Can A Service Contract Create A Duty To Defend?

A clause obliging the insurer to defend an insured, or pay for the insured's defence, is a well know feature of liability insurance policies. Recently, some Canadian courts have held that the duty of one party to defend or pay for defence of another party to the contract may arise in contracts outside the field of insurance, for instance in building contracts. This obligation has been found to arise from an indemnity clause or insurance clause in the contract. Such a duty has been held to exist in a service or building contract even though that contract contained no express duty to defend or pay for a defence.

However, a duty to defend or pay for a defence before a finding of liability seems to be an obligation of a different kind than a duty to indemnify or to obtain insurance. Recently, the Ontario Court of Appeal has clarified this issue in Papapetrou v. 1054422 Ontario Limited. The court held that an insurance clause may create an obligation to pay damages equal to defence costs, but it does not create a duty to defend.

Background

Ms Papapetrou brought a slip and fall claim after she fell on ice on the stairs of The Galleria. That building was owned by the numbered company and managed by the Cora Group. The Cora Group hired Collingwood to provide winter maintenance and snow removal.

The service contract between Collingwood and the Cora Group contained the following indemnity clause:

The Contractor assumes sole responsibility for all persons engaged or employed in respect of the Work and shall take all reasonable and necessary precautions to protect persons and property from injury or damage. The Owner shall not be responsible in any way ... resulting from any act or omission of the Contractor...The Contractor shall indemnify and save harmless the Owner ...against all claims, losses, liabilities, demands, suits and expenses from whatever source, nature and kind in any manner based upon, incidental to or arising out of the performance or non-performance of the contract by the Contractor....[Emphasis added.]

The contract also contained an insurance clause. Collingwood agreed to obtain CGL insurance covering the liability of Collingwood and its employees and agents for bodily injury up to a minimum of $2,000,000 and to include the Owners as additional insureds on the policy. Instead, Collingwood obtained an insurance policy covering a maximum of $1,000,000 and the policy did not name The Cora Group as an additional insured.

The Cora Group...