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Subrogated Claims by Insurers in Commercial Leases (Part III)
My blog entries of October 28, 2005 and August 29, 2006 discussed the ability of an insurer of a landlord to proceed against a tenant to recover from the tenant amounts paid out by the insurer under a claim by the landlord. This is referred to as a subrogated claim.
This issue is reviewed in Alberta Importers & Distributors (1993) Inc. v. Phoenix Marble Ltd. (2007) R.P.R. (4th) 217 (Alta. Q.B.).
Phoenix Marble was a tenant of 358296 Alberta Ltd. (the “Landlord”) in industrial premises. There was a fire that started in the premises of Phoenix Marble resulting in considerable loss and damage to the building. Phoenix Marble admitted negligence. The Landlord and other tenants brought an action against Phoenix Marble. The issue was whether or not the Landlord’s insurer was barred from pursuing a subrogated claim against Phoenix Marble for items covered by the insurance.
Typically, where a tenant pays its proportionate share of the landlord’s insurance, its expectation is probably that it would get the benefit of such insurance and not face a law suit from the insurance company that the premiums were paid to. It would be paying twice. Sometimes a lease will specifically deal with the situation and contain an obligation of the landlord to obtain a waiver of subrogation from its insurer or contain a release by the landlord to the tenant in those circumstances (which release would be binding on the landlord’s insurer as it can have no higher rights than the landlord).
However, not all leases deal specifically with the issue. In those situations the lease must be reviewed to determine the intention of the parties as to who assume the risk for any losses caused by fire or other insured perils caused by the tenant’s negligence. The factors that the courts have considered are as follows:
1. If the lease contains an obligation of the landlord to obtain fire insurance and an obligation of the tenant to pay for it (or its proportionate share), then giving the lease a reasonable and business sense reading results in the risk passing from the tenant to the landlord and the tenant being protected from a subrogated claim;
2. Where the tenant’s repair obligations in the lease do not expressly exclude matters which the landlord is intended to insure, this favours an interpretation whereby the tenant retained the risk and could be held responsible;
3. Where there is an express provision making the tenant responsible for damage that it causes through its negligence, this shows an intent for the tenant to retain the risk; and
4. Where the tenant’s insurance obligations include legal liability coverage for the full replacement cost of the leased premises, this indicates an intent that the tenant (and its insurer) should bear the risk.
In the case of Sooter Studios Ltd. v. 74963 Manitoba Ltd. (2006) 42 R.P.R. (4th) 196 the Manitoba Court of Appeal held that the insurer was not barred from bringing a subrogated claim against the tenant. The court had two main reasons. There was an express indemnification in the lease whereby the tenant agreed to indemnify the landlord from claims and losses suffered as a result of an act or omission by the tenant and, most importantly, there was an absence of an express covenant of the landlord to insure.
In the Phoenix Marble case the court did not agree with the analysis in Sooter Studio. The court indicated, with respect and relying on the previous case law including a trilogy of the Supreme Court of Canada, that the cases do not require a lease to express the intention that a tenant not be legally liable. Rather, the onus is reversed. For an insurer to proceed with a subrogated claim where the tenant is paying a share of the insurance premiums, the insurer must show that the lease expresses an intent that the tenant should be denied the benefit of its obligatory outlays of insurance premiums. The absence of a landlord’s covenant to insure or even the existence of indemnity clause was held not to express that needed intention.
Although the Phoenix Marble case is favorable for a tenant’s interpretation, the fact that the case law continues to go both ways confirms the importance, from the tenant’s perspective, of having the appropriate lease provisions so that the landlord’s insurer is restricted from making a subrogated claim.
March 6, 2007 in Leasing | Permalink
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