Those involved in building projects should always be alert to court decisions dealing with insurance, or insurance clauses in contracts, even if those contracts are not building contracts. Those decisions will inevitably impact the interpretation of insurance clauses in building contracts.
So the decision of the Ontario Court of Appeal in Deslaurier Custom Cabinets Inc. v.1728106 Ontario Inc., (2016), 130 O.R. (3d) 2016 ONCA 246 should be noted by those involved in the building industry and construction law. In a landlord-tenant setting, the court held that when a tenant covenanted in the lease to obtain fire insurance covering the tenant’s property in which the owner would be named as an additional insured, and failed to obtain insurance in which the landlord was so named, the tenant and its insurer could not recover against the landlord even though the fire was caused by a contractor hired by the landlord.
Changing landlord, tenant and contractor to owner, contractor and subcontractor, the same result would likely apply in the building contract setting.
The lease required the tenant to obtain insurance against all risks of loss or damage to the tenant’s property. If fire insurance was not provided by that insurance, the tenant was required to carry insurance against the risk of damage to its property caused by fire. The lease also required the tenant to include the landlord as an additional insured on the liability and property damage policies. In the lease, the landlord indemnified the tenant for damage arising from the act, default or negligence of the landlord, its agents, contractors and others, and the tenant indemnified the landlord in similar language. The property damage insurance obtained by the tenant did not name the landlord as an additional insured.
A welding contractor engaged by the landlord caused a fire while working at the premises, causing damage to the tenant’s property and business. The limits of the tenant’s property damage insurance policy did not cover the tenant’s losses. The tenant sued the landlord to recover its property and business losses. It sought to recover both the subrogated losses and the uninsured losses.
The motion judge granted summary judgment against the landlord. The landlord’s appeal was allowed by the Court of Appeal.
Decision of the Ontario Court of Appeal
The Court of Appeal held that, by agreeing to obtain insurance against “All Risks of loss or damage to the Tenant’s property” and “against the risk of damage to the tenant’s property within the Premises caused by fire”, the tenant assumed the risk of loss or damage to its own property caused by fire. That covenant relieved the landlord from liability for that loss or damage, even if caused by the landlord’s negligence, unless the lease elsewhere provided to the contrary. The lease did not provide elsewhere to the contrary. The court concluded:
“Here, the parties specifically agreed that the tenant would insure against the risk of loss or damage to its property by fire. That is the very risk that materialized. No coverage exclusion applied under the Lumbermen’s policy and the tenant’s claim was paid to the extent of the policy limits. The fact that, as it happens, the tenant was underinsured for this risk does not mean that its failure to obtain full protective coverage can be laid at the landlord’s door.”
The Court of Appeal also held that the tenant’s failure to obtain insurance, which named the landlord as an additional insured barred its subrogated claim against the landlord, for two reasons.
First, as already found, the tenant had assumed the relevant risk so the tenant’s insurer could be in no better position.
Second, the tenant’s covenant to add the landlord as an additional insured, if honoured, would have barred a subrogated claim by the tenant’s insurer since an insurer cannot sue another insured under the same policy. The court said:
“The tenant’s insurer can be in no better position than that of the tenant itself….where, as here, the risk of loss or damage by a specific peril passes to one contracting party under the terms of its insurance covenant, there is no basis for the covenantor’s insurer to assert a subrogated claim against the beneficiary of the covenant. Simply put, because the covenantor (in this case, the tenant) has contractually assumed the risk of liability for loss or damage caused by a specific peril, neither it nor its insurer can seek to recover for loss or damage caused by that peril from the beneficiary of the insurance covenant (in this case, the landlord). Further, had the tenant complied with its s. 8(5) obligation to have the landlord named as an additional insured on its property damage insurance policy, no right of subrogation for the tenant’s property loss or damage due to fire would arise. An insurer cannot assert a subrogated claim against its own insured…”
Finally, the Court of Appeal held that the covenant whereby the landlord indemnified the tenant did not over-ride the insurance clause, but only applied in the event that the insurance to be obtained by the tenant did not cover the loss. Referring to the approach taken by a judge in a previous decision, the court said:
“Applied to the facts of this case, this interpretive approach gives meaning to all the challenged provisions of the lease. It holds the tenant to its contractual bargain under the tenant’s insurance covenants to assume responsibility for the risk of loss or damage to its own property caused by fire and requires the landlord to indemnify the tenant under the landlord’s indemnity covenant for those types of risks against which the tenant is not required to insure. It also ensures that, under the immunity provision, the landlord is not exposed to negligence claims where the tenant has agreed to insure against an underlying risk, such as fire… “
In this decision, the Ontario Court of Appeal has followed and applied previous decisions of that court and the Supreme Court of Canada holding that an insurance clause in a contract, requiring one party to take out insurance, necessarily places the risk of loss specified in that insurance clause on the party required to take out that insurance. Neither that party nor its insurer may then sue the other party for that loss. That result flows from contract law.
And if the insurance clause requires that party to name the other party as an insured in the policy, that is icing on the cake. Due to the principles of subrogation, the insurer cannot sue the other party. That result flows from insurance law.
Perhaps the most interesting aspect of this decision is its resolution of the conflict or tension between the insurance clause and the indemnity clause in the lease. On their face, these clauses seem totally at odds with each other. But then the principles of contract interpretation swing into play. A way must be found to reconcile these seemingly opposing paragraphs. And the court has said that the way to do so is to allow the insurance clause to operate within the coverage that the insurance clause says the party obtaining it is to secure, and to allow the indemnity clause to operate outside that coverage.
Insurance clauses and the impact of a failure to obtain insurance conforming to that clause in the context of construction projects, were discussed by me in previous articles dated February 20, 2012 and June 24, 2012.
See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., Chapter 14, parts 7and 8.
Deslaurier Custom Cabinets Inc. v.1728106 Ontario Inc, (2016), 130 O.R. (3d) 2016 ONCA 246
Insurance – insurance clauses – subrogation – indemnity clauses
Thomas G. Heintzman O.C., Q.C., FCIArb January 29, 2017
This article contains Mr. Heintzman’s personal views and does not constitute legal advice. For legal advice, legal counsel should be consulted.