Risk, Responsibility and Insurance: Who’s covered in your lease?


Have you reviewed the insurance clause in your lease agreement lately? If not, now may be the time to have a look. On February 22, 2008 the Ontario Superior Court of Justice considered the language contained in the insurance provision of a commercial lease agreement in Harlon Canada Inc. v. Lang Investment Corporation and Lee Stephens carrying on business as Stephens Mechanical (“Harlon”). At issue was whether the insurance provision, while clearly protecting the landlord, also protected the landlord’s independent contractor for damage caused by the contractor to the tenant’s inventory.

The claim, brought in the name of the tenant by the tenant’s insurer against the landlord and the landlord’s independent contractor, was a subrogated claim for an insured loss arising from water leakage. The tenant’s inventory was damaged as a result of a water leak from the roof, which was caused by negligent repair work by the contractor that was hired by the landlord. The court noted that the lease between the landlord and tenant was a fairly typical commercial lease, which holds the landlord responsible for keeping the roof in good repair. The court also stated that the purpose of the insurance lease terms is to allocate risks between the landlord and tenant and to require each party to insure its portion of the risk. The lease provision relating to the tenant’s insurance required that the landlord and its mortgagee be named insureds and contained a waiver of subrogation against the “landlord or those for whom the landlord is in law responsible.”

The tenant conceded that the lease clearly protected the landlord from a subrogated claim, and consented to an order dismissing the claim against the landlord. But what about the independent contractor hired by the landlord to repair the roof? Did the language in the lease also protect the independent contractor? The question before the court was whether the contractor fell “within the class of persons included in the specific wording of this lease.”

The tenant maintained that although the lease protected the landlord, it did not protect a negligent independent contractor. The tenant argued that because the contractor was an independent contractor rather than an employee of the landlord, the contractor is not a person for whom the landlord is responsible.

The court noted that the tenant’s position overlooked the landlord’s contractual obligation to the tenant to keep the roof in good repair. How could the landlord uphold its obligation to the tenant if it could not hire a contractor to fulfill that obligation? But here’s a twist to the story: the contractor had cross claimed against the landlord arguing that the landlord specified the work to be performed to the roof and allegedly ignored a recommendation by the contractor which may have prevented the leaky roof and the entire claim! The court noted that a claim against the contractor therefore “draws the landlord into the very litigation it has contracted to avoid”. The court concluded that the claim against the independent contractor was barred by the lease, as there was “no evidence to suggest that the intention of the parties concerning the allocation of risk, responsibility and insurance is other than clearly stated in the lease.”

The tenant appealed the court’s decision and on September 22, 2010, the appeal judge upheld the decision and dismissed the appeal. In reviewing the decision, the appeal judge made reference to the following two factors which had been raised in supporting case law: first, did the parties to the contract intend to extend the benefit in question to the third party seeking to rely on the contractual provision? and second, are the activities performed by the third party seeking to rely on the contractual provision the very activities contemplated as coming within the scope of the contract in general, or the provision in particular, again as determined by reference to the intentions of the parties? The appeal judge concluded that the landlord had secured a clause which gave the protection of the waiver of subrogation clause to the landlord and to the contractor the landlord was in law responsible for and “the landlord was entitled to the protection he had bargained for in the lease.”

Compare the Harlon case to Broben Investments Ltd. v. Cadillac Contractors & Developments Ltd. et al (“Broben”), a 1962 decision of the Ontario High Court, where the tenant in the Broben case was in fact successful against the landlord’s general contractor for negligence and would have succeeded against the landlord had it not been for an “escape” clause in the lease which “by its words protects and was only intended to protect the landlord and not any other person.”

In Broben, the tenant brought an action against the landlord, the landlord’s general contractor, and the subcontractor for water damage caused to the tenant’s bowling alleys. The premises directly above the tenant’s premises, was under construction by the general contractor for the landlord and was completely exposed to the elements. The water pipes in the premises above the tenant’s premises had been capped at their ends by the subcontractor, but the pipes had been left open where they connected with the main water line. This work was all done by the subcontractor during the summer months and was found to be generally approved practice. As the weather changed and the winter months approached, the general contractor had failed to shut off the water valves, so when the water in the pipes froze as a result of the change in weather temperature, they burst and water then leaked into the tenant’s premises causing damage.

The court found that the subcontractor was not liable to the tenant, as its actions were proper and accepted practice, however the general contractor’s actions, in failing to shut off the water valve as winter approached, was found to be negligent and the general contractor was therefore found liable to the tenant. With respect to the landlord, the court found that the landlord was not liable to the tenant for damage because of the operation of the clause in the lease exempting the landlord from responsibility for all damage caused by “…steam, water, rain or snow which may leak into, issue or flow from any part of the said building or from the water, steam, sprinkler, or drainage pipes or plumbing works of the same or from any other place or quarter…” The court stated that because there was no express clause in the lease limiting the liability of the general contractor, it was not free to apply the landlord’s escape clause for the protection of the general contractor who was “not a party to that lease and not even mentioned in the lease.”

The court did note that in the absence of the escape clause, the landlord would have been found liable for the negligence of its general contractor, even though the general contractor was an independent contractor and not an employee of the landlord because “there is an exception where the contractor is employed to do acts which the employer himself would do at his own risk.”

In Broben there was a third party claim, but it was brought by the landlord against the general contractor, in which the landlord claimed indemnification from the general contractor. However, due to the operation of the clause in the lease exempting the landlord of any liability, the third party proceeding against the general contractor was unnecessary.

What do these decisions mean to landlord’s and tenant’s? It appears that a waiver of subrogation protects the landlord from being sued either directly or indirectly, unless the lease clearly provides otherwise.