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Subrogated Claims by Insurers in Commercial Leases (Part IV)
My blog entries of October 28, 2005, August 29, 2006 and March 6, 2007 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. That is referred to as a subrogated claim.
In Lincoln Canada Services LP v. First Gulf Design Build Inc. [2007] O.J. No. 4167 the court dealt with a very similar issue, though in this case it was claim by the tenant and there was no insurer involved.
Lincoln Canada Services LP (the “Tenant”) leased certain premises from First Gulf Design Build Inc. (the “Landlord”). A sprinkler leak occurred in the building and the Tenant suffered damages to its inventory and incurred repair costs in cleaning up the water. The amount of the damages were less than the deductible under the Tenant’s insurance policy so initially the Tenant had to absorb these costs. The Tenant then sued the Landlord to recover the costs.
The court reviewed the Lease and found as follows:
1. the Tenant was obligated to insure for various matters including damage to its property as a result of sprinkler leakage; and
2. the insurance of the Tenant was required to contain a “waiver of any subrogation rights which the Tenant’s insurers may have against the Landlord and those for whom the Landlord is in law responsible”.
The court found these provisions consistent with the principle arising from the leading cases in this area that the insuring party has, by agreeing to insure against a specific loss, relieved the other party from the risk of liability for the loss caused, even by negligence of such other party.
The Tenant made a couple of arguments to try and overcome this. First, it tried to argue that since this was an amount within the Tenant’s deductible, the above principle should not apply. The court did not agree. The court indicated that once a party has agreed to obtain insurance, the amount of that deductible is a matter between that party and its insurer and should not change the allocation of risk as between the parties (as such allocation or risk is set out in the lease).
The Tenant then made reference to various indemnity and
exculpatory (release) provisions in the Lease. While the court found these
somewhat difficult to reconcile, in the end the court held that the Landlord’s
indemnity to the Tenant would apply only to damage which the Tenant was not
required to insure and the indemnity did not change the result.
So the Lease terms relieved the Landlord from the risk of liability for damage caused to the Tenant’s property from sprinkler leaks (whether arising from the Landlord’s negligence or otherwise) and brought that risk under the insurance coverage to be maintained by the Tenant. That allocation of risk applied whether or not the amount of the loss was within the deductible amount.
February 26, 2008 in Leasing | Permalink
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