Recent Ontario Decision Permitting Subrogation Claim By Tenant Against Landlord

 A recent decision by the Ontario Superior Court of Justice serves as a reminder of how contractual language in lease agreements may permit recovery against a negligent party in subrogated claims. In Designer Collection Sales Inc. v. 161 Spadina Inc., (decided May 8, 2012) a frozen water pipe burst in an unoccupied upstairs unit of a property located in Toronto. Water flowed down to lower floors, ruining the tenant’s stock in trade. The tenant recovered damages under its property insurance policy and its insurer pursued a subrogation claim against the landlord for its failure to maintain the pipe that burst. The landlord argued that it could not be liable to the tenant, relying on lease language that the landlord was “not liable for any damage to the tenant’s property or for any injury to any person in or coming to or from the premises,” and language that required the tenant to “maintain public liability insurance.”

The Court in Designer Collection Sales agreed with the insurer for the tenant that a close reading of the lease terms was required before a right to subrogation would be foreclosed. There, the wording of the lease in question was not sufficiently clear to insulate the landlord from liability. In arriving at this conclusion, the Court distinguished between liability insurance and property insurance and noted that the lease only required the tenant to obtain liability insurance to protect the landlord. Although insurance for property losses was obtained by the tenant, the Court reasoned that this was not required under the lease agreement. For the above reasons, the landlord’s motion for summary judgment was dismissed by the Court and the subrogation claim was allowed to proceed.

The lesson of Designer Collection Sales is that each lease must be carefully analyzed to determine whether subrogation may be pursued against the negligent party, regardless of whether that party is the landlord or the tenant. 

** Doug would like to thank Francois Lesieur for his assistance in writing this blog post.

Ontario Court Clarifies Carriage of Action Disputes

In Zurich v. Ison T.H. Auto Sales, 2011 ONSC 1870, the Ontario Superior Court of Justice was faced with a dispute between an insurer and insured over who had control over a recovery action. The loss arose from an explosion and fire that occurred at an apartment building. The insured, an automobile dealer, was storing 71 new cars in rented space in the underground parking lot of the building. The cars were damaged and could not be sold as new. The insured made a claim under its policy and was paid approximately $1.9 million. This represented the factory invoice price of the vehicles, less a deductible of $10,000. The insurer was subsequently able to recover about $900,000 in salvage for the cars, so it had a net subrogated claim of about $1 million. In addition, the insured claimed that it had suffered a loss of profits as a result of the damage to the cars – namely, the difference between the manufacturer’s price and the price at which the vehicles could be sold to customers. As well, the insured lost the ability to service the 71 new automobiles and the opportunity to resell trade-ins on those vehicles. It also claimed a loss of goodwill. The insured then commenced an action and included the insurer's subrogated portion. The insurer did not commence its own action. Shortly prior to discoveries commencing in the insured's action, the insurer appointed its own lawyers and asked to be added as counsel of record. The insured denied this request, and the insurer then brought an application seeking carriage and control over the action.

The Court examined the subrogation clause in the policy, which stated the insurer’s subrogation right arose on making any payment or on assuming liability to make payment. The insurer argued that the clause overrode the common law rule that the insurer does not have control over the action until the insured has been fully indemnified. The Court agreed that the clause altered the common law by allowing the insurer to subrogate prior to fully paying the loss, and permitted the insurer to share the amount recovered with the insured, on a pro rata basis, where there has been less than a full recovery. However, the clause was silent on who had control over the action. There was no reason to imply a provision giving the insurer the right of control in order to give business efficacy to the contract. Further, the effect of the clause, including the right of the insurer to share proportionately in recoveries, coupled with the duty of good faith, required the insured, although in control of the litigation, to consider the insurer’s interests, to keep the insurer informed concerning the status of the litigation and concerning major issues in the litigation, and to consult with the insurer with respect to the prosecution of the litigation. Thus, the Court ruled in favour of the insured and dismissed the application. Of note, the Court also considered the fact that the insured had been diligent in advancing the claim, the action was well advanced, the insurer had waited a year and half before discussing subrogation with the insured, and the lack of any prejudice by leaving carriage with the insured. However, the Court did state that there may be cases where the insurer’s interest is so vastly disproportionate to the insured’s interest that it would be unreasonable to allow the latter to have control of the litigation (this did not apply in the present case as the insured's claim was $700K and the insurer's claim was $1M).

Zurich v. Ison T.H. Auto Sales clarifies the impact of subrogation wording commonly used by insurers and thought, based on obiter dicta by the Supreme Court of Canada, to afford the insurer control over an action prior to full indemnity by the insured. In the wake of Zurich v. Ison T.H. Auto Sales, insurers should be diligent in appointing subrogation counsel at the earliest opportunity. This will allow the parties the opportunity to enter into joint recovery agreements, and at a minimum document at an early stage the insurer's desire to pursue its subrogated claim. Thought should also be given by underwriters to expressly provide for the insurer's control over subrogation in cases of partial indemnity, as it is clear the Court is unwilling to imply such a right.