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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 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.