Fire Damage: Should the Tenant Pay Twice?

An interesting issue arises in most commercial leases. The Landlord will arrange to obtain a policy of insurance to protect it against various risks and perils including damage by fire.

The Tenant occupies the premises and may be the party who either caused the fire or should have been able to prevent it. The fire results in damage to the Tenant’s leasehold improvements and chattels. Usually, the Tenant will have his own insurance. The fire was bad enough, but what about a claim to pay for the landlord’s damages? Is this fair?

A point in issue, is that under most commercial leases the Tenant was paying for this “cost to the Landlord” all along under the TMI (taxes, maintenance and insurance). So, in effect, the Tenant would be reimbursing the Landlord monthly for the insurance premium, and then again, by paying for all the damage caused by the fire.

Let’s have a look at a case in the British Columbia Court of Appeal North Newton Warehouses Ltd. v. Alliance Woodcraft Manufacturing Inc., (2005).

Alliance was negligent by storing flammable products which resulted in a fire and substantial damages to the North Newton building.

Clauses in the Lease

Here is the actual wording under various clauses of the Lease:

clause 8.3(a):

The Landlord shall, during the Term and any renewal thereof, take out and maintain in full force and effect insurance against all risks of physical loss or damage to the Building, and such fixtures and improvements as the Landlord shall determine, including the perils of flood and earthquake and including gross rental value insurance, in amounts equal to the full insurable value thereof calculated on a replacement cost basis, and subject to such deductibles as the Landlord may reasonably determine. Provided however that the full insurable value shall not include, and the insurance shall not cover, any property of the Tenant, whether owned by the Tenant or held by it in any capacity, nor Leasehold Improvements nor any other property of whatsoever kind and description located at the Premises whether made or installed by or on behalf of the Tenant. The Landlord shall, upon 30 days’ written notice from the Tenant, advise the Tenant of the amount of the deductible referred to in this subclause.

Clause 8.3(d) provides:

Notwithstanding any contribution by the Tenant to any Insurance Costs as provided for herein, no insurable interest shall be conferred upon the Tenant under policies carried by the Landlord.

Clause 10.1(b), which is of significance in this case, requires the tenant to repair at its expense all damages caused to the premises by its negligence:

Except as provided in subclause 10.1(c), if the Premises are damaged by fire or other casualty not caused by the negligence of the Tenant or those for whom it is responsible in law, and the damage is covered by insurance held by the Landlord under this Lease, then the damage to the Premises shall be repaired by the Landlord at its expense provided that the Tenant shall, to the limits of insurance it ought to have received under the terms of this Lease, be responsible for any costs in excess of insurance proceeds received. The Tenant shall, at its expense, repair all Leasehold Improvements and any installations, alterations, additions, partitions, improvements, and fixtures made by or on behalf of the Tenant and all damage caused by its negligence or the negligence of those for whom it is responsible in law….

The Court Decision

The Court stated, referring to another case:

…It is well established that a covenant to obtain fire insurance will relieve the beneficiary of the covenant from any liability for the fire losses that may be suffered by the covenantor….

This statement appears to accord with the leading decisions on this issue, a trilogy of Supreme Court of Canada decisions: Ross Southward Tire Limited v. Pyrotech Products Limited, 1975 CanLII 25 (S.C.C.), [1976] 2 S.C.R. 35, 57 D.L.R. (3d) 248; Agnew-Surpass Shoe Stores Limited v. Cummer-Yonge Investments Ltd., 1975 CanLII 26 (S.C.C.), [1976] 2 S.C.R. 221, 55 D.L.R. (3d) 676; and T. Eaton Company v. Smith, 1977 CanLII 39 (S.C.C.), [1978] 2 S.C.R. 749, 92 D.L.R. (3d) 425.

The following represents the discussion of the legal principles by the Court:

· These cases afford support for the proposition that where there is in a lease a covenant by a landlord to insure, the tenant should benefit from it unless there is something inconsistent with such a result contained in the lease document.

· Here the tenant Alliance has paid the landlord an amount for the insurance obtained by North Newton covering fire damage to the building.

· It seems to me that, as Laskin C.J.C. observed in the Ross Southward case, a tenant who has paid for an expected advantage as between itself and its landlord should benefit from those payments, and loss issues thereafter are between the landlord and its insurer.

· In such circumstances, to allow the insurer of North Newton to pursue its subrogated action against Alliance would render nugatory benefits accruing to the tenant under the covenant of the landlord to insure.

· Ultimately, the policy rule underpinning the proposition that the insurer cannot pursue a tenant for damages in circumstances such as those present in the instant case is based on the proposition that it makes little business sense for a landlord to covenant to insure and for a tenant to pay the premiums if the tenant is not to derive some benefit from the insurance.

· One might properly say that there is something approaching a presumption in favour of a tenant benefiting from a landlord’s covenant to insure.

· That is the legal principle that I take to be established from the trilogy of cases decided by the Supreme Court of Canada.


This case went to Court largely because two common clauses were not included for the benefit of the tenant, and they are:

1) additional named insured, and
2) waiver of subrogation.

You will appreciate that in this case, it is not really North Newton as the Landlord suing Alliance Woodworking its Tenant, although that’s what the Court documents say. It is the Landlord’s insurance company suing the Tenant’s insurance company for reimbursement of its loss.

Most of the time, careful practice would have the Tenant require the inclusion of a provision to the effect that he is to be added to the Landlord’s policy as an additional named insured. It is trite law, that the insurer cannot seek reimbursement from its own insured, so that’s generally the end of it.

In some cases, the parties do not wish to have the Tenant added to the policy, so the second best solution will also work. This is to have the insurance company agree to waive its right of subrogation as against the Tenant. Subrogation is the right of the Insurer to “stand in the shoes” of its insured and sue anyone that the insured might have been able to sue. Here, the insurer will agree that it will not sue the Tenant, but it can still sue anyone else.

In this case, the Court concluded that even absent those two usual safeguards for the tenant, the tenant would still be protected from ultimate liability. Simple payment of the insurance premium as part of the TMI was considered to be sufficient. Application for leave to appeal to the Supreme Court of Canada was denied.

However, if you are a tenant negotiating a lease, still include the “additional named insured”, and “waiver of subrogation” provisions.

Brian Madigan LL.B., Broker

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