Canadian Underwriter

Underinsured furniture vendor loses lawsuit against landlord arising from water damage

March 3, 2016   by Canadian Underwriter

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The Court of Appeal for Ontario recently ruled against a furniture and lighting fixture dealer, whose premises were flooded, based in part on a trilogy of Supreme Court of Canada rulings from the 1970s involving agreements to insure between landlords and tenants.

The Court of Appeal for Ontario ruled against a tenant who tried to sue its landlord, because the lease agreement required the tenant to have flood coverage naming the landlord as an insured

Orion Interiors Inc. sells furniture and lighting fixtures in a building on Alness drive in Vaughan, just north of the Toronto city limits. It leases space in a building owned and managed by Rhyl Realty Inc.

Court records indicate that in July, 2012, “a rubber drain plug in one of the drain lines from the roof” of Rhyl Realty’s building dislodged, “resulting in flooding of the interior of the premises.”

The terms of the Orion’s original lease with Rhyl required Orion to have “flood and earthquake coverage, in an amount equal to the full replacement costs of all improvements, equipment and chattels in or serving the Leased Premises or for which the Tenant is legally liable …” The lease also required the landlord to be a named insured and for the insurance policy to “contain a waiver of any subrogation rights which the Tenant’s insurers may have against the Landlord and those for whom the Landlord is in law responsible, whether the damage is caused by the act, omission or negligence of the Landlord or for those for whom the Landlord is in law responsible …”

After the 2012 flood, State Farm paid Orion Interiors $156,560, the limit on its policy. State Farm is not pursuing a subrogated claim, but Orion filed a lawsuit against Rhyl Realty for the loss incurred by the flood over and above the policy limit.

Orion’s suit was dismissed, by Madam Justice Victoria Chiappetta, of the Ontario Superior Court of Justice, in a ruling released Jan. 6, 2015. Her ruling was upheld on appeal, in a decision released Feb. 29, 2016.

“The terms of the lease are clear and unequivocal,” Justice Chiappetta wrote, noting that Orion “contractually undertook to maintain insurance in its name and the name of the Defendant landlord at a rate sufficient to insure its own property from loss or damage caused by flooding, to its full replacement cost.”

Another issue before the court was whether the terms of the lease governed the parties at the time of the flood, and the court ruled that it did.

Justice Chiappetta cited case history, including a trilogy of Supreme Court of Canada rulings released in the 1970s. Those cases arose from separate fires at separate locations involving three tenants – Agnew-Surpass Shoe Stores, T. Eaton Company and Ross Southward Tire Ltd.

Cummer-Yonge Investments Ltd. owned a shopping centre in which Agnew-Surpass was a tenant. A fire was allegedly caused by negligence on the part of an Agnew-Surpass employee. Three separate rulings were issued in 1975 by the Supreme Court of Canada and the outcome was largely in favour of Agnew-Surpass. Two Supreme Court of Canada judges upheld a Court of Appeal for Ontario in favour of the landlord, three dismissed the lawsuit and four found Agnew-Surpass liable for loss of rentals but not for the building.

“The tenant’s covenant expressly exempted its liability for loss caused by perils against which the landlord was obligated to insure,” Justice Chiappetta wrote, of Agnew-Surpass’s lease agrement, in her 2015 ruling in favour of Rhyl Realty.

While the facts of Orion’s lawsuit “are different from those” of the 1970s trilogy of Supreme Court of Canada rulings, “in that the covenant to insure is in favour of the Defendant landlord and the claim at issue is not one of subrogation, given the contractual bargain between the parties, the rationale of the trilogy nonetheless applies to bar the Plaintiff tenant’s claim against the landlord,” Justice Chiappetta added.

The Court of Appeal for Ontario agreed, stating the “line of authority” of the Eaton trilogy of cases, as well as other cases, applies to Orion.

Justice Chiappetta also cited an Ontario Superior Court of Justice ruling, released Oct. 31, 2007, which cited the 1970s trilogy of fire negligence lawsuits.

A tenant, Lincoln Canada Services LP, tried to sue its landlord, First Gulf Design Build Inc., for damage to inventory and repair costs arising from a sprinkler leak that occurred in June, 2005.

The loss was less than the deductible under Lincoln’s insurance policy, according to court records.

Lincoln’s lease agreement required Lincoln “to maintain ‘fire and standard extended perils insurance coverage, including sprinkler leakages…’ for the full replacement cost of all improvements, equipment and chattels in or serving the leased premises or for which the Tenant is legally liable,” noted Madam Justice Barbara Conway of the Ontario Superior Court of Justice.

Citing case history – including Eaton and Cummer-Yonge – Justice Conway noted that the “principle arising from these cases is that the insuring party has, by agreeing to insure against a specific loss for which the other party would otherwise be liable in negligence, relieved the other party from the risk of liability for the loss caused by its own negligence. The insuring party must deal with its own insurer for the loss.”

In ruling against Orion, the Court of Appeal for Ontario found that the terms of Orion’s lease with Rhyl Realty “had the effect of shifting” to Orion to “the risk of damage to its property from an insured peril, in this case, flooding.”

“This is so regardless of whether the landlord’s conduct in relation to the flooding is characterized as a breach of the lease or, as the appellant argues in the alternative, a ‘fundamental breach’ or ‘gross negligence,’” wrote Madam Justice Janet Simmons, Madam Justice Sarah E. Pepall and Madam Justice Katherine van Rensburg, of the Court of Appeal for Ontario, in their unanimous ruling released Feb. 29.

“The tenant had a contractual obligation to insure its property against such a risk to its full replacement cost value and failed to do so.”