Great Scott: Covenants To Insure And Tort Immunity

A covenant to insure most often arises in a landlord-tenant situation but does have broader commercial application as was seen in the recent British Columbia Court of Appeal decision of Kruger Products Ltd. v. First Choice Logistics Inc., 2013 BCCA 3.  There, the insurers of a paper warehouse brought a subrogated action to recover more than $16,000,000 paid out following a fire at the warehouse which destroyed not only the building but over 3,700 tonnes of unprocessed paper, and 236,000 cases of finished paper products. The fire began when paper debris came into contact with the exhaust system of a forklift being operated in the warehouse. 

The stored paper products were owned by Kruger Products, formerly known as Scott Paper Ltd. ("Scott") and managed by First Choice Logistics ("First Choice") pursuant to a warehouse management agreement.  Under the warehouse management agreement, Scott covenanted both to insure loss or damage to the inventory in the warehouse, and