April 6, 2016 by Canadian Underwriter
The Court of Appeal for Ontario has ruled against a tenant who was obliged under its lease to obtain property insurance, and tried to sue its landlord after a fire destroyed a Renfrew, Ontario building.
In a decision released Monday, the Court of Appeal for Ontario overruled a 2014 ruling, by the Ontario Superior Court of Justice, citing a trilogy of cases from the 1970s arising from subrogated fire claims.
Deslaurier Custom Cabinets Inc. leased space in a Renfrew building owned by 1728106 Ontario Inc. Deslaurier was insured by Lumbermen’s Underwriting Alliance.
A lease agreement stipulated, among other things, that Deslaurier was to have:
“insurance against all risks of loss or damage to the Tenant’s property; The Tenant covenants to keep the Landlord indemnified against all claims and demands whatsoever by any person, whether in respect of damage to person or property, arising out of or occasioned by the maintenance, use or occupancy of the Premises or the sub-letting or assignment of same or any part thereof, and the Tenant further covenants to indemnify the Landlord with respect to any encumbrances on or damage to the Premises occasioned by or arising from the act, default or negligence of the Tenant, its officers, agents, employees, contractors, customers, invitees or licensees.”
On Jan. 1, 2009, John Faught Steel Inc. was performing work at the building, and a fire occurred.
The insurer paid Deslaurier about $10.86 million on its claim, and Deslaurier filed a lawsuit against John Faught Steel and 1728106 Ontario seeking about $4.1 million in damages for its uninsured losses.
The landlord was initially unsuccessful in seeking dismissal, arguing it was relieved of liability due to the terms of the lease.
The landlord cited a trilogy of three Supreme Court of Canada rulings released in the mid-1970s: Smith vs. T. Eaton Co., Cummer-Yonge Investments Ltd. v. Agnew-Surpass Shoe Stores Ltd. and Pyrotech Products Ltd. vs. Ross Southward Tire Ltd.
In Cummer-Yonge, Agnew-Surpass Shoe Stores was a tenant whose alleged negligence caused a fire. The Supreme Court of Canada ruled mainly in favour of the tenant (which was liable for loss of rentals but not for the loss of the building), with the majority ruling that the provisions of the lease agreement when “read together … force the conclusion that the lessee is to have the benefit of fire insurance to be effected by the lessor in respect of loss or damage arising from the lessee’s negligence.”
“In subsequent cases, courts have held that the Trilogy principles also apply where the obligation to insure against specified perils is that of the tenant, rather than the landlord,” wrote Madam Justice Eleanore Cronk of the Court of Appeal for Ontario, in its ruling in released April 4, 2016. “In other words, a tenant’s covenant to maintain insurance for damage caused by specified perils runs to the benefit of the landlord and protects the landlord from a claim for loss or damage that is subject to the covenant to insure and is caused by its negligence.”
The appeal court ruled that in 2014, the Ontario Superior Court of Justice erred by “failing to apply the principles from the Trilogy” and in a previous Court of Appeal for Ontario ruling in Madison Developments Limited et al. vs. Plan Electric _Co. et al.
The Madison Developments decision was released Oct. 22, 1997.
A general contractor, Edilcan, had agreed to obtain fire insurance on a construction project owned by Madison.
A fire occurred “due to the negligence” of employees of a subcontractor, which got sued in a subrogated claim by an insurer.
“The law is now clear that in a landlord-tenant relationship, where the landlord covenants to obtain insurance against the damage to the premises by fire, the landlord cannot sue the tenant for a loss by fire caused by the tenant’s negligence,” wrote Mr. Justice James Carthy in Madison. “A contractual undertaking by the one party to secure property insurance operates in effect as an assumption by that party of the risk of loss or damage caused by the peril to be insured against. This is so notwithstanding a covenant by the tenant to repair which, without the landlord’s covenant to insure, would obligate the tenant to indemnify for such a loss. This is a matter of contractual law, not insurance law, but, of course, the insurer can be in no better position than the landlord on a subrogated claim. 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.”