A Landlord’s insurer is not entitled to bring a subrogated claim against a tenant whose rent financed the insurance

A Landlord’s Insurer was not entitled to bring a subrogated claim against a Tenant to recover the amounts paid out on the Landlord’s claim following a fire caused by the Tenant’s negligence where the Tenant paid the Landlord’s insurance premium as additional rent under the lease.

Alberta Importers and Distributers (1993) Inc. v. Phoenix Marble Ltd., [2006] A.J. No. 1514, Alberta Court of Queen’s Bench, Clark J., November 30, 2006

The Landlord of an industrial warehouse structure entered into a commercial lease agreement with a Tenant. A fire started in the premises leased by the Tenant causing substantial damage to the building. The Tenant admitted negligence in the handling and storage of flammable chemicals. The Landlord carried insurance on the leased premises and passed the pro-rated cost of this insurance on to the Tenant. Much of the damage and loss resulting from the fire was covered by the Landlord’s insurance. The Landlord’s Insurers commenced an action against the Tenant.

The Court noted that it was a well-established principle that the question of whether or not a subrogated claim against a tenant can proceed is determined by the lease, and not by the insurance policies: see Ross Southward Tire Limited v. Pyrotech Products Limited, [1976] 2 S.C.R. 35. In Pyrotech, the majority of the Supreme Court of Canada decided that the subrogated Insurer was in the same position as the Landlord with respect to its rights to sue the Tenant. The decision is based upon the interpretation of the lease as to the allocation of risk between those two parties.

The Court set out the following principles extracted from the Supreme Court of Canada’s decision:

1)   Where a landlord covenants to insure, the tenant gains the benefit of that insurance unless there is an explanation to the contrary in the lease. If the covenant is not specific in describing the insurance, the court will consider what a standard policy covers. If the landlord obtains insurance beyond what is required by the lease, the tenant does not obtain the benefit of that extra insurance.

2)   Where a tenant covenants to pay for insurance to be purchased by the landlord and the landlord presents a bill to the tenant listing the amounts owing for insurance premiums and the tenant pays the bill, the tenant receives the benefit of whatever insurance policies the tenant reimbursed the landlord for, unless the lease should be taken as denying the tenant any benefits from those obligatory outlays.

In this case, the Court found that the Tenant had agreed to pay for insurance to be placed by the Landlord, including fire insurance. The Tenant was presented with a bill for the premiums and paid for the insurance pursuant to the lease. In these circumstances, the Court held that a subrogated claim against the Tenant could not proceed. The Court rejected the argument by the Landlord’s Insurers that the lease requirement that the Tenant obtain general liability coverage for the property including the Landlord as a named Insured on the policy altered the finding with respect to the allocation of risk as between the parties.

In the result, the subrogated action commenced by the Insurer of the Landlord was barred from proceeding.

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