You have a fire loss at a commercial premise, and the insured’s tenant is clearly at fault for the same. Is there subrogation? Not so fast, preparing that demand or settlement brief may be premature as there may be language in the lease precluding subrogation against the tenant. In a trilogy of cases, the Supreme Court of Canada set forth the legal principles which may act to bar a subrogated claim in the context of a commercial tenancy. In Cummer-Yonge Investments Ltd. v. Agnew Surpass Shoe Stores Ltd., [1976] 2 S.C.R. 221 and Smith v. T. Eaton Co., [1978] 2 S.C.R. 749, the subject leases contained a covenant from the landlord to insure the property against loss from fire. The Supreme Court of Canada held that the covenant established that the landlord had intended to eliminate any right of action against the tenant. Since the insurer is in no better position than the insured as against the third party, the subrogated claim was dismissed. In Ross Southwood Tire Ltd. v. Pyrotech Products Ltd., [1976] 2 S.C.R. 35, the lease required the tenant to pay part of the cost of the property insurance secured by the landlord. The Supreme Court of Canada held that since the tenant contributed to the cost of the policy, the landlord and tenant were essentially joint insureds and the subrogated claim could not proceed.
The above cases demonstrate that it is critical to review the underlying lease prior to advancing the claim. Although the presence of a covenant to insure or contribute to insurance may result to bar the claim, the existence of the same only creates an inference of a waiver of subrogation which may be rebutted based on the wording contained in the other parts of the lease. For instance, the following factors may assist in a finding against a waiver:
– a mere agreement to insure versus an actual covenant to insure
– the loss may not have been a peril sought to be covered under the subject policy
– deductibles or self insured retentions may not be barred
– the requirement of a cross liability clause in the tenant’s liability policy
– an express versus an implied covenant
– the existence of an "entire agreement clause" in the lease
The above list is not exhaustive but illustrates that there are several factors which the Canadian courts may consider in determining whether a bar to subrogation exists. An early review of the lease ensures that time and costs are not needlessly expended on a clearly barred claim.
