2017 (9 months after the examinations for discovery) that the hotel learned that the contractor did not obtain the required coverage pursuant to the contract. The breach of contract allegation was first raised by the hotel in its Amended Statement of Defence and Crossclaim dated February 2, 2017.

In dismissing the hotel’s application the Court held that “any reasonable party, standing in [the hotel’s] position, would have made an inquiry into its status as an Additional Insured” upon learning of a potential claim. On this basis, the Court held that the limitation period for the failure to insure claim commenced on the date the hotel’s property insurer wrote to the contractor advising them that they were investigating the claim and suggested they contact their insurer. In this case, it was held that the limitation period starting running as of January 2013. As the application was brought more than two years later, the Court held that the failure to insure claim was statute barred.

This decision serves as a reminder of not only how costly these applications are for the parties (as the applicant hotel was ordered to pay costs of $57,5001), but as a matter of risk management, the importance of obtaining and reviewing the adequacy of proof of insurance coverage at the outset of a contractor’s term of service.

1Brookstreet v Economical 2018 ONSC 1036.

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