Clark Wilson LLP Insurance Bulletin
Case Law Review Archive
B.C. Court of Appeal Quashes Subrogated Action – Claim Against Tenant Barred By Insurance Covenants
On August 20, 2001, a fire occurred in a warehouse complex in Surrey,
B.C., resulting in substantial damage to the building and its contents.
The building was owned by North Newton Warehouses. Having paid
the loss, North Newton’s insurer sued one its tenants, Alliance Woodcraft,
for alleged negligence in causing the fire. In its defence, Alliance relied,
among other grounds, on provisions in the lease pursuant to which North
Newton covenanted to insure the building and Alliance paid the premiums.
Earlier today, the British Columbia Court of Appeal released Reasons
quashing that subrogated action. The significance of the Court's
Reasons are threefold.
First, the Court of Appeal held that, even without the tenant's covenant
to pay its share of the premiums, a landlord's covenant to insure
essentially creates a presumption of tort immunity/implied waiver of
subrogation.
Second, the Court stated that such presumption will only be displaced
by clear language to the contrary.
Finally, the Court comprehensively reviewed both the lease and prior
caselaw, and effectively created a checklist of clauses which, it held,
do not displace such defence to subrogated claims regarding leased
premises.
- Presumption Of Tort Immunty/Implied Waiver of Subrogation
In clause 8.3(a) of the lease, North Newton covenanted to insure
the building, as follows:
"The Landlord shall, during the Term and any renewal thereof,
take out and maintain in full force and effect insurance against
all risks of physical loss or damage to the Building..."
In clause 4.1(b), Alliance covenanted to pay its proportionate share
of the premiums, as "additional rent".
Insurance covenants such as these were considered in a trology
of decisions by the Supreme Court of Canada, in the late 1970s:
Ross Southward Tire v. Pyrotech Products, Agnew-Surpass Shoe
Stores v. Cummer-Yonge Investments, and T. Eaton Company v.
Smith.
Regarding Alliance's covenant to pay its share of North Newton's
insurance premiums, Hall J.A. stated as follows:
"It seems to me that, as Laskin C.J.C. observed in the Ross
Southward case..., a tenant who has paid for an expected
advantage as between itself and its landlord should benefit
from those payments, and loss issues thereafter are between
the landlord and its insurer. In such circumstances, to allow
the insurer of North Newton to pursue its subrogated action
against Alliance would render nugatory benefits accruing to
the tenant under the covenant of the landlord to insure."
Perhaps more significant, however, are Justice Hall's comments with
respect to the landlord's covenant to insure the premises, as follows:
"Ultimately, the policy rule underpinning the proposition that
the insurer cannot pursue a tenant for damages in circumstances
such as those present in the instant case is based on the
proposition that it makes little business sense for a landlord
to covenant to insure and for a tenant to pay the premiums
if the tenant is not to derive some benefit from the insurance.
One might properly say that there is something approaching a
presumption in favour of a tenant benefiting from a landlord's
covenant to insure. That is the legal principle that I take to be
established from the trilogy of cases decided by the Supreme
Court of Canada."
In other words, even absent the tenant's covenant to pay premiums,
a landlord's covenant to insure, in and of itself, will constitute a prima
facie defence to claims by the landord, against a tenant - whether
subrogated or not - for loss or damage to the premises.
- Only Clear Language Will Displace Presumption
Further, Justice Hall went on to state that,
"If a different result is to obtain, it seems to me that quite
clear language would be requisite in a lease to achieve such
a result. In my opinion, the instant Lease does not contain
such language."
- Checklist of Common Clauses Which Do Not Displace Presumption
Further, the Court held that none of the clauses cited by the landlord,
which are commonly found in leases, are sufficiently clear to displace
such presumption. At trial, and in the Court of Appeal, North Newton
relied on the following clauses.
Clause 8.3(d) provided that no insurable interest shall be conferred
upon the tenant under the landlord's policy of insurance. Justice Hall
followed the Ontario Court of Appeal in Amexon Realty v. Comcheq
Services, which held that,
"While this provision would presumably preclude the tenant
from asserting a claim for his own loss under that policy, it
does not speak to the claim asserted by the [landlord] in this
case."
Clause 8.3(a) provided that the insurance of the landlord shall not
cover any of the tenant's property. Justice Hall reasoned that this
"does not appear... to have much relevance... This case is concerned
with camage to the building."
Persuant to clause 8.1(a)(iv), the tenant covenanted to obtain liability
insurance for all risks, up to the replacement cost of the building. In this
regard, Justice Hall stated:
"I agree with the submission of Alliance that the insurance
required by this particular clause should be held to have a
different purpose than the insurance coverage North Newton
covenanted to obtain because it indemnifies for a negligence
claim against Alliance by third parties, which could include
North Newton, and it only insures Alliance. In my opinion,
this additional insurance Alliance covenanted to obtain under
clause 8.1(a) does not affect North Newton's covenant to
insure and the resultant benefits flowing to the tenant appellant
pursuant to such covenant."
Finally, the landlord's insurer relied upon clause 4.7, which structures the
lease as a net lease. in this regard, Justice Hall stated:
"In my view, the cost of repairing damage by fire is not in the
nature of "costs, expenses, and obligations of any kind" a tenant
would be expected to cover under a net lease like the one in this
case, and in any event the principles requiring a clear statement
to displace the responsibility of a landlord via its insurer for
damages where the landlord covenants to insure should govern."
As pointed out in Alliance's Factum, although not mentioned in the
Reasons, a precedent clause which clearly displaces a tenant's
defence of tort immunity/implied waiver of subrogation does exist. It
is found in a leading Canadian textbook on leases and their drafting.
In its oral submissions, Alliance requested that the Court of Appeal
provide reasons sufficiently comprehensive to provide future guidance,
in similar situations, to insurance counsel, real estate solicitors and
landords and tenants alike. Justice Hall appears to have done just that.
His Reasons in North Newton Warehouses and Alliance Woodcraft
Manufacturing can be found on the B.C. Courts website.
Counsel for the insurers of Alliance, the successful Appellant, were
Neo Tuytel (604-643-3180; njt@cwilson.com) and Jon Hodes
(604-643-3168; jlh@cwilson.com) of Clark Wilson LLP. Covenants to
insure and implied waivers of subrogation are discussed, in detail,
in a paper by Nigel Kent (604-643-3135; npk@cwilson.com), titled
"Tort Immunity: Covenants to Insure and Waivers of Subrogation".
Feel free to contact Messrs. Tuytel, Hodes or Kent with any questions
or comments you might have on this or any other areas of insurance law.
