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Landlord and Tenant (Commercial) - Insurance. James Dick Construction Limited v. Courtice Auto Wreckers Limited
In James Dick Construction Limited v. Courtice Auto Wreckers Limited (Ont CA, 2024) the Ontario Court of Appeal dismissed an appeal, here from a trial dismissal of a fire damage action by the LL plaintiff involving both the landlord's and the tenant's duties to insure.
Here court addresses contractual (lease) interpretation issues regarding the duty to insure and resultant party liability:(1) Standard of Review
[23] At issue in this appeal is whether the trial judge adopted the correct legal test to interpret the landlord JDC’s covenant to insure the leased buildings. Additionally, the covenant to insure is drafted using language that is standard form in commercial tenancy agreements. Accordingly, the review of the trial judge’s interpretation of the clause comes within the Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, exception, making that issue reviewable on a standard of correctness: Royal Host GP Inc. v. 1842259 Ontario Ltd., 2018 ONCA 467, 422 D.L.R. (4th) 661, at paras. 12-13, leave to appeal refused, [2018] S.C.C.A. No. 316. If the trial judge adopted the correct test, then her application of it to these facts is a question of mixed fact and law that is reviewed using the standard of palpable and overriding error: Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37, [2016] 2 S.C.R. 23, at para. 21.
(2) Interpreting the contract - the covenant to insure
[24] Contractual interpretation is a matter of ascertaining the rights and obligations the parties agreed to undertake. In understanding what parties intended when including a covenant to insure in a lease agreement, as with any contractual covenant, “it is necessary to discern the intentions of the parties in accordance with the language they have agreed to in the contract”: Royal Host, at para. 16; Sanofi Pasteur Limited v. UPS SCS, Inc., 2015 ONCA 88, 124 O.R. (3d) 81, at para. 48, leave to appeal refused, [2015] S.C.C.A. No. 152.
[25] Reflecting on more than 50 years of jurisprudence interpreting covenants to insure, this court noted in Capital Sewer Servicing Inc. v. Crosslinx Transit Solutions Constructors, 2022 ONCA 10, 30 C.L.R. (5th) 249, at para. 26, that “[i]n many, if not most circumstances, a promise to insure against a certain risk will lead to the logical conclusion that the party undertaking to insure against the risk had agreed to be responsible for any damages should the risk ensue.” But “that inference can only properly be drawn after a reading of the contract as a whole in the factual context of the particular circumstances”: Crosslinx, at para. 26. This court repeated the holding from Royal Host, that “there is no legal rule that a party’s covenant to insure against a risk must mean it was intended that the party undertaking to insure assumed the risk of the harm insured against”: Crosslinx, at para. 26, citing Royal Host, at para. 16.
[26] In this case, alongside a survey of the relevant Supreme Court jurisprudence interpreting the effect of covenants to insure, the trial judge quoted a passage from Madison Developments, at p. 84, that stated in part that “[a] contractual undertaking by the one party to secure property insurance operates in effect as an assumption by that party of the risk of loss or damage caused by the peril to be insured against.” Drawing from this passage, the trial judge concluded that: “[w]hile the presence of a covenant to insure is not an absolute bar to claims by the covenantor against the covenantee, the covenant does have presumptive effect unless the covenantor is able to establish something specific that displaces it.”
[27] The focal point of the appellants’ argument is that Crosslinx, which had not been decided at the time of trial, constitutes a change in the law respecting the meaning of covenants to insure, a change which has flowed from more general developments in the law of contractual interpretation from cases such as Sattva. The appellants argue that the trial judge erred by treating the existence of the covenant to insure like a ‘decoder ring’ that translates that obligation directly to an obligation to assume the risk of the peril insured against, without any further consideration of what the other textual provisions of the agreement or contextual circumstances may have to say about the matter.
[28] The appellants argue that the trial judge, in effect, stopped reasoning once she read the covenant to insure, and then placed an onus on the landlord to disprove that the intention of the parties was that the landlord carry the risk of loss by fire. What the trial judge ought to have done, the appellants argue, is read the agreement as a whole – relating all of the relevant clauses to each other – along with the surrounding circumstances, and only then come to a conclusion about how the parties agreed to allocate risk.
[29] I do not agree that the trial judge made the error complained of. The trial judge framed the analysis of the “the effect of the covenant to insure” as “ultimately a matter of contractual interpretation that will be sensitive to the particular language of the agreement and the surrounding circumstances.” The appellants agree with this statement of the law. The trial judge continued: “[i]n general, a covenant to insure will represent an intention by the parties to allocate the risk of the peril insured against to the covenantor.” Again, this is unobjectionable. It describes what parties to this type of contract usually intend to accomplish when they use this type of clause. Finally, the trial judge noted that “[i]t is recognized that this is a presumption that may be rebutted by evidence of some other intention”, a statement drawing on Deslaurier Custom Cabinets Inc. v. 1728106 Ontario Inc., 2016 ONCA 246, 130 O.R. (3d) 418, and stated:While the presence of a covenant to insure is not an absolute bar to claims by the covenantor against the covenantee, the covenant does have presumptive effect unless the covenantor is able to establish something specific that displaces it. [30] There is reason to avoid the language of presumption used by the trial judge; although this language has been used by this court in several decisions, including Deslaurier, it carries a connotation of an exclusionary rule that is not intended. But what is genuinely at issue in this appeal is not the terminology used in the case law but the reasoning process of the trial judge. When one attends to the 12 paragraphs the trial judge devotes to the interpretation of the clause in the context of the agreement as a whole, it is abundantly clear that the trial judge was not approaching the interpretation of the contract as though she were applying an exclusionary rule. She was attentive to the text of the clause, the broader text of the contract as a whole, and the factual context in which the agreement was made. Her focus throughout was on ascertaining what agreement the parties actually reached. To be sure, she treated the covenant to insure as a significant datum in ascertaining how the parties had allocated risk between themselves, which it was. She did not, however, treat it as determinative in isolation from the rest of the contract and therefore did not apply an incorrect principle.
[31] Any substantive difference between what the trial judge – following Cronk J.A. in Deslaurier – refers to as a presumptive interpretation, and what Doherty J.A. refers to in Crosslinx as “the logical conclusion” of the choice to include a covenant to insure would have to be exceedingly subtle. Neither embrace what Crosslinx was at pains to reject: that there is a rule of law that a covenant to insure indefeasibly allocates risk.
[32] The live issue, then, is not so much that the trial judge made an extricable error of law, which she did not, but whether she made an error in how she applied the law to the facts. That question is assessed using the standard of palpable and overriding error.
[33] The appellants argue that the trial judge erred in concluding that the landlord JDC agreed to bear the risk of loss of fire given that: the respondent tenant CAW had an obligation to heat the premises; CAW undertook to maintain the fire suppression system; CAW did not notify JDC that it was shutting off the fire suppression system; JDC covenanted to pay for the maintenance of the fire suppression system; and the parties agreed to indemnify each other from third party suits.
[34] Some of these submissions – such as that the tenant CAW undertook to maintain the fire suppression system – contradict findings of the trial judge that are supported in the record. Others relate to provisions of the contract that the trial judge canvassed and that she concluded did not displace the inference that the agreement allocated risk of fire to the landlord JDC. It is not the role of this court on a question of mixed fact and law to redo factual findings and findings applying the facts to the law. I would reject the submission that the trial judge made a reviewable error in her interpretation of the agreement. . Priestly Demolition Inc. v. Universal Designs Ltd.
In Priestly Demolition Inc. v. Universal Designs Ltd. (Ont CA, 2023) the Court of Appeal considered the liability of a commercial tenant against the subrogated claim of the landlord's insurer after a fire, here as a matter of contractual interpretation:[5] The respondent [SS: tenant] denied liability for the fire and asserted that the terms of the lease precluded any recovery for damage caused by the fire.
[6] On a Rule 22 (Special Case), Rules of Civil Procedure, R.R.O. 1990, Reg. 194, motion, Dineen J. stated the issue in these terms:The issue in this case is whether a commercial lease between the parties permits the landlord’s insurer to bring a subrogated action against the tenant for damage sustained in a fire alleged to have resulted from the tenant’s negligence, or whether the tenant’s payment of a share of the landlord’s insurance pursuant to the lease precludes such an action. [7] The motion judge considered whether the indemnification provision and other terms in the lease that provide that the tenant (the respondent) is responsible for certain damage arising from its conduct were intended to displace the assumption that would otherwise flow from the tenant contributing to the landlord’s fire insurance that the risk of loss by fire would be borne by the landlord (the appellant). He concluded that the lease must be read as a whole but ultimately the provisions on which the appellant sought to rely did not reflect an intention that the respondent should not receive the full benefit of insurance to which he contributed. He noted that the indemnity provision in the lease said nothing about operating notwithstanding the respondent’s contribution to the appellant’s insurance.
[8] In the end, the motion judge concluded:Accepting that this lease is not free of ambiguity on this issue, I find that the interpretation advanced by the defendant is most consistent with the lease read as a whole. I would hold that the subrogated action is barred by the lease. [9] The appellant contends that the motion judge made three errors in his interpretation of the lease.
[10] First, the appellant submits that the motion judge failed to read the lease as a whole in a manner that gave meaning to all of its terms and avoided an interpretation that would render one or more of its terms ineffective.
[11] We do not accept this submission. The motion judge explicitly identified and analyzed the terms in the lease relating to additional rent, insurance obligations, maintenance and repair, and indemnity. He was alive to the entire contract and, especially, the obligations it imposed on both parties.
[12] Second, the appellant asserts that the motion judge failed to properly consider or give weight to case law directly on point.
[13] We are not persuaded by this submission. The motion judge explicitly considered the leading decision by this court in this area of law, Royal Host GP Inc. v. 1842259 Ontario Ltd., 2018 ONCA 467, and two more recent decisions in the same domain, Paulin v. Keewatin Patricia District School Board, 2019 ONCA 286 and Capital Sewer Servicing Inc. v. Crosslinx Transit Solutions Constructors, 2022 ONCA 10. In our view, there is nothing in the motion judge’s reasoning and conclusion that falls afoul of these decisions. Indeed, the motion judge explicitly pointed out a crucial difference between the issue in this case and in Royal Host: “Unlike the lease in Royal Host, the indemnity provision in this lease says nothing to indicate that it operates notwithstanding the contribution of the tenant to the landlord’s insurance.” . D.L.G. & Associates Ltd. v. Minto Properties Inc.
In D.L.G. & Associates Ltd. v. Minto Properties Inc. (Ont CA, 2015) the Court of Appeal considered whether a contractual duty on one party to a contract to obtain liability insurance (here a tenant) immunized the other party (the landlord) from claims that would have been covered by that insurance, where it was not obtained [paras 16-29]:The covenant to insure
[16] D.L.G. in para. 7.1 of the lease undertook to obtain “all risks” insurance which specifically included insurance for “sewer back-up”. D.L.G. accepts that a claim in negligence against Minto for failure to properly maintain the plumbing is barred by the covenant to insure, but submits that it is not plain and obvious that the covenant also bars a claim based on Minto’s breach of its “quiet enjoyment” and “good repair” obligations under the lease.
[17] D.L.G. argues that a trial is necessary to properly interpret the covenant to insure in the context of the entire agreement. I do not accept this argument. The covenant to insure focuses on risk and the responsibility as between D.L.G. and Minto for losses covered should the identified risks materialise during the term of the agreement. The provision is not concerned with the legal characterization of claims for losses arising out of the materialization of the risks.
[18] D.L.G.’s submission runs aground on this court’s judgment in Madison Developments Ltd. v. Plan Electric Co. (1997), 1997 CanLII 1277 (ON CA), 36 O.R. (3d) 80 at para. 9. Carthy J.A., speaking of a situation in which the landlord had covenanted to insure against all risks said:The law is now clear that in the landlord-tenant relationship, where the landlord covenants to obtain insurance against the damage to premises by fire, the landlord cannot sue the tenant for a loss by fire caused by the tenant’s negligence. A contractual undertaking by one party to secure property insurance operates in effect as an assumption by that party of the risk of loss or damage caused by the peril to be insured against. This is so notwithstanding a covenant by the tenant to repair which, without the landlord’s covenant to insure, would obligate the tenant to indemnify for such a loss. This is a matter of contractual law not insurance law, but of course, the insurer can be in no better position than the landlord on a subrogated claim. The rationale for this conclusion is that the covenant to insure is a contractual benefit accorded to the tenant, which, on its face, covers fire with or without negligence by any person. There would be no benefit to the tenant from the covenant if it did not apply to a fire caused by the tenant’s negligence. [Emphasis added.] [19] The language from Madison applies here. A covenant to insure is one of several provisions within a lease which allocates risk as between the parties to the lease. The allocation of risk is presumably reflected in the rent to be paid. A covenant to insure would hardly serve the purpose of risk allocation if it were read as allocating the risk to the tenant if the landlord was negligent, but to the landlord if the same act amounted to a breach of a provision in the lease, e.g. the obligation to maintain and repair. As almost any act of negligence would also be a breach of the obligation to maintain and repair, the interpretation urged by the appellant would effectively put the risk on Minto despite D.L.G.’s obligation to obtain “all risks” insurance.
The enforceability of the covenant to insure
[20] D.L.G. submits that the covenant to insure is an exclusion clause and is unenforceable under the principles set down in Tercon. In my view, the covenant to insure cannot be read as a clause excluding Minto from liability it would otherwise carry but for the clause. Instead, the covenant to insure assigns risk for certain losses by requiring that the tenant, D.L.G., obtain insurance coverage for those losses: Smith v. T. Eaton Co., 1977 CanLII 39 (SCC), [1978] 2 S.C.R. 749 at 756, St. Lawrence Cement Inc. v. Wakeham & Sons Limited (1995), 1995 CanLII 2482 (ON CA), 26 O.R. (3d) 321 at paras. 37-39 (C.A.).
[21] As I am satisfied that the covenant to insure cannot be read as an exclusion clause, I need not address the enforceability of that clause. I would, however, observe that in the context of a negotiated lease between arms-length commercial entities I see little room for an argument that a covenant to insure, whether directed at the landlord or the tenant, could be viewed as unconscionable.
[22] Nothing in the pleadings alleges any inherent unfairness in placing the burden of obtaining “all risks” insurance on D.L.G. I reject the argument that the relationship between D.L.G. and Minto during the lease negotiations was one of unequal bargaining power because Minto had knowledge about the plumbing that D.L.G. did not have. Nothing in the pleadings suggests that D.L.G. could not have made the relevant inquiries and conducted the necessary inspections to obtain whatever information about the plumbing it deemed necessary. Although D.L.G.’s claim that it relied on fraudulent/negligent misrepresentations by Minto gives rise to tort claims against Minto, it does not provide the basis for the assertion that D.L.G. was in a position of unequal bargaining power during the lease negotiations: see also the reasons of the motion judge at paras. 85-89.
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