The action arose after the plaintiff, a pharmaceutical company, entered into an agreement (the “Agreement”) with one of the defendants, UPS SCS (“UPS”), pursuant to which UPS was to store vaccines belonging to the plaintiff in a temperature-controlled environment. Unfortunately, unbeknownst to UPS employees, the cooler in which the vaccines were being stored malfunctioned, and the vaccines, after spending a weekend in an excessively cool environment, were unsellable. The plaintiff’s insurer brought a subrogated claim for damages of $8,259,934.48 against UPS and the companies which had manufactured and maintained the cooling system. All defendants brought a motion for summary judgment which was granted by the Ontario Superior Court of Justice.

Under the terms of the Agreement, the plaintiff agreed to insure its stored goods, including the vaccines, against all risk of loss and was required to insure the full replacement cost of the vaccines ( the “Covenant  to Insure”). The Court noted that the state of the law regarding covenants to insure was clear: “The Ontario Court of Appeal has stated in an unqualified way that, ‘[a] contractual undertaking by one party to secure property insurance operates in effect as an assumption by that party of the risk of loss or damage caused by the peril to be insured against.’: Madison Developments Ltd. vPlan Electric Co. (1997) 36 O.R. (3d) 80.” Accordingly, the legal effect of the Covenant to Insure was that UPS enjoyed “tort immunity.” That is, where the plaintiff agreed to obtain all-risk property insurance against damage to the stored goods, the plaintiff could not sue UPS for a loss of those goods caused by UPS’s or its employees’ negligence. Any consequential losses resulting from the damage to the vaccines were likewise covered by the Covenant to Insure. It therefore provided  a complete answer to the plaintiff’s action.

The Court rejected the plaintiff’s argument that the fact that the Agreement contained a limitation of liability clause capping UPS’s liability at $100,000 meant that UPS could be held liable for its negligence. The Court stated that the effect of the Covenant to Insure was to displace the risk that would otherwise be on UPS. Accordingly, UPS could not be responsible for the plaintiff’s loss beyond its limited obligation to pay $100,000 (which it had done already).

The Court likewise rejected the plaintiff’s argument that because the parties had mutual insurance obligations, UPS should be responsible for the damage to the vaccines. While UPS had agreed to obtain liability insurance, this was to cover the risk of damage and injury to third parties. The plaintiff, by contrast, had agreed to obtain general liability insurance, covering damage to its own property. The nature and purpose of the two kinds of insurance were different.

The claims against the other three defendants were also dismissed. Since they were all alleged to have played a role in the failure of the cooling or monitoring system in the warehouse, they had an “identity of interest” with UPS and were entitled to the benefit of the Covenant to Insure.

This decision highlights the importance of considering the potential availability of summary judgment in circumstances where the state of the law is clear and the scope of contentious factual issues may be limited.




Insurance and Tort Liability