In 2019 the Supreme Court of Canada declined to hear an Appeal out of Ontario involving a fire loss wherein the landlord’s insurer commenced a subrogated claim against a tenant notwithstanding that the lease agreement contained a covenant to Insure by the landlord.
In Royal Host GP Inc. v. 1842259 Ontario Ltd., 2018 ONCA 467, a fire broke out in a Sushi restaurant located inside a Thunder Bay Hotel. The Plaintiff’s insurer indemnified the Plaintiff and then commenced a subrogated action against the owners of the Sushi restaurant.
The case centered around the interpretation of a trilogy of Supreme Court of Canada cases released in the 1970s, Summer-Yonge Investments Ltd. v. Agnew-Surpass Shoe Stores Ltd. 2 S.C.R. 221, Pyrotech Products Ltd. v. Ross Southward Tire Ltd. 2 S.C.R. 35 (S.C.C.); and Smith v. T. Eaton Co. 2 S.C.R. 749, which have been relied on by subsequent Courts in dismissing subrogated claims by insurers in the context of commercial and residential tenancy situations where the lease contains a covenant by a Landlord to insure the premises.
The Ontario Court of Appeal described the principles arising out of the Trilogy succinctly as follows:
5 The Supreme Court set out two principles in the trilogy. The first is that 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 the damages due to its negligence. The rationale for the principle is that since the landlord is free to insure the premises, the inclusion of a covenant to insure must be for the benefit of the tenant. If the landlord’s insurer were allowed to bring subrogated claims against the tenant, the covenant “expressly running to the benefit of the tenant . . . would have no subject matter”: T. Eaton Co., at p. 754.
6 The second principle is that where the tenant pays for the insurance coverage, it should get the benefit of the insurance coverage. The logic is that the tenant having paid for the insurance should get the benefit of the insurance. As Laskin C. J. put it in Pyrotech Products Ltd., at p. 41, the tenant “has paid for an expected benefit, as between itself and its landlord which any standard fire policy would reflect in providing indemnity to the landlord”.
Since the release of the Trilogy, Insurance clauses have become more complex resulting in leases with basic insurance clauses and more complex cross insurance clauses.
However, the discreet issue in Royal Host was whether the tenant lost the benefit of the landlord’s covenant to insure as a result of qualifying language in the lease. In this case the insurance provision in the lease read as follows:
Section 7.02 Landlord’s Insurance — Mandatory
The Landlord shall take out and maintain, to the full replacement value, fire and other hazard insurance, as the Landlord in its sole discretion may deem advisable, on the Building, excluding any property thereon with respect to which the Tenant or other tenants are obliged to insure, and its own general liability insurance, including general liability insurance in respect of the Common Areas in an amount no less than $10,000,000.00 in respect of any injury to or death of one or more persons and loss or damage to the property of others, the costs of which shall be included in Common Expenses.
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.
Other provisions of the lease expressly addressed subrogation. The tenant argued that the failure to include the same wording in section 7.02 of the lease should be interpreted in its favour:
The Ontario Court of Appeal disagreed on the basis that the lease should be interpreted in favour of the landlord:
The Court of Appeal concluded that in normal circumstances a tenant is liable for its negligence. Therefore, the focus of the Court should be on whether the contractual provisions of the lease displace ordinary principles of negligence law. In this case, clause 7.02 was clear and unambiguous. The Court interpreted the lease to say that the tenant had the benefit of the landlord’s insurance, except where the tenant was negligent.
On February 21, 2019 the Supreme Court refused leave to appeal, and since that time there has been only one case considering the decision. In Paulin v. Keewatin Patricia District School Board, 2019 ONCA 286, the Ontario Court of Appeal confirmed that the scope of indemnity was based on the contractual terms of the lease:
Royal Host demonstrates the importance of reviewing lease agreements with attention paid to Insurance provisions and any qualifying language surrounding them. It highlights that the Insurance clauses, at least in Ontario, will be reviewed to the Insuring party’s favour.
It will be interesting to see how insurance clauses continue to evolve in the coming years in light of the Royal Host decision.