Covenants to insure in commercial leases are
special. They obligate a party to obtain insurance. But what makes
them special is that they are interpreted to relieve the other
party of liability for breaches of that party's obligations
under a lease that relate to the risk being insured against. While
it is true that a covenant to insure is one of several clauses in a
lease that allocates risk between the landlord and tenant, the
covenant often trumps the other clauses that are intended to assign
risk when it is engaged.
The law is settled that in a landlord and tenant relationship a
covenant to insure prevents the party who agreed to obtain
insurance from successfully suing the other party for damages
caused by the risk being insured against even if the other party
would otherwise be liable for the loss. Subrogated claims in this
regard are also barred. The commercial rationale for the immunity
is that the party who obtains the insurance assumes the risk of the
loss covered by the insurance. The insuring party must deal with
its insurer for the loss not the other party to the lease.
The broad scope of the immunity is limited by the terms of the
lease. Claims that can be characterized as being unrelated to
the obligations in the lease may prevail even if the loss that is
the subject of the claim flows directly from the risk of peril that
the insurance was intended to cover. This is because the
covenant to insure in a commercial lease operates as a matter of
contractual law not insurance law, as the Court of Appeal for
Ontario emphasized in Madison Developments Limited et al v. Plan
Electric Co.,  O.J. No. 4249.
By way of example, a tenant's claim against a landlord for
breach of quiet enjoyment pursuant to a lease following a fire loss
would be barred by a covenant to insure against the risk of
fire. On the other hand, a claim based on a pre-contractual
representation that arises out of the same fire loss may prevail
notwithstanding the presence of a covenant to insure in the
lease. The misrepresentation claim may proceed to the extent
that the alleged misrepresentation does not engage the terms of the
The Court of Appeal for Ontario recently considered this issue
and the scope of a covenant to insure on an appeal from a motion to
strike in D.L.G. & Associates Ltd. v. Minto Properties Inc.,
 O.J. No. 5494. The tenant, D.L.G. & Associates
Ltd., had covenanted to obtain "all risk" insurance which
included the risk of sewer back-up. The tenant alleged that
during the lease negotiations the landlord represented to it that
the plumbing was in good order and it relied on these
representations to its detriment. After a sewer back-up occurred,
the landlord represented that the plumbing was in good repair going
forward and that it carried out the necessary repairs, when in fact
it had not done so. A second sewer back-up occurred.
The tenant sued the landlord.
The tenant advanced claims in breach of contract, negligence,
and negligent and fraudulent misrepresentation. The landlord
moved to strike the claims, in part, on the strength of the
covenant to insure. The motion judge held that it was plain
and obvious that the tenant's claims in breach of contract,
negligence, and negligent misrepresentation were barred by the
covenant to insure. It was not plain and obvious that the
fraudulent misrepresentation claim could not succeed. The
The Court of Appeal allowed the appeal in part, holding that the
motion judge erred in striking the negligent misrepresentation
claim. Writing for the Court, Justice Doherty stated that the
"covenant to insure was intended to assign risk within the
operation of the contractual relationship between D.L.G. and
Minto. The alleged tortious conduct, be it fraudulent or
negligent, occurred outside of that relationship." Thus,
it was not plain and obvious that the negligent and fraudulent
misrepresentation claims must fail.
It is somewhat counter-intuitive to think that the result may
have been different if the lease contained a specific
representation or warranty from the landlord that the plumbing was
in good working order and had been repaired. Of course, the
intent of such a representation would be to assign the risk of a
faulty sewer system to the landlord. Had such a
representation been included in the lease, the alleged
misrepresentation claim would arguably come within the ambit of the
contractual relationship and would be barred by the covenant to
insure as a result.
D.L.G. Associates Ltd. underscores the importance of reading
covenants to insure together with other clauses in the lease to
fully understand how the parties to the lease intended to allocate
risk as between them when litigation arises.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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