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North Newton Warehouses - Subrogated Claims by Insurers in a Commercial Tenancy

In my blog entry of October 28, 2005 the general principles applicable to subrogated claims by insurers of a landlord against a tenant in a commercial tenancy were reviewed.

This issue arises in any fact situation where the tenant (or one of its employees or other persons for whom it is responsible) causes damage to the building containing the leased premises. The landlord will typically collect from its insurer. That insurer may want to subrogate (stand in the shoes of the landlord) and claim against the tenant on the basis of the tenant’s negligence. The terms of the lease will dictate whether or not the landlord’s insurer will be successful. The case of North Newton Warehouses Ltd. v. Alliance Woodcraft Manufacturing Inc. (2005) 37 R.P.R. (4^th) 93 (B.C.C.A.) is a recent example of a review of this issue.

Alliance Woodcraft was a tenant of North Newton in a warehouse in Surrey. On August 20, 2001, a fire caused substantial damage to the warehouse. North Newton alleged that Alliance Woodcraft or its employees negligently caused the fire. The action involved a subrogated claim brought by North Newton’s insurer against Alliance Woodcraft seeking to recover amounts it paid to North Newton for the damage caused by the fire. The British Columbia Court of Appeal held that the subrogated action could not proceed. In doing so, the court indicated the following:

1. the policy rule underpinning the proposition that an insurer cannot pursue a tenant for damages in circumstances such as those that existed in this case is based on the presumption 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;
2. there is something approaching a presumption in favour of a tenant benefiting from a landlord’s covenant to insure;
3. it would take very clear language in a lease to achieve a reversal of this presumption and allow the tenant to be pursued by the landlord’s insurer; and
4. the fact that no insurable interest was given to the tenant under the terms of the lease is not determinative. While such a lease provision would presumably preclude the tenant from ascertaining a claim for its own loss, it does not speak to the landlord’s losses.

The conclusion here is in contrast to the Manitoba case of Sooter Studies Ltd. v. 74963 Manitoba Ltd. (2005) 32 R.P.R. (4^th) 316 (Man. Q.B.) where the court held that the insurer’s claim could proceed because the lease did not contain an express provision that the tenant would not be liable for damage to the leased premises caused by its negligence and the lease did not have an express obligation of the landlord to insure (see the October 28, 2005 blog entry). It would seem to me in North Newton that the British Columbia Court of Appeal took a more businesslike approach. Clearly the expectation of a tenant who is contributing to the landlord’s insurance costs is that it will not be held responsible by that insurer (and in effect pay twice). The British Columbia Court of Appeal recognized this and, in its words, that “it makes little business sense for a landlord to covenant to insure and for tenant to pay the premiums if the tenant is not to derive some benefit from the insurance”.

Bill Rowlands

March 17, 2006 in Leasing | Permalink

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