July 31, 2010 by Sandra Weber and Trisha Gain
An insured tenant might question, I paid for the insurance: can my landlord sue me? Or, the landlord’s insurer might ask whether they can pursue the tenant by way of subrogation. Either way, a trilogy of cases decided over 30 years ago by the Supreme Court of Canada — Cummer-Yonge Investments Ltd. v. Agnew -Surpass Shoe Stores Ltd., Pyrotech Products Ltd. v. Ross Southward Tire Ltd, Smith v.T. Eaton Co. — determined the answer comes from the terms of the lease, not the insurance policy.
Although there was a basis in law for the landlord to sue the tenant in each case, the Supreme Court did not allow the subrogated claims. The insurer’s right of subrogation is grounded in the landlord’s right to pursue its tenant. If the lease establishes the landlord has agreed to forego that right and assume the risk of damage, the insurer will have no right of subrogation.
In both Agnew-Surpass and T. Eaton, the leases included a covenant by the landlord to obtain fire insurance. In Pyrotech, the lease required the tenant to pay the fire insurance premiums. There was no specific covenant requiring the landlord to insure. However, the Court found that when the landlord presented the insurance bill to the tenant, the risk of loss passed to the landlord.
The trilogy established that if the tenant pays for insurance and there is an obligation on the landlord (expressed or otherwise) to place the insurance, the landlord’s insurer cannot pursue the tenant, unless there is a contrary intention in the lease.
Despite the trilogy, the issue has continued to be litigated over the years, often with cases going to the appeal level and some seeking leave to the Supreme Court. Time and time again, the courts decide against the landlord (i. e. the landlord’s insurers). While some cases have been allowed — for example, Lee-Mar Developments Limited v. Monto Industries Ltd. and Union canadienne (L’), compagnie d’assurances c. Quintal — those are few and far between.
What is the rationale driving these decisions? From a commercial or contractual standpoint, one can understand the basis for the decisions. As stated by the Ontario Court of Appeal in Madison Developments Ltd. v. Plan Electric Co., “The rationale for this conclusion is that the covenant to insure is a contractual benefit accorded to the tenant, which, on its face, covers fires with or without negligence by any person. There would be no benefit to the tenant from the covenant if it did not apply to a fire caused by the tenant’s negligence.”
Not surprisingly, any doubt in the lease will be decided in the tenant’s favour. In Northwestern Metal & Salvage Ltd. v. Alltar Roofing Ltd., the Alberta Court of Appeal considered two apparently competing clauses. The first was that the tenant would contribute to the fire insurance premiums and the second was that any damage to the property was the tenant’s responsibility. Justice Cote concluded that, “. . . the best way to reconcile the two clauses is to say that the clause about insurance deals with those losses that are or can reasonably be covered by insurance such as fire insurance. The sentence about damages should be read as speaking about those losses not covered or readily coverable by fire insurance.”
Even if a tenant is required to have its own insurance, that will not necessarily allow for a subrogated claim. In Alberta Importers and Distributors (1993) Inc. v. Phoenix Marble Ltd., although there was no express covenant, the Court of Appeal found the wording of the lease had the same effect as an express covenant by the landlord to insure for fire. The tenant was required to have a comprehensive general liability policy. Noting the distinction between fire insurance and liability insurance, the Court found the obligation to obtain liability insurance did not detract from the landlord’s obligation to acquire property insurance and did not shift the liability for fire from the landlord to the tenant.
If the landlord takes the position that the lease shows a contrary intention, it must be absolutely clear. In North Newton Warehouses Ltd. v. Alliance Woodcraft Manufacturing Inc., the Court considered a clause that stated the tenant was responsible for all damage caused by its negligence. The Court did not accept the landlord’s position that this showed an intention that the tenant would not be protected. Noting the tenant had paid the insurance premiums, the Court stated that, “. . . a tenant who has paid for an expected advantage as between itself and its landlord should benefit from those payments, and loss issues thereafter are between the landlord and its insurer. In such circumstances, to allow the insurer of North Newton to pursue its subrogated action against Alliance would render nugatory benefits accruing to the tenant under the covenant of the landlord to insure. . . . 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. One might properly say that there is something approaching a presumption in favour of a tenant benefiting from a landlord’s covenant to insure. . . . If a different result is to obtain, it seems to me that quite clear language would be requisite in a lease to achieve such a result. In my opinion, the instant Lease does not contain such language.”
In 2009, the Ontario Court of Appeal once again had the opportunity to consider the issue in 1044589 Ontario Inc. (c. o.b. Nantucket Business Centre) v. AB Autorama Ltd. Autorama was a tenant in a strip mall owned by Nantucket. The relationship was governed by an Offer to Lease. There was no covenant by the landlord to obtain fire insurance. However, the Court had no difficulty finding that as the tenant was required to pay for insurance, the tenant was to receive the benefit of that insurance. The Court found there was nothing contrary in the offer to allow the subrogated claim. Even though the tenant had a responsibility to keep his leased unit in good repair, the risk of loss by fire had passed to the landlord. The Court distinguished the facts from its earlier decision in Lee-Mar.
It is important for tenants to fully understand the terms of the lease and what benefits there may be. While it appears in most cases they will not be found liable, they are well advised to ensure from the outset that they are, in fact, protected. Insurers of tenants may well want to review the lease to ensure any coverage does sufficiently protect the tenant’s interest.
On the flip side, if the landlord has property insurance, it is the insurer who will have the interest, as it will be the insurer who may seek to recover payments made. The difficulty for insurers is they essentially have no control over whether they will ultimately be successful in a subrogated action against an at-fault tenant, as the insurer generally has no input into the lease. The insurer provides coverage and it is only after a loss they may be faced with the wording of the lease preventing them from pursuing the tenant. Given this, if insurers want to attempt to “preserve” their rights of subrogation, perhaps they should consider whether they have the ability to be more proactive in seeking input into the wording of their insureds’ leases.
Sandra Weber is a partner and Trisha Gain is an associate with McLennan Ross LLP. McLennan Ross is a member firm of The ARC Group Canada.