This case deals with cross-indemnity obligations under a commercial lease following a fire that destroyed both the Landlord’s premises and the business of the Tenant.
The plaintiff was the Tenant of space in a light industrial building. The lease required the Tenant to maintain fire insurance for loss of its own property and business interruption insurance. The Lease also required the Tenant’s insurance policies include the Landlord as a named, additional insured. While the Tenant had appropriate coverage for the identified perils, the Tenant failed to obtain insurance that named the Landlord as an additional insured.
Under the Lease, the Landlord agreed to indemnify the Tenant for any losses caused by the Landlord or its contractors (the “Indemnity Provision”). However, the Lease also excluded the Landlord from liability for any of the Tenant’s losses caused by fire (the “Immunity Provision”).
A fire caused by the Landlord’s contractor destroyed the building and damaged the Tenant’s business. The Tenant made partial recovery under its own policy and sued the Landlord and the contractor for the shortfall. The Landlord and the Tenant agreed to proceed for a summary determination as to the operation of the Indemnity Provision and the Immunity Provision. In particular, the Court was asked to determine whether the failure of the Tenant to maintain the Landlord as an additional insured barred the Tenant from making any claim at all.
At the lower level of court, the judge ruled in favour of the Tenant on all issues. On appeal, the Court of Appeal ruled that because the Landlord was intended to be an additional insured, there was an intention in the Lease that a subrogated claim by the Tenant (or its insurer) would be barred, as a subrogation claim cannot be made against an additional insured. The Tenant could not rely on its own breach of the Lease as an opening for a claim against the Landlord. Further, a contractual obligation that the Tenant obtain insurance for a specific peril meant that the Tenant had assumed all risk for that peril. Only those risks that the Tenant was not obligated to insure fall within the Indemnity Provision.
In summary, Tenants and brokers should carefully review the insuring provisions of a lease to ensure that the Tenant maintains the required insurance. Insurers should take note that a lease may define which party has assumed the risk of certain perils.
As a further note, contractual interpretation in Canadian law has, in recent years, become presumptively a mixed question of fact and law. As such, extrinsic evidence may inform contractual interpretation and a lower court decision is entitled to significant deference upon appeal. However, in this case, the Court of Appeal also ruled that the interpretation of the insurance provision in the Lease was a purely legal question for which the lower court was entitled to no deference.