Landlord Assumes Risk of Loss if Contracted to Obtain Property Insurance

The Supreme Court of Canada had, in a trilogy of cases (Agnew-Surpass Shoe Stores Ltd v. Cummer-Yonge Investments Ltd., [1976] 2 SCR 221, Ross Southward Tire Ltd. v. Pyrotech Products Ltd., [1976] 2 SCR 35, Eaton (T.) Co. Ltd. v. Smith, [1978] 2 SCR 749), established that where a landlord covenanted to secure insurance from which the tenant was intended to benefit, that landlord and its insurer (if any) cannot then claim against the tenant for losses even if they are alleged to have been caused by that tenant’s negligence.

In a recent decision, Giddings Holdings Ltd. v. High, 2014 BCSC 1658, the B.C. Court further affirmed the trilogy’s ratio. What is significant about the case is that the judge added strength to this long-standing subrogation bar under a unique set of factual circumstances.

In Giddings, the landlord sought to recover against two tenants of commercial premises, which was damaged by fire. The lease agreements required the tenants to pay rent and expressly included an amount for “building insurance”. None of the parties obtained and maintained insurance against fire. Moreover, one of the tenants’ rent payments were not in good standing on the date of the fire.

Justice Crawford found that reference in the lease to “building insurance” was sufficient to ground a finding that the landlord covenanted to secure insurance for the property against risk of fire. This means any ambiguity on what “building insurance” entailed (that is, liability as opposed to property or both) lies at the feet of the landlord.

Consistent with prior authorities, the bar to recovery applies even though the landlord, in fact, failed to obtain and maintain coverage.

Justice Crawford also held that while both the landlord and the tenant breached the lease (landlord for not insuring the property, tenant for not paying rent owed in full), the landlord’ covenant to insure prevailed, because it would be inequitable to deny that benefit, particularly given that the landlord did not, at any time before the fire, act upon its lawful rights to sue for possession and to terminate the lease with the defaulting tenant. Rather, the Landlord accepted a late payment of rent shortly before the fire.

Giddings is an affirmation of the trilogy ruling. The risk of loss to the building transfers to Landlords who covenant to insure by requiring tenants to contribute toward insurance premiums even if no insurance was actually taken out.

Prepared by former WT associate, Lori Leung.