Insurance Provisions in Lease Held Not To Preclude Action by Lessor Against Lessee

UPDATE: At the end of 2012, the Court of Appeal allowed (in part) an appeal from this decision. The brief reasons are here. The Court said that “the applicable jurisprudence is unsettled”. It went on to conclude the following:

Based on the record before us and the state of the jurisprudence, it is not plain and obvious whether the lease contained a covenant to insure for the loss claimed by the respondent. Accordingly, paragraph 1 of the judgment, which addresses this issue, is set aside without prejudice to the parties to advance their respective positions at trial.

It reversed Justice Métivier’s finding, that the lease did not contain an express or implied covenant to insure. However, it agreed that the action should be permitted to proceed.

This is a disappointing and unhelpful decision. Isn’t the clarification of unsettled jurisprudence one of the important functions of the Court of Appeal? And what additional information is likely to emerge at trial that will shed light on the meaning of the lease between the parties in this case?

My original post follows.

In Cain v. 1150320 Ontario Inc. (The Antique Shoppe), 2012 ONSC 3018 (CanLII), Madam Justice Monique Métivier dealt with the recurring question of whether insurance provisions in a lease preclude suit by the landlord against the tenant for damage to the landlord’s property.

Here, an above-ground oil tank belonging to the tenant leaked and the landlord sued for damages. The tenant moved under Rule 21 for dismissal of the action on the basis that the insurance provisions in the lease resulted in the landlord having waived the right to sue.

Justice Métivier summarized the requirements in such cases as follows:

To escape liability, the tenant must show either:

(1) clear wording in the lease of a covenant on the part of the landlord to insure against the specific peril; or;

(2) that the tenant is responsible for the payment of the insurance premiums for coverage for the specific peril, and is therefore entitled to the benefit of the insurance for which it paid.

Here, Her Honour held that the tenant had failed to establish either of the two.

With respect to the former, Justice Métivier elaborated:

[19] That principle is grounded in the fact that the covenant to insure by the landlord is a contractual benefit for the tenant. It is an assumption of risk by the landlord of the risk of loss or damage caused by the peril to be insured against. This is so no matter how the peril is caused, even if by negligence.

[20] In the absence of facts where specific losses are set out in the covenant to insure, ordinarily a tenant is responsible for damages caused by its own negligence. [Emphasis in original]

Here, the lease said, “[t]he LESSOR shall be responsible for realty taxes, garbage removal, building insurance.” Justice Métivier held that the provision lacked the “clarity and certainty” found in other cases where an action by the landlord was found to be barred. The shortcoming seemed to be, that it was not clear that the “building insurance” that the landlord was “responsible for” included coverage for damage resulting from oil spills.

If reference in the lease to “building insurance” was not adequate to preclude suit by the landlord, what language would have sufficed? Would it have been necessary that the lease specify every peril that the insurance was meant to cover (even though insurance policies typically do not do so)? Or would wording such as “fire and extended perils” have been adequate? Would there have had to be evidence as to what “extended perils” are ordinarily covered?

Her Honour disposed of the second ground in two sentences: “While this lease provides for a possibility that the tenant would have to pay for additional insurance premiums, there is no evidence that ever happened. A mere obligation is not sufficient to establish a covenant.”

The applicable provision in the lease, dealing with payment by the tenant of some portion of the landlord’s insurance premiums, was indeed a little speculative. Normally, commercial leases oblige the tenant to contribute to payment of the landlord’s insurance premiums in the form of additional rent. In this case, the applicable provision only imposed a contingent obligation on the tenant, to reimburse the landlord for such increased insurance premiums as might result from the tenant’s activities:

The Lessee covenants with the said Lessor that his said business to be so carried on in the said building will not be of such a nature as to increase the insurance risk on the said premises or cause the Lessor to pay an increased rate of insurance premiums on the said premises by reason thereof and it is distinctly understood that in case said business so carried on by the Lessee is or becomes of such a nature to increase the insurance risk or cause the lessor and/or other occupants of the said building to pay an increased rate of insurance premiums, that the Lessee will from time to time pay to the Lessor the increased amount of insurance premiums and which the said Lessee and other occupants of the said building have to pay in consequence thereof; provided that the Lessee covenants that he will not carry on or permit to be carried on any business in the said building which may make void or voidable any insurance held by the Lessor or the other occupants of the said building.

It seems to me that Justice Métivier’s statement that “[a] mere obligation [to contribute to or pay the landlord’s insurance premiums] is not sufficient to establish a covenant” goes a little too far, at least as a general proposition. Various Court of Appeal decisions indicate that a mere obligation is sufficient.

For example, in 1044589 Ontario Inc. (Nantucket Business Centre) v. AB Autorama Ltd., 2009 ONCA 654 (CanLII), the Court of Appeal said, “the Tenant’s obligation under para. 1 of the Offer to Lease to contribute to the cost of insurance has the effect of allocating the risk of fire loss to the Landlord.”

And in Tony and Jim’s Holdings Ltd. v. Silva, 1999 CanLII 969 (ON CA), it was stated that “[i]t is well established that the risk of loss by fire passed to the landlord under the provision of the lease respecting payment of insurance rates by the tenant.”

In none of the cases, to my knowledge, has there been found to be an obligation to adduce evidence that the tenant actually paid the insurance premiums: the covenant to do so is sufficient.

However, as noted above, the covenant in this case was only a contingent one, to pay the landlord’s insurance premiums in certain circumstances. Those circumstances might never occur. So, given the very limited covenant in this lease, it seems reasonable to require evidence that the contingency had happened. Justice Métivier’s description of the requirement in paragraph 21 of her reasons, suggests that it is only because of the facts of this case that she felt that “a mere obligation” was not sufficient.

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