Canadian Underwriter

Did 1970s fire insurance subrogation decisions really set a precedent?

May 22, 2018   by Greg Meckbach

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Property insurers’ subrogation rights in Canada may be a bit broader than some lawyers and judges might think.

An off-cited trilogy of Supreme Court of Canada decisions released during the 1970s– including one in favour of the Eaton’s department store chain – “did not enunciate freestanding principles,” Justice Russell Juriansz of the Court of Appeal for Ontario wrote in a ruling released this past Friday.

The ruling – Royal Host GP Inc. v. 1842259 Ontario Ltd. – overturned a Superior Court of Justice decision released July 5, 2017.

The case arose from a fire that broke out in 2011 in commercial property in Thunder Bay, the location of both a Travelodge Hotel and the Sushi Station restaurant. Through 1842259 Ontario, the restaurant is operated by Mao Hui Zhang, Tian Xing Yang and Dong Jiang.

Royal Host, the landlord, alleged the fire arose through the negligence of the restauranteurs. The dispute before the court was over whether Royal Host’s insurer could pursue a subrogated claim against the restauranteurs, rather than on the cause of the fire.

Initially, Justice Mark Garson of the Ontario Superior Court of Justice decided in favour of the tenant, 1842259 Ontario, ruling that landlord Royal GP’s insurer could not sue the tenants for negligence on behalf of the landlord. But Friday’s ruling paves the way for the landlord’s insurer to subrogate.

“As a general rule, courts have limited the subrogation rights of an insurer when a landlord covenants to pay for the insurance and agrees to look to its own insurer for any loss,” Justice Garson wrote. He cited three Supreme Court of Canada rulings: Pyrotech Products Ltd. vs. Ross Southward Tire Ltd., released in 1975; Smith vs. T. Eaton Co., released in 1977; and Cummer-Yonge Investments Ltd. v. Agnew-Surpass Shoe Stores Ltd. All three arose from fires in commercial properties.

That “trilogy” of cases is often cited in subrogation lawsuits – arising from fires allegedly caused by tenants negligence – when the lease agreements stipulate that the landlord’s must buy fire insurance.

In general, when lease agreements require one party to obtain insurance for “any loss which would have been covered by that insurance, even if caused by the negligence of the other party,” that agreement “essentially creates a complete waiver of subrogation,” Adam Grant, a lawyer for McCague Borlack, wrote in an article on his law firm’s website. The article – Liability Limits in Subrogation – was not on the Royal Host ruling but on limitations of liability clauses cargo shipment contracts.

In the lease agreement in Thunder Bay between Royal Host and the numbered company operating the Sushi Station, the landlord agreed to obtain $10 million in property and general liability insurance. The lease agreement also stipulated that the tenant “is not relieved of any liability arising from or contributed to by its acts, fault, negligence or omissions.” Despite the tenant’s liability, Justice Garson ruled that the landlord had no subrogation rights because the lease agreement did not “expressly preserve the right of subrogation by the landlord’s insurer against the defendants.”

But the trilogy of 1970s rulings  arose from “the particular provisions of the leases that were in issue in those cases,” Justice Juriansz wrote. Concurring with Justice Juriansz were Justice Alexandra Hoy and Bradley Miller.