I cannot specifically address the Canadian aspect, but generally speaking the situation does raise a few eyebrows.
Having been an IT-contractor for 15+ years, insurance has been mentioned 3-4 times. I have insurance, but have never needed it. As a side note, my Danish insurance explicitly does not cover North America, so there may be some liability laws that should be looked into if you decide to move forward.
When there is an intermediate company between the contractor and the end client, it's only natural that the intermediate seek to limit their exposure to any potential disagreement between the two other parties - who are involved in the actual work, which 99% of the time is what causes disagreements.
When the client has been mine directly (as seems to be the case here), I have never ever heard them mention insurance. There could be several reasons for that; the first being that they assume you have insurance, another being that they do not foresee problems of a scale that merit insurance.
In your case, I would ask the client which aspects of the project worry them to a degree that they are willing to pay for insurance. If the client is not technologically advanced, it could be that they are merely attempting to insure away a general paranoia towards technology. If so, make it clear that there are best practices that mitigate all of their concerns; e.g. source control, CI, backup.
The only real red flag would be if they want insurance against late delivery. Scope creep is often tricky to manage - especially if the client is 'immature' regarding IT-projects, or just unresponsive or organizationally a mess. Instead I would attempt to put processes in place that seek to ensure that the delivery process moves along and resolve issues when they arise.
If the client seems to insist on insurance regardless of what you say - it could be time to walk away, as it seems they have already decided that they will be needing the insurance.