Insurance Covenants: Paying For Insurance is No Guarantee of Tort Immunity


Edited by Samantha Ip

The Ontario Court of Appeal has made a clear statement on an insurer’s right to make a subrogated claim in the context of insurance covenants typically found in commercial leases.  As between a landlord and tenant, it will be the terms of the lease, and not the terms of the insurance policy, that will determine whether a subrogated action can be brought in the name of the indemnified insured against the party who paid for the insurance.

In the recent decision of Royal Host GP Inc. v. 1842259 Ontario Ltd., 2018 ONCA 467, the Ontario Court of Appeal determined whether a commercial lease barred the landlord’s insurer from bringing a subrogated claim in the name of the landlord against the tenant.

The tenant operated a restaurant in a multi-unit commercial building owned by the landlord.  There was a fire in the kitchen of the restaurant that caused extensive damage to the building.  The landlord was indemnified for its losses by its property insurer and the insurer then commenced a subrogated action against the tenant to recover the damages on the basis that the fire was caused by the tenant’s negligence.

As with many commercial leases, this lease required the landlord to take out and maintain fire insurance on the building, and the costs of this property insurance was charged back to the tenant as common expenses paid by the tenant.  By paying for the property insurance, the tenant usually receives the benefit of a waiver of subrogation.  However, this lease also contained an exclusion clause that stated the tenant was not relieved of any liability arising from or contributed to by, among other things, its negligence.  This latter term appeared to contradict the usual benefit of the insurance covenant in the lease.

Does the property insurer have a right of subrogation in light of the exclusion clause?

The lower court interpreted a trilogy of Supreme Court of Canada cases addressing the right of subrogation in the context of insurance covenants:  Agnew-Surpass v. Cummer-Yonge, [1976] 2 S.C.R. 221; Ross Southward Tire v. Pyrotech Products, [1976] 2 S.C.R. 35; and T. Eaton Co. v. Smith et al., [1978] 2 S.C.R. 749 (collectively, the “Trilogy”).  The Court focused on two principles from the Trilogy:

  1. a landlord’s covenant in a lease to insure the premises is a contractual benefit for the tenant and the tenant would receive no benefit if the landlord could sue the tenant for damages due to its negligence; and
  2. where the tenant pays for the insurance coverage, it should get the benefit of the insurance coverage.

In line with the principles set by the Trilogy, the lower court in Royal Host held that the lease intended the insurance to be a benefit for the tenant and that to allow subrogated claim would be contrary to the parties’ intentions in the lease.  The court interpreted the exclusion clause to mean that the tenant was not relieved of any liability to third parties for its negligence, but that the principles from the Trilogy otherwise applied and the tenant was relieved of liability for its negligence from the landlord.

This decision was appealed by the landlord.

The Court of Appeal found the lower court judge had erred in his interpretation of the trilogy of cases and found that the conclusions in each case flowed from and reflected the particular provisions of the leases at issue in those cases.  The Court of Appeal found that, if read on its own, the first part of the clause in the lease at issue that stated the landlord was to take out and maintain insurance and that the costs were to be treated as a common expense would have been sufficient to prevent the subrogated action under the trilogy of cases.  However, the exclusion clause provided that the tenant was to remain liable for its own negligence in spite of the landlord’s covenant to obtain insurance and the tenant’s contribution to that cost.

The Court of Appeal considered the entirety of the lease to determine whether the entire content dictated a different result on their interpretation and determined that it did not.  The landlord’s subrogated claim was allowed to proceed.

This case is an important reminder that the terms of a lease with an insurance covenant will generally benefit the beneficiary of the clause – the party paying for the insurance pursuant to the lease.  However, such waiver of subrogation is always subject to the overall terms of the lease and the court’s interpretation of the intention of the contracting parties.