Court Dismisses Uninsured Claim on Basis of Waiver of Subrogation Clause in Lease

In Lincoln Canada Services LP v. First Gulf Design Build Inc., Madam Justice Barbara Ann Conway dealt with an interesting subrogation issue that arose in a dispute between landlord and tenant. One of the things that makes it interesting is that there was no insurer involved.

The tenant, Lincoln Canada, suffered damage as a result of a sprinkler leak in premises that it leased from First Gulf Design Build Inc. Its losses totalled $72,153.17, which was less than the deductible under its insurance policy. So, in other words, Lincoln had to absorb these costs itself. It sued First Gulf in breach of contract and negligence.

The landlord, First Gulf, moved under Rule 21 before Justice Conway, seeking dismissal of the action. It relied upon a “waiver of subrogation” provision in the lease. Justice Conway accepted the landlord’s argument and dismissed the action.

Rule 7.01 of the lease contained provisions with respect to the tenant’s insurance obligations and, in subparagraph 7.01(b)(i), there was a waiver of subrogation rights. Justice Conway summarized the provisions as follows (the “subrogation bar” is highlighted):

(a) Section 7.01(a)(i) requires the Tenant to maintain “fire and standard extended perils insurance coverage, including sprinkler leakages…” for the full replacement cost of all improvements, equipment and chattels in or serving the leased premises or for which the Tenant is legally liable.

(b) The insurance is to be taken out in the name of the Tenant and the Landlord. (First Gulf argues that this protects both parties if any loss arises, whether or not as a result of the Landlord’s negligence.)

(c) Section 7.01(b)(i) requires that the policy 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, whether the damage is caused by the act, omission or negligence of the Landlord or those for whom the Landlord is in law responsible” (the “Subrogation Bar”).

(d) The Tenant’s insurance policy must be taken out with insurers and in a form reasonably satisfactory to the Landlord (Section 7.01(b)(ii)).

The tenant, Lincoln, took the position that the subrogation bar did not apply because the entire claim, in this case, was uninsured.

Justice Conway referred to a rather venerable trilogy of cases, (Cummer-Yonge Investments Ltd. v. Agnew Surplus Shoe Stores Ltd., [1976] 2 S.C.R. 211, 55 D.L.R. (3d) 676; Ross Southward Tire Ltd. v. Pyrotech Products Ltd., [1975] S.C.R. 35, 57 D.L.R. (3d) 248; and T. Eaton Co. Ltd. v. Smith, [1978] 2 S.C.R. 749, 92 D.L.R. (3d) 425), all of which dealt with waiver of subrogation in the landlord-tenant context. After reviewing the authorities, Her Honour extracted the following principle:

[T]he insuring party has, by agreeing to insure against a specific loss for which the other party would otherwise be liable in negligence, relieved the other party from the risk of liability for the loss caused by its own negligence. The insuring party must deal with its own insurer for the loss.

 

On this basis, Conway J. was satisfied that the parties to this lease had agreed to relieve the landlord from the risk of liability for sprinkler leaks arising from its negligence.

Conway J. then turned to the issue of whether the fact that the claim was entirely within Lincoln’s deductible altered the result. She held that it did not. In doing so, she accepted First Gulf’s argument that an insurance policy’s deductible is “a matter between the party and its insurer and should not change the allocation of risk as between the parties to the lease. Many factors affect the amount of the deductible and the other party should not be in a position of having its exposure fluctuate depending on the size of the deductible.”

Finally, Lincoln made an argument that we have encountered before. It contended that an indemnity provision in the lease, whereby the landlord agreed to indemnify the tenant against loss caused by its negligence, superseded the insurance provision and the subrogation bar. While Justice Conway said that it was “difficult to reconcile all of these clauses in a meaningful way”, it was not impossible. She reasoned that the indemnity provision would apply only to damage for which the tenant was not required, by the terms of the lease, to obtain insurance.

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