The Court of Appeal has provided further guidance on the issue of prescriptive easements in the case of Hunsinger v. Carter. The case involved one party having uninterrupted use of a shared driveway over a 40 year period for commercial purposes, facing off against a neighbor who purchased the property last year and attempted to restrict his neighbours historic use of the property. The ‘new’ neighbor was operating a daycare and wanted to erect a fence in the middle of the shard driveway for reasons of safety.
On application, the court held that the ‘new’ neighbor could erect the fence, in part relying on the finding that the historic neigbour would be able to maneuver vehicles on their portion of the driveway and that the fence would not provide an absolute impediment to doing so. The application court judge found that the historic neighbor had established a prescriptive easement over the driveway as it was the dominant tenement for over 40 years before 2007 when both properties were registered in the Land Titles system. The appellant and his family had made use of the gravel driveway “openly, continuously, and without licence over this period. However, the application court judge found that the obstruction of the easement in erecting a fence was allowable because that portion of the driveway which was obstructed was not needed to be used by the historic neighbor.
The Court of Appeal disagreed, finding that building the fence would encroach on the easement. It is interesting to note that the Court did not disagree that the proposed fence did not prevent the historic neighbor from utilizing the driveway to access the back of his property. Rather it was clear that the court accepted the argument that the fence would substantially interfere with the neighbours use. Encroachment is only permissible where the encroachment does not substantially interfere with the easement and in this instance, the fence was thought to constitute a substantial interference.
The Court of Appeal’s reasons in L-Jalco Holdings v. MacPhersonreminds us that the concept of subrogation extends beyond the realm of insurance and into the realm of mortgage priority claims. In L-Jalco, the plaintiff lender advanced funds to a property owner who discharged only one of two prior mortgages with the funds advanced, while registering a new mortgage in its favour. The prior (then undischarged) second mortgage moved into first position and the plaintiff’s mortgage fell into second position. When the property owner defaulted, the plaintiff sold the property under power of sale and sought an order that its mortgage had priority against the first mortgage and in so doing attempted to in effect cut the first mortgagee out of participation in the sale proceeds.
The plaintiff floated two arguments:
the ‘new’ first mortgagee had undertaken to discharge its mortgage and failed to do so and would be unjustly enriched if they maintained priority; and
the plaintiff could have preserved the priority by taking an assignment of the original first mortgage and therefore it would be equitable that the plaintiff receive priority through being subrogated to the discharged first mortgagees priority position
The court rejected both arguments.
Importantly there was a finding that the plaintiff was aware of the undischarged mortgage and seemed not to care at the time of the original closing. This knowledge was critical to the court’s finding because it took it out of the realm of cases where there was a mistake that lead to an unjust result. The Court of Appeal’s 1997 decision in Mutual Trust v. Creditviewwas referred to in the underlying reasons to juxtapose circumstances where a mortgagee has knowledge of prior encumbrance vs a circumstance where a mortgagee has no knowledge as a result of a mistake. Mutual Trust involved a mortgagee who was unaware of CPL’s registered on title when its mortgage was registered and when it discharged first mortgages held by Scotia. The court held that Mutual Trust was unaware of the CPL’s as a result of its solicitor’s mistake. They found that if Mutual Trust was not subrogated to Scotia’s interest as the prior first charge, the holder of the CPL would be unjustly enriched as a result of a solicitor’s error. The court also identified that the plaintiff could have taken an assignment of the discharged mortgagee’s interest. However, the lack of knowledge was critical to the court’s finding.
Subrogation in the context of mortgage priorities embraces the same underlying concept as traditional subrogation – one party standing in the shoes of another. However, there is no automatic statutory or common law right of subrogation for mortgagees. Rather it is available only if facts support the fairness of granting it.
For those keeping score, subrogating insurers have been coming up on the short end of the stick in cases involving commercial leases. The Court of Appeal’s decision in Royal Host v. 1842259 Ontario (released May 18, 2018) goes the other way in permitting an insurer of a landlord to advance a subrogated action against an at fault tenant. On that basis alone, it is worth a close look.
The lease in issue in Royal Host contained provisions we often see in commercial leases. The landlord was required to obtain fire insurance and the tenant contributed financially to the premiums for that insurance. The lease contained a provision that the tenant was not relieved of any liability arising from or contributed by its acts, fault or negligence.
The motion judge ruled in favour of the tenant and dismissed the subrogated action commenced by the landlord’s insurer, relying on what he called the ‘general rule’ in the Supreme Court of Canada’s risk shifting trilogy (Agnew-Surpass v. Cummer-Yonge, 1975 CanLII 26 (SCC),  2 S.C.R. 221; (ii) Ross Southward Tire v. Pyrotech Products, 1975 CanLII 25 (SCC), and (iii) T. Eaton Co. v. Smith et al., 1977 CanLII 39 (SCC)) that ‘subrogation rights will be limited where a landlord covenants to pay for the insurance and agrees to look to its own insurer for any loss’. On appeal, Ontario’s Court of Appeal overturned the motion judge and permitted the matter to proceed. The appeal court relied on a number of lease provisions which in their view made it clear that the risk of loss by fire was to be borne by the tenant if they were responsible for the loss.
The Trilogy is the starting point for the analysis of commercial leases in subrogation claims in the Canadian environment and is worthy of brief review. In Surpass, the landlord covenanted to maintain fire insurance on the premises. There were no tenant repair covenants in the lease. The lease did require the tenant to take good and proper care of the leased premises, “except for reasonable wear and tear…and damage to the building caused by perils against which the lessor is obligated to insure hereunder”. The landlord’s insurer was precluded from subrogating in Surpass, and with good reason. There was a clear relationship between the tenant’s covenant to repair and the landlord’s covenant to insure. The provisions worked together harmoniously - the tenant was not required to repair if the damage was caused by a peril against which the landlord was required to insure.
In T. Eaton, the lease provisions were similar although the tenant’s covenant to repair was not tied in any way to the landlord’s covenant to insure as it had been in Surpass. Despite this distinction, the Supreme Court found in favour of the tenant and prevented the landlord’s insurer from subrogating. In effect, the covenant to insure trumped the covenant to repair.
How did the Court of Appeal reach a different result in Royal Host? The devil is in the details as they say and in this case, the details are the lease provisions. Specifically, the section of the lease that required the landlord to obtain insurance also included the following language:
Notwithstanding the Landlord’s covenant contained in this Section 7.02, and notwithstanding any contribution by the Tenant to the cost of any policies of insurance carried by the Landlord, the Tenant expressly acknowledges and agrees that
the Tenant is not relieved of any liability arising from or contributed to by its acts, fault, negligence or omissions, and
no insurance interest is conferred upon the Tenant, under any policies of insurance carried by the Landlord, and
the Tenant has no right to receive any proceeds of any policies of insurance carried by the Landlord.
The effect of using the word ‘notwithstanding’ is to provide a limited circumstance in which the benefit conferred to the tenant will not apply; namely when the tenant’s ‘acts, fault, negligence or omissions’ result in loss or damage. The parties had turned their minds to the issue of which party was to bear the risk of loss in this circumstance and despite the landlord’s covenant to insure, the lease precluded the tenant from enjoying the benefit of that insurance if the loss resulted from its negligence.
It is worth noting that the motion judge in this case repeatedly referred to the ‘general rule’ derived from the Trilogy which was to limit subrogation rights when the landlord agreed to obtain insurance. The Court of Appeal disagreed with this interpretation and clarified that the Trilogy did not pronounce a general rule of application nor did it enunciate freestanding principles. Rather, ‘the principles drawn from the trilogy are contractual in nature. They are conclusions that flow from and reflect the particular provisions of the leases that were in issue in those cases’. This underscores the first rule in analyzing subrogation rights when commercial leases are involved: try to discern the intention of the parties based on the lease language. https://bit.ly/2KCPH0p
Neil is a Partner of Samis+Company. Neil focuses exclusively on insurance-related litigation. He has handled a broad range of matters before the Ontario Superior Court of Justice and the Financial Services Commission of Ontario, as well as advocating on behalf of his clients in private arbitrations.
In this subrogated matter, the appellant landlord owned a commercial property that included the respondent’s pub, Red’s Pub, and neighbouring businesses. A fire broke out in Red’s Pub and the pub was destroyed. The fire caused damage to a neighbouring businesses. The landlord’s insurer commenced a subrogated action against Red’s Pub for the damage.
Red’s Pub successfully brought an application to dismiss the claim. The Master concluded that the landlord was barred from advancing any action against Red’s Pub as the lease, when read as a whole, transferred the risk of loss by fire to the landlord. The landlord appealed the decision of the Master.
On appeal, the Alberta Court of Queen’s Bench reviewed several clauses in the lease and found that the landlord assumed the risk of loss by fire. The lease specified that Red’s Pub was responsible for any increase in the cost of fire insurance caused by its conduct. The court held that this term implied that the landlord intended to carry fire insurance. In addition, the lease required the premises to be kept in good repair, except when there was damage from fire. The lease specifically required that Red’s Pub carry insurance against burglary, glass insurance, public liability, and property damage. There was no specific reference to fire insurance. Finally, it was provided in the lease that if Red’s Pub could not be repaired within 120 days of fire damage, then the lease would terminate.
After reading all of the sections of the lease together, the court held the landlord impliedly agreed to obtain fire insurance for the benefit of Red’s Pub. As a result, the appeal was dismissed.
This decision underscores the importance of completing a detailed review of all leasing documentation in advance of pursuing a subrogated action.
In Mabe Canada Inc. v. United Floor Ltd., the Ontario Court of Appeal weighed in on the standard of care in the context of contractual duties and industry practices.
Mabe sustained damages when a drainage pipe that ran underneath a floor installed by United Floor caused a flood in Mabe’s warehouse. United Floor was hired by First Gulf to build the warehouse in 2004. First Gulf is not a party to the action. The flood was caused by two holes in the drainage pipe that ran below the concrete floor.
At trial, Mabe’s alleged that the holes were caused by United Floor when installing the floor. None of the building drawings showed a drainage pipe in the location where the damaged pipe was found. In addition, the pipe was installed much shallower than it ought to have been under industry standards.
The trial judge dismissed Mabe’s claim in negligence. The trial judge found that United Floor damaged the drainage pipe by puncturing it with a stake it used to brace its concrete floor. However, United Floor should not have anticipated that it was as shallow as it was. There was no reason for United Floor to be concerned that there would be a shallow pipe in the location where the damaged pipe was found. United Floor did not breach the standard of care.
Mabe submitted to the Court of Appeal that the trial judge failed to take into account the United Floor’s contractual duties in determining the standard of care; erred in his foreseeability analysis; and erred in failing to determine whether relevant industry practice was itself negligent and should not have been followed.
The Court of Appeal held that, although contractual duties may, in some circumstances, modify the standard of care that would otherwise apply, the trial judge’s findings precluded such a finding in this case. The contract required United Floor to notify First Gulf in writing if the subsurface conditions differed significantly from those specified in the contract. The trial judge found that United Floor should have been aware that a pipe ran underneath the floor, but he accepted expert evidence that the United Floor had no reason to foresee that the pipe would be at a shallow depth. As a result, the respondent’s duty to notify First Gulf under the contract did not arise.
The trial judge was held not to have erred in his foreseeability analysis. He accepted expert evidence offered by United Floor that there was no reason not to put a stake in the ground at the subject location. It was the plumber’s responsibility to alert First Gulf to the shallow depth of the pipe and First Gulf’s responsibility to notify United Floor. First Gulf failed to do so.
It was accepted by the Trial Judge that a flooring contractor would not have expected to have a pipe running through the subfloor at the position it was in. United Floor’s expert testified that drainage pipes would normally be set two to three feet into the subfloor, well below the reach of the 18 inch stakes used by United Floor. The trial judge rejected the Mabe’s expert evidence and found that there were no other factors that should have alerted United Floor to the possibility of puncturing a pipe.
The Court of Appeal held that, although it is clear that conformity with standard practice in an industry does not necessarily insulate a defendant from a finding of negligence, as the Supreme Court explained in Neuzen v. Korn, , a practice will be judged negligent “only where the practice does not conform with basic care which is easily understood by the ordinary person who has no particular expertise in the practices of the profession” – only where it is “fraught with danger”. Mabe’s expert provided the only evidence supporting the submission that industry practice was negligent in this case. But it was rejected by the trial judge, who preferred the evidence of United Floor’s experts in concluding that the United Floor had no obligation to do more than it did to determine the location of the drainage pipe. There was no basis for the Court of Appeal to interfere with the trial judge’s decision concerning the expert evidence and the weight to be attached to it.
The Ontario Court of Appeal clarified the concept of replacement cost property coverage in the recent decision of Carter v. Intact Insurance.
Property insurance policies generally provide for the basis of valuation, which is the manner in which a loss will be quantified. There are two common types of valuation in property policies: actual cash value and replacement cost.
Take, for instance, the case of a fire damaging a television that is four years old. A policy providing only actual cash value would take the cost of the television when it was new and apply a reduction (usually a percentage) for depreciation. Therefore, the policyholder would not receive enough money to buy a new television. If, on the other hand, the policy provided for replacement cost coverage, the policyholder would be entitled to the cost of a new television of the same type and quality as the damaged one.
Often, replacement cost coverage is available as an endorsement (an addition to the policy providing additional coverage) to a property policy. Moreover, policies often specify that the policyholder must replace or repair damaged property within a specified time frame, such as two years, in order to qualify for the replacement cost coverage, preventing people from profiting from the insurance. The insurer will generally pay the actual cash value of the damaged property and will then pay the further amounts owing for replacement cost once the property is replaced (assuming replacement cost coverage was purchased).
In the case of Carter v. Intact, the policyholder owned and insured a series of small apartment buildings on one property. A fire caused substantial damage to the buildings and the owners demolished and rebuilt everything. The issue, however, is that the new apartments were very different from the old ones. Originally, there were 15 residential units in small one, two and three storey buildings with a total of 51,000 square feet of floor space. The new condo building, however, was eight and a half storeys high, contained 129 residential units, and over 193,000 square feet of floor space.
The Court of Appeal determined that the policyholder was not entitled to replacement cost coverage, despite having the endorsement, as the building was not replaced with "like kind and quality", wording that is often used in connection with replacement cost coverage. Simply put, the policyholder replaced their property with something that was bigger and better. The Court noted that the building had not been "replaced" within the meaning of the policy.
In summary, when reviewing property policies, it is important to determine whether the basis for valuation is actual cash value or replacement cost. Even if replacement cost coverage is available, there might be certain requirements that need to be met in order to qualify for the coverage, such as making replacements within a given time period and replacing property with "like kind and quality".
The Ontario Superior Court of Justice has recently found that there is no time limit to elect to proceed with an appraisal pursuant to Section 148 of the Insurance Act.
Recall that Section 148 of the Insurance Act gives insurers and insureds the right to elect appraisal when there is a disagreement as to the value of the property insured, the value of the property saved, and the amount of the loss. In the practical course, a proof of loss is submitted. If quantum is disputed, either the Insurer or Insured can invoke the appraisal process in writing. Each party has seven days to appoint an appraiser. The two appraisers then appoint an umpire. An agreement by any two of the parties resolves the quantum dispute.
An often contentious issue is whether the elect to proceed with appraisal is time sensitive.
In 56 King Inc. v. Aviva Canada Inc., the Plaintiff sought payment of insurance funds from Aviva for the costs of repairing structural damage, accounting costs, and damages for bad faith and punitive damages, allegedly due to Aviva’s denial of the claim under the policy.
The structural damage was reported to Aviva on August 3, 2013 and coverage was denied on August 19, 2013. The Statement of Claim was issued on February 14, 2014 and the Statement of Defence was served on April 8, 2014. In August 2015, documentation in support of the Plaintiff’s claim for damages under the policy was received. By Request to Admit, dated January 7, 2016, Aviva agreed there was coverage under the policy.
By letter, dated January 25, 2016, Aviva elected to proceed with an appraisal.
The Plaintiff took the position that the appraisal process was not available to Aviva and refused to appoint an appraiser on its behalf. Aviva brought a motion for a declaration that the losses regarding structural damage and accounting were capable of being determined by appraisal. Aviva did not seek to have the claims related to bad faith and punitive damages determined by way of appraisal.
The main issue in 56 King was whether the appraisal process was not available due to the stage of the proceeding. Ultimately, Justice Lofchik held that the appraisal process remained available to Aviva.
In coming to his decision, he emphasized that the appraisal wording in the Insurance Act is mandatory – “those questions shall be determined by appraisal.” Section 148 reads as follows:
11. In the event of disagreement as to the value of the property insured, the property saved or the amount of the loss, those questions shall be determined by appraisal as provided under the Insurance Act before there can be any recovery under this contract whether the right to recover on the contract is disputed or not, and independently of all other questions. There shall be no right to an appraisal until a specific demand therefor is made in writing and until after proof of loss has been delivered.
Justice Lofchik did not find Aviva’s “undue delay” argument pursuant to the Rules of Civil Procedure compelling, commenting that the Rules have no application to the mandatory procedure mandated by the provisions of the Insurance Act and that the appraisal process must be continually available, despite the commencement of an action. Justice Lofchik highlighted that there was no timeline in either the relevant policy or the Insurance Act that stipulates a deadline for which an election for appraisal must be made.
Similarly, Justice Lofchik found no prejudice on the Plaintiff by having the value of the covered loss adjudicated by the appraisal process. He commented that, in his view, the appraisal process may enable a determination to be made more expeditiously and allows for selection of an umpire that is well-versed in the matter.
Justice Lofchik also found that the Plaintiff’s allegation related to bad faith and punitive damages did not bar the right to an appraisal. He noted that the thrust of the appraisal process is taken out of the jurisdiction of the Court, but the Plaintiff’s right to have the other issues tried at trial is not.
This decision flies in the face of prior decisions of the Court which dismissed Insurers’ requests for appraisal due to the requests being brought too late. (see 1633092 Ontario Ltd and Ouellette Estate v. North Waterloo Farmers Mutual Insurance Company)