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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 Debruge v. Arnold, the plaintiff appealed the decision of the trial judge on the defendant’s threshold motion. One of the grounds of appeal was whether the trial judge erred by granting the defendant’s threshold motion after receiving a jury verdict which implicitly concluded that the plaintiff’s injuries and claims exceeded the threshold. This appeal was dismissed on the basis that a jury’s verdict is only one factor that the trial judge may consider, but is not bound to consider, in coming to his or her ultimate conclusion regarding the threshold motion.
The defendant brought a cross-appeal on the issue of whether the trial judge erred by excluding the decision on the threshold motion from the costs analysis. The cross-appeal was granted, based on the reasoning of the Divisional Court in Saleh v. Nebel, in which the decision on the threshold motion should be taken into account when considering the issue of costs of the trial.
That is of course a subjective question and one that you won’t find an explicit answer for in the case of Konopka v. Traders. However, you will read about what is not considered to be reasonable conduct in the context of an OAP 1 policy breach. In Konopka, the elderly insured fell ill while driving to her cottage and permitted her unlicensed husband to drive her vehicle to a nearby parking lot where they intended to stop and rest until she felt better. Shortly after taking the wheel, the unlicensed husband caused an accident. There was no dispute that the insured was aware that her husband was unlicensed and as a result on the face of it she was in breach of the ‘authorized by law to drive’ provision in section 4(1) of the policy. The insurer denied coverage as a result.
The court noted that a breach of this nature was subject to a strict liability standard which required that the insured to establish that she took all reasonable steps to avoid the particular event. The reasonableness standard requires a consideration of the nature of the breach, what caused it and all of the surrounding circumstances that explain the act or omission. The court ultimately determined that it was not reasonable for the insured to allow her husband to drive. It is worth noting that the court relied in large part on the discovery transcript of the husband which betrayed a level of confusion and an inability to focus. The court ultimately concluded that the husband was someone ‘who simply cannot get his bearings’ and as a result it was not reasonable to allow him to drive, regardless of the circumstances.
This case is fact driven but provides a good counterpoint to the decision of Ontario’s Court of Appeal in Kozel v. Personal. In that case, the insured was also in breach of section 4(1) for driving while she was not authorized by law to drive. However, in that case the license suspension was the result of a failure to respond to a license renewal notice which was considered to be a ‘relatively minor breach’. In contrast, allowing an elderly individual who had an ‘inability to get his bearings’ and who had not driven in more than 20 years was something quite different and ultimately, not reasonable. https://bit.ly/2KoWLxQ