May 24, 2013 by Greg Meckbach, Associate Editor
A Canadian manufacturer of paper towels and personal tissue this week completed its application to the Supreme Court of Canada for leave to appeal a ruling which disallowed a subrogated claim against the operator of a Vancouver area warehouse.
Kruger Products LP wants to appeal a January decision by the British Columbia Court of Appeal which barred it from making a subrogated claim against warehouse manager First Choice Logistics over a July 2001 fire that destroyed unprocessed paper belonging to Kruger. The provincial appeal court barred Kruger’s subrogated claim because a lease agreement required Kruger to maintain property and inventory insurance and to name First Choice Logistics as an insured.
Although a lower court judge allowed a subrogated claim, based on his finding that a warehouse operator does not have a “generalized property interest” in the goods it stores, the B.C. Court of Appeal on Jan. 9, 2013 overturned that decision, contending, in essence, that when a lease agreement requires a “bailor” who owns goods to buy insurance, the bailee who is responsible for storing those goods should benefit from it, unless the lease agreement says otherwise.
Kruger, formerly known as Scott Paper, makes several hygiene products, including Cashmere toilet paper, Scottie’s facial tissue and White Swan paper towels. Some of its products were being stored in a New Westminster warehouse operated by First Choice Logistics, when on July 31, 2001, a piece of paper caught fire in the exhaust grill of a forklift. The fire drifted to a stack of unprocessed paper rolls and went out of control, resulting in the destruction of the entire building and all inventory Kruger stored at the warehouse.
Kruger sued First Choice Logistics, the forklift manufacturer and the driver in July 2003, alleging, among other things that First Choice Logistics breached its agreement to maintain the warehouse in such as way as to minimize the risk of damage to Kruger’s inventory. A trial was held in 2008.
Since then, a major issue in the legal battle has been the interpretation of agreements between Kruger and First Choice on who was responsible for liability, property and inventory insurance, and who was supposed to benefit from those agreements.
Kruger’s warehousing contract required First Choice Logistics to maintain “comprehensive general liability insurance and industry standard warehouseman’s legal liability insurance” but also required Kruger to maintain “insurance of its property and inventory within the warehouse” and to name First Choice Logistics as an additional insured.
According to court records, FM Global Insurance Co. was Kruger’s property insurer and also provided risk management advice on storage of paper at its warehouses. FM Global was not a party in the lawsuit. In its defence at the original trial, First Choice Logistics alleged that Kruger did not follow all advice from FM Global.
“Before the warehouse was occupied, FM Global as the property insurer of Scott analyzed the sprinkler system of the warehouse and recommended a maximum storage height of 15 feet for parent rolls,” according to court records.
However, court records also indicate Kruger later instructed First Choice Logistics to store 60-inch unprocessed rolls four high, meaning the storage height would be 20 feet and 90-inch rolls would be stored three high, with a storage height of 22.5 feet. FM Global said storage heights above 15 feet would require reinforced or redsigned sprinkler systems.
“These were recommendations only,” Mr. Justice Grant Burnyeat of the Supreme Court of B.C., the original trial judge, stated of FM Global’s guidelines. “I find that the fire was not in any way inevitable or caused as a result of an inherently dangerous characteristic of the goods.” In his November 2010 decision, Judge Burnyeat ruled that First Choice Logistics “was under an obligation to take whatever steps were within its power to limit the exposure of Scott products to the risk of fire.”
Judge Burnyeat also ruled that Kruger could make a subrogated claim against the warehouse operator. First Choice Logistics appealed that decision and the B.C. Court of Appeal last January overuled the part of Judge Burnyeat’s decision allowing a subrogated claim. The B.C. Court of Appeal agreed with the Judge Burnyeat on the question of what caused the fire.
In March 2013, Kruger Products applied for leave to appeal to the Supreme Court of Canada. First Choice Logistics filed its response in April, and court records indicate that on May 21, all materials on the application for leave to appeal had been filed.
In the trial, First Choice Logistics had claimed that its warehouse management agreement with Kruger Products “included a provision requiring (Kruger) to obtain insurance including ‘insurance of its inventory and property within the Warehouse’ and that such insurance was to name (First Choice Logistics) as an additional insured and was to stand as the primary insurance coverage.”
The warehouse firm cited three Supreme Court of Canada decisions from the 1970s involving landlord-tenant agreements that mentioned insurance coverage. They were: Agnew-Surpass Shoe Stores Ltd. versus Cummer-Yonge Investments Ltd. from April 1975; Ross Southward Tire Ltd. versus Pyrotech Products Ltd., from June 1975; and T. Eaton Company versus Smith, from May 1977.
“These cases are generally recognized as standing for the proposition that, in the context of a commercial lease, a covenant to insure by a landlord should flow to the benefit of a tenant unless that result would be inconsistent with something in the lease itself,” Judge Burnyeat wrote in his decision allowing a subrograted claim against First Choice Logistics.
For its part, First Choice Logistics contended that that Kruger was “barred … claiming against First to the extent of the indemnity which would have been provided by such insurance.”
But Judge Burnyeat noted the “trilogy” of Supreme Court of Canada decisions cited by First Choice Logistics can be distinguished from Kruger’s lawsuit because “a warehouser does not have a generalized property interest in the goods which it stores” whereas “tenants have an insurable interest in the continuing existence and availability for use of demised premises.”
But in their decision last January, the Court of Appeal judges disagreed with Judge Burnyeat on the insurance obligations.
Writing for the provincial appeal court, Madame Justice Mary Newbury stated: “… the insertion of a covenant to insure … on the part of a bailor or landlord is generally regarded as intended for the benefit of the bailee or tenant.” The other B.C. Court of Appeal judges who heard the case, Mr. Justice John Hall and Madame Justice Nicole Garson, concurred with the ruling.
Quoting from a warehouse management agreement between Scott Paper and First Choice Logistics, the B.C. Court of Appeal noted it is “clearly analogous to the wording in cases in which subrogated claims were disallowed.”
Quoting from a different B.C. Court of Appeal decision, in the case of North Newton Warehouses Ltd. vs Alliance Woodcraft Manufacturing Inc., Judge Newbury noted: “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.”
Therefore, the B.C. Court of Appeal concl
uded a clause in Kruger’s warehouse agreement with First Choice Logistics requiring Kruger to hold insurance “was clearly intended” for the benefit of First Choice Logistics.