Supreme Court bars $16 million subrogated negligence claim for warehouse fire

The Supreme Court of Canada Thursday stopped a Canadian tissue paper maker from pursuing a subrogated claim against the manager of a Vancouver-area warehouse that was destroyed by fire, along with more than $16 million of the manufacturer’s inventory, in 2001.

Kruger Products LP, formerly known as Scott Paper, was required by a warehouse management agreement to maintain property and inventory insurance and to name First Choice Logistics, the warehouse manager, as an insured.

This was the reason the B.C. Court of Appeal ruled last January that Kruger is barred from making a subrogated claim.

Kruger applied last March for leave to appeal to the Supreme Court of Canada, which on June 13 dismissed that application.

The B.C. Court of Appeal decision cited extensive case history involving insurance agreements, including a “trilogy” of Supreme Court of Canada decisions in the 1970s, when the highest court in the land ruled in favour of three tenants — Agnew-Surpass Shoe Stores, T. Eaton Company and Ross Southward Tire Ltd.

Those three cases stemmed from fires allegedly caused by negligence on the part of the tenants or their employees. The trilogy of rulings essentially established that when a landlord is required to buy fire insurance, the tenant should benefit from the insurance, and therefore either the landlord cannot sue the tenant, or the landlord’s insurer cannot pursue a subrogated claim against the tenant.

Mississauga, Ont.-based Kruger was storing unprocessed paper in a warehouse, operated by First Choice Logistics, about 25 kilometres southeast of downtown Vancouver in New Westminster, across the Fraser River from the Surrey Docks marine terminal.

On July 31, 2001, a piece of paper caught fire in the exhaust grill of a forklift and drifted to a stack of unprocessed paper rolls. The fire destroyed the warehouse and Kruger’s products. Kruger’s insurer was FM Global Insurance Co.

Kruger sued First Choice Logistics, a trial was held in 2008 and the B.C. Supreme Court judge allowed Kruger to make a subrogated claim. But on Jan. 9, 2013, the B.C. Court of Appeal overturned the part of the lower court verdict that allowed a subrogated claim. The appeal court upheld the lower court decision on the cause of the fire.

In his 2010, verdict, Mr. Justice Grant Burnyeat ruled that the Supreme Court of Canada trilogy of decisions barring subrogated claims against tenants can be distinguished from Kruger’s claim against First Choice Logistics. This, he found, was because “bailment” cases, where a manufacturer stores goods in a warehouse, are different from landlord-tenant cases when it comes to insurance interest.

Although a “warehouser does not have a generalized property interest in the goods which it stores” a tenant has “an insurable interest in the continuing existence and availability for use of demised premises,” Judge Burnyeat wrote at the time.

But the provincial appeal court disagreed, finding that “where there is in a lease a covenant by a landlord [in this case bailor] to insure, the tenant [in this case warehouser] should benefit from it unless there is something inconsistent with such a result contained in the lease document.

Kruger’s warehouse management agreement was actually a draft, written by First Choice Logistics, which had never been signed. But in his 2010 decision, Judge Burnyeat found that the unsigned draft “accurately reflects the contract” between First Choice Logistics and Kruger “relating to the operations at the Warehouse and the obligations which existed between the parties.”

In overruling Judge Burnyeat’s decision the appeal court cited a June, 2005 decision, also by the B.C. Court of Appeal, in the case of North Newton Warehouses Ltd. vs Alliance Woodcraft Manufacturing Inc.

“Ultimately, the policy rule underpinning the proposition that the insurer cannot pursue a tenant for damages …. is based on the proposition that it makes little business sense for a landlord to covenant to insure and for a tenant to pay the premiums if the tenant is not to derive some benefit from the insurance,” the Court of Appeal wrote in North Newton.