Landlord and tenant — Fire insurance — Issue of far-reaching importance — Whether in the circumstances of the case the landlords, and their insurers by subrogation, could recover damages from tenants by whose negligence the insured building had been destroyed — The relevant lease provided that the landlords should insure the whole building against fire, that the tenants should contribute to the cost of the insurance, that the tenants were to be relieved of their repairing obligations in the event of damage to the building by fire, and that the landlords should lay out the insurance moneys to rebuild the demised premises — In the event the landlords received full indemnification from their insurers and the building was reinstated — The present appeal was from the decision of Stephen Brown LJ (sitting as a judge of the Queen’s Bench Division, who had decided in an action by the landlords as plaintiffs that they had no right to recover damages for negligence from the tenants (effectively from the tenants’ insurers) — The policy was in the landlords’ name only and contained no reference to the tenants — There was no question of the tenants being coinsured — It was, however, held by Stephen Brown LJ, and agreed by the Court of Appeal, that the policy was intended for the benefit of the tenants as well as the landlords, the tenants having an insurable interest — This, however, did not decide the real issue between the parties, which was whether the terms of the lease, and the full indemnification of the landlords by receipt of the insurance moneys, precluded them from recovering damages in negligence from the tenants — On this issue there was only one English authority, of somewhat indirect relevance, but there was some direct Canadian and American authority, discussed in the judgment of Kerr LJ — Held, after examining these cases, that the intention of the parties to the present lease, to be gathered from its terms, was that in the event of damage by fire, whether due to accident or negligence, the landlords’ loss was to be recouped from the insurance moneys and that the landlords were to have no further claim against the tenants for damages in negligence — Consequently the landlords’ insurers had no right of subrogation
This was an
appeal by Mark Rowlands Ltd, landlords of a building at 10-12 Lambs Lane and
6-12 Albion Place in Leeds, plaintiffs in an action before Stephen Brown LJ
(sitting as a Queen’s Bench judge) brought against the tenants, Berni Inns Ltd,
for negligence in respect of a fire which effectively destroyed the whole
building, of which the tenants, defendants in the action and present
respondents, occupied the basement and part of the ground floor as a
restaurant. Electrical contractors had originally been joined in the action as
defendants, but were later dismissed from the suit. Stephen Brown LJ decided in
favour of the defendant tenants.
Michael Turner
QC and J R W Harvey (instructed by Lawrence Graham) appeared on behalf of the
appellants; Michael Harvey QC and Roger Ter Haar (instructed by Hewitt
Woollacott & Chown) represented the respondents.
Giving
judgment, KERR LJ said: This is an appeal from a judgment delivered by Stephen
Brown LJ on November 25 1983 sitting as a judge of the Queen’s Bench Division.
It raises an issue of far-reaching importance in relation to fire insurance. In
brief, this is whether a landlord’s fire insurers can recover damages by
subrogation from a tenant by whose negligence the insured building has been
destroyed or damaged by fire when the lease provided that: (i) the landlord
should insure the whole building against (inter alia) fire, (ii) the
tenant was to contribute to the cost of the insurance, (iii) the tenant was to
be relieved from his repairing obligations in the event of damage to the
building by fire, and (iv) the landlord would lay out the insurance moneys to
rebuild the demised premises. It was common ground that similar provisions are
frequently to be found in leases for commercial and residential premises and
that this issue has not previously arisen for decision in our courts, although
it has been extensively litigated in Canada and the United States. Since the
insurers’ right of subrogation depends on the rights of the landlord, the issue
can also be stated as being whether under a lease in such terms a landlord who
has been fully indemnified by his insurers under an ordinary policy covering
the risk of fire, whether caused by accident or negligence, can nevertheless
recover damages from the tenant on the ground that the fire had been caused by
his negligence. Stephen Brown LJ decided this issue in favour of the tenants,
and the landlords’ insurers, suing in the name of the landlords by virtue of
their right of subrogation, are now appealing against this decision. We were
told that in the present case the effective defendants are the tenants’
liability insurers, but the issue would of course be precisely the same in
proceedings brought against tenants who have no such insurance.
In the early
hours of January 27 1980 a serious fire broke out in a building known as 10-12
Lambs Lane and 6-12 Albion Place in Leeds and effectively destroyed the whole
building. The plaintiffs were the freeholders but did not occupy any part of
the building. The fire originated in what is described as the ceiling void of
the basement part of the premises in which a quantity of flammable material had
been stored or deposited. The basement and part of the ground floor were
occupied by the defendants and used as a restaurant under a lease from the
plaintiffs dated July 28 1970. The remainder of the building was occupied by
another tenant of the plaintiffs, originally John Peters (Furnishing Stores)
Ltd, and subsequently Waring & Gillow Ltd, and was used for the storage and
sale of furniture. The immediate cause of the fire was electrical and the
plaintiffs had originally joined the electrical contractors as additional
defendants. However, they were subsequently dismissed from the action and this
has proceeded on the basis that the defendants’ negligence was the effective
cause of the fire. The quantum of the plaintiffs’ claim for damages has been
agreed in the sum of £1,429,166. This is effectively the cost of reinstating
the whole building, as happened, with the moneys which the plaintiffs received
from their insurers, the Legal & General Assurance Society Ltd, and it is
also common ground that the plaintiffs themselves have suffered no additional
loss which they can claim in the action. The pleadings went through many
stages, but the only remaining issue, which was raised by a late amendment, is
whether in these circumstances the plaintiffs can maintain an action for
negligence against the defendants.
The terms of
the lease, and to a lesser extent of the insurance policy, are of crucial
importance to this issue, and I must accordingly begin by setting out their
provisions in so far as these are material.
The lease
between the plaintiffs as landlord and the defendants as tenant was for a term
of 30 years from January 1 1970. It defined ‘the landlord’s premises’ as the
whole building and ‘the demised premises’ as the basement and part of the
ground floor to which I have already referred. I must set out the tenant’s
covenants under clauses 3(3) and (4):
(3) To pay to the Landlord a sum or sums of money
equal to the amount or amounts (whether increased by any Act or omission of the
Tenant or not) which the Landlord shall from time to time expend in effecting
or maintaining the insurance of the demised premises and being a fair
proportion as certified by the Landlord’s Surveyor (whose Certificate shall be
final and binding in all respects on the parties hereto) acting as an expert of
premiums paid in respect of insuring the Landlord’s premises in their full
re-building value for the time being including three years rack rent of the
demised premises and the Architects and Surveyors and other fees and incidental
expenses consequent upon rebuilding and reinstating against loss or damage by
fire storm tempest lightning explosion aircraft and such other risks as the
Landlord shall from time to time during the said term reasonably deem necessary
(all which perils are hereinafter referred to as ‘the insured risks’) and such
sum or sums made payable by this Sub-Clause shall be paid to the Landlord on
demand on the rent day in each year next following the expenditure thereof by
the Landlord and if not so paid shall be recoverable as rent in arrear.
This provision
was conveniently referred to as requiring the tenants to pay an ‘insurance
rent’. The amount paid by the defendants was at first five-seventeenths and
later about 25% of the annual premiums paid by the plaintiffs.
(4) At all times during the said term well and
substantially to repair cleanse and keep in good and substantial repair and
condition all parts of the interior of the demised premises and all additions
thereto including all glass in the windows and doors and all internal walls
drains sewers watercourses and all sash cords and door furniture and all
Landlord’s fixtures and fittings and appurtenances thereto belonging and to
replace all missing locks and keys (damage by or in consequence of any of the
insured risks excepted save where the insurance effected by the Landlord shall
be vitiated in whole or in part by any act or omission by the Tenant or by any
person acting for or under the Tenant).
The tenants’
covenants under clauses 3(5) and (6) dealt with their obligation to paint and
decorate the demised premises every seven years and to yield up the premises in
a proper state of repair on termination of the lease. It is unnecessary to set
out these provisions save to say that in both cases there was a similar
exemption from these obligations in cases of damage by or in consequence of the
insured risks, as in the brackets at the end of clause 3(4).
The tenants’
covenant under clause 3(11) was in the following terms, so far as material:
To insure and
keep insured with such Insurance Office as the Landlord shall nominate and in
the joint names of the Landlord and the tenant — (a) the Third Party and
Property Owners Liability Risks of the demised premises . . .
This provision
is of no direct relevance for present purposes, but Mr Turner QC, representing
the plaintiffs, placed some reliance on the express requirement for the tenants
to insure in joint names, which does not appear in the corresponding insurance
covenants by the landlords. These and the landlords’ repairing covenants are
contained in clause 4 as follows:
4(2) To keep the landlord’s premises including the
demised premises insured against loss or damage by the insured risk and to lay
out any moneys received under such insurance in rebuilding and reinstating as
quickly as possible the demised premises or such parts thereof as shall be
destroyed or damaged.
(3) To keep the main walls main timbers boundary
walls and main services of the demised premises in good and tenantable repair
and condition.
Finally I must
set out clause 6(4) as follows:
If the
demised premises or any part or parts of the Landlord’s premises are so damaged
or destroyed by any of the insured risks as to make the demised premises unfit
for occupation or use and insurance in respect thereof has not become vitiated
by any wilful or reckless act or omission of the Tenant or any person acting
under the Tenant then the rent hereby reserved or a proper proportion thereof
according to the extent of the damage sustained shall from the date of such
damage or destruction and until the demised premises shall have been reinstated
or made fit for occupation or use (as the case may be) or for a period not
exceeding three years whichever period is the shorter cease to be payable.
I then turn to
the insurance policy which the plaintiffs took out pursuant to clause 4(2) of
the lease. The first peril insured against was ‘fire (whether resulting from
explosion or otherwise)’, with immaterial qualifications, and there was also
cover against lightning and explosion which is irrelevant for present purposes.
The subject-matter of the insurance was the entire building, an agreed sum for
loss of rent (cf clause 6(4) of the lease) and architects’ and
surveyors’ fees. The insurers agreed that in the event of any part of the
building being damaged or destroyed by fire they would:
pay to the
Insured the value of the property at the time of the happening of its
destruction or the amount of such damage or at its option reinstate or replace
such property or any part thereof.
The persons
insured under the policy were described by the plaintiffs as mortgagor and the
insurers themselves as mortgagees, without any reference to the defendants.
There was a special condition that the insurance did not cover ‘consequential
loss or damage of any kind or description other than loss of rent when such
loss is insured by the policy’. In the present case this is of no relevance,
since the plaintiffs sustained no other consequential loss. In the printed
conditions the insurers’ rights of subrogation against ‘other parties’ were
expressly preserved, but it was common ground that this provision did not add
anything to the ordinary rights of insurers at common law. Finally, there was
an endorsement mentioning that John Peters (Furnishing Stores) Ltd ‘have an
interest in the insurance by this policy as tenants’. As mentioned hereafter,
the defendants requested that there should be a similar endorsement with
reference to them; this did not happen, but evidently only as the result of an
oversight and not because there would have been any objection to it. It was
common ground that the purpose of such endorsements is merely to record that
the persons referred to in them, such as mortgagees or tenants, have an
interest in the proceeds of the insurance in the event of loss or damage to the
subject-matter by an
mentioned, when the building was destroyed the plaintiffs’ insurers paid in
full for its reconstruction and reinstatement, and there was no dispute between
the plaintiffs and the defendants in this regard: it was common ground that the
insurance effected by the plaintiffs and their use of the insurance moneys
complied in all respects with the terms of the lease.
When Mr Turner
opened the appeal on behalf of the plaintiffs, his first submission was that
the defendants were not coinsured with the plaintiffs under the terms of this
policy. He made this submission because the learned judge had placed some
reliance on the decision of Lloyd J (as he then was) in Petrofina (UK) v
Magnaload Ltd [1984] 1 QB 127 to which I return later. However, when Mr
Harvey QC addressed us on behalf of the defendants, he immediately conceded —
inevitably in my view — that the defendants could not maintain that they were
coinsured with the plaintiffs under this policy. The plaintiffs’ insurers’ claim
by subrogation can therefore not be resisted by the defendants on the ground
that they were coinsured parties to the contract of insurance. A secondary
issue was whether the insurance had been effected by the plaintiffs for the
defendants’ benefit as well as for their own benefit. The judge upheld this
contention in favour of the defendants. He relied partly on the terms of the
lease and partly on correspondence passing between the plaintiffs’ insurance
brokers and the defendants between 1972 and 1977, before the occurrence of the
fire in 1980. While Mr Turner rightly did not accept that this correspondence
was admissible for the purpose of interpreting the lease, he raised no
objection — presumably on instructions — to its admissibility for the purpose
of determining whether the parties’ common intention was that the insurance
should enure for the benefit of the defendants as well as of the plaintiffs. I
do not think that it is necessary to refer to this correspondence in detail,
since I would have reached the conclusion — for the reasons explained hereafter
— that the insurance was intended for the benefit of the defendants as well as
of the plaintiffs by reference to the terms of the lease alone. The effect of
the correspondence was to show that the defendants were at all times concerned
that the total sum insured should be sufficient to cover their interest under
the lease as tenants of part of the building, and that it should be increased
as necessary from time to time to keep pace with increases in property values
and the costs of reconstruction and repair. In addition, as already mentioned,
they requested at one stage that their name should be endorsed on the fire
policy to record their interest in the insurance as tenants, but this matter
was not pursued and is now of no relevance. The defendants never saw the
insurance policy, but there is no complaint about any of its terms.
After
reviewing the facts and referring to certain authorities which I mention later,
the judge concluded his judgment as follows:
In my
judgment, the true inference to be drawn from the covenants in the lease and
from the facts disclosed in the correspondence passing between the defendants
and the plaintiffs’ insurance brokers, to which I have referred, is that the
plaintiffs are to be regarded as having insured the entire premises for the
joint benefit of themselves and of the defendants their tenant. The plaintiffs
have been indemnified and have suffered no loss. In the light of my findings I
do not consider that there is any scope for subrogation. Accordingly, the
plaintiffs’ claim must fail.
The first
issue argued on this appeal was whether the judge was right in concluding that
the plaintiffs were to be regarded ‘as having insured the entire premises for
the joint benefit of themselves and of the defendants their tenant’. For the
reasons mentioned below I do not think that this is the decisive issue, but in
my view the judge was correct in reaching this conclusion, both on the terms of
the lease and the relevant authorities.
Turning first
to the lease, I think that the defendants’ interest in the insurance to be
effected by the plaintiffs under clause 4(2) is plain, as is the fact that it
must have been the mutual intention of both parties that the insurance should
enure for the benefit of the defendants as well as the plaintiffs. The
defendants were required to contribute to the cost of the insurance by the
payment of the ‘insurance rent’ under clause 3(3). In the event of damage by
fire (we are not concerned with any other insured peril) the defendants were to
be correspondingly relieved from their repairing and other obligations under
clauses 3(4), (5) and (6), provided that the insurance was not vitiated by any
act or omission on their part, viz ‘by any wilful or reckless act or omission
of the tenant or any person acting under the tenant’ as mentioned in clause
6(4). In the present case we are only concerned with a fire resulting from the
tenants’ negligence, and it must of course be borne in mind throughout that for
the purposes of insurance against the risk of fire it is irrelevant whether the
cause of the fire is accidental or due to negligence on the part of anyone. The
effect of clause 6(4) was to relieve the tenants from the obligation to pay
rent to the extent there provided ‘if the demised premises or any part or parts
of the landlord’s premises’, ie comprising the whole building, ‘are so damaged
or destroyed by any of the insured risks as to make the demised premises unfit
for occupation or use’. For their part, under clause 4(2), the plaintiffs were
required to insure the entire building against fire and to apply the insurance
moneys in rebuilding and reinstating the defendants’ premises as quickly as
possible in the event of damage by fire. The fact that the latter obligation
did not extend to the entire building does not, in my view, militate against
the conclusion that the mutual intention of the parties was that the insurance
should be for the benefit of the tenant as well as the landlord. The lease
relating to the remainder of the building was not in evidence since it is of no
direct relevance, but it may well have contained a similar provision. As
pointed out by Mr Harvey, the commercial reason for confining the reinstatement
obligation to the tenants’ premises alone may well be that any alterations
which the landlords might seek to make on reconstruction could then be
negotiated with individual tenants in relation to their own premises without
having to involve other tenants.
I therefore
turn to the question whether there is anything in law which precludes the
conclusion that the insurance effected by the plaintiffs in this case was also
intended to enure for the benefit of the defendants. In my view the answer is
no. Provided that a person with a limited interest has an insurable interest in
the subject-matter of the insurance — an issue to which I turn in a moment in
relation to the circumstances of the present case — there is no principle of
law which precludes him from asserting that an insurance effected by another person
was intended to enure for his benefit to the extent of his interest in the
subject-matter, whether the insurable interest of the person effecting the
insurance be upon the whole of the subject-matter or also only to the extent of
a limited interest in it. Illustrations of relationships which may give rise to
this consequence are those of bailee and bailor and mortgagee and mortgagor. I
do not see why the relationship between landlord and tenant should not be
capable of giving rise to the same consequence, and the decision of Harman LJ
(sitting as a judge of the Chancery Division) in Mumford Hotels Ltd v Wheler
[1964] Ch 117 directly supports this conclusion.
In that case
the tenant was required to pay ‘a yearly insurance rent equal to the premium
for keeping the property insured against comprehensive risks’ and the landlord
covenanted to insure the entire building on this basis. There was no covenant
to reinstate, but the lease contained other provisions comparable to those in
the present case indicating that the tenant had an interest in the property
being adequately insured. As in the present case, the insurance was in the name
of the landlord alone. Upon the destruction of the property by fire and the
landlord’s refusal to use the insurance moneys for its reinstatement, the
tenant claimed that the landlord was obliged to do so and succeeded. Harman LJ
said at p 125:
In my
judgment, the true question is not whether a covenant to reinstate should be
implied, but whether the true inference is that Mrs Wheler is to be treated as
insuring for her own benefit or for the joint benefit of herself and the
company.
He then
reviewed a number of authorities and concluded as follows on the next page:
In my
judgment the true implication is that Mrs Wheler’s obligation to insure, done
as it was at the tenant’s expense, was an obligation intended to enure for the
benefit of both parties, and that Mrs Wheler cannot simply put the money in her
pocket and disregard the company’s claim. She must, therefore, if called upon by
the company so to do, use the money as far as it will go towards reinstatement
of the property.
In the context
of cases where an insured A will be treated as having effected the insurance
partly for his own benefit and partly for the benefit of B, Mr Harvey rightly
pointed out that the issue whether or not this was the intention of the parties
in the circumstances of any particular case must not be confused with two
overriding principles of the law of insurance. First, he conceded that such an
intention cannot be inferred if B had no insurable interest in the
subject-matter of the insurance. Second, in cases of indemnity insurance such
as the present, it is axiomatic that no one with an interest in the insurance
can recover more than an indemnity for the loss which he has in fact sustained.
In that regard an insurable interest and a merely limited interest in the
subject-matter of the insurance are separate concepts which must not be
confused. This distinction does not arise directly in
the decision of the House of Lords in Hepburn v A Tomlinson
(Hauliers) Ltd [1966] AC 451 and in relation to tenant and landlord by the
decision of the High Court of Australia in British Traders Insurance Co Ltd
v Manson [1964] 111 CLR 86.
Mr Turner’s
submissions against the conclusion that the insurance in the present case
should be treated as having been effected for the benefit of the defendants as
well as of the plaintiffs were based on two grounds. First, he submitted,
albeit faintly, and understandably without enthusiasm, that this conclusion
would infringe section 2 of the Life Assurance Act 1774. This provides that:
it shall not
be lawful to make any policy or policies on the life or lives of any person or
persons, or other event or events, without inserting in such policy or policies
the person or persons name or names interested therein, or for whose use,
benefit, or on whose account such policy is so made or underwrote.
Although
obviously directed primarily to life insurance, the words ‘or other event or
events’ admittedly widen its scope. A literal application of the language of
section 2 would create havoc in much of our modern insurance law, and Mumford
v Wheler would have been decided wrongly or per incuriam in
ignorance of this statutory provision. In my view Mr Harvey was right in his
submission that this ancient statute was not intended to apply, and does not
apply, to indemnity insurance but only to insurances which provide for the payment
of a specified sum upon the happening of an insured event. I think that this is
supported by the long title of the Act, and in Halsbury’s Statutes, 3rd
ed vol 17 at p 827, it is pointed out that this Act is also known as the
Gambling Act 1774. In Dalby v The India & London Life Insurance
Co (1854) 15 CB 365 the judgment of the court delivered by Parke B appears
to distinguish insurances covered by this Act from indemnity insurance at p
387, and in Tattersall v Drysdale [1935] 2 KB 174 Goddard J (as
he then was) appears to have taken the same view at the top of p 181.
Mr Turner’s
second and more substantial submission in this connection was that the
defendants had no insurable interest in the building as such, including — as I
understood him to say — the parts of it which they themselves occupied as
tenants. He pointed out that under the provisions of the lease the tenants were
relieved from all their covenanted obligations in the event of its destruction
by (inter alia) fire, as well as from their obligation to pay rent
(though only for a maximum period of three years) under clause 6(4), and he
relied upon the plaintiffs’ obligation of reinstatement under clause 4(2). In
the latter connection he distinguished Mumford v Wheler, where
there was no similar obligation, and submitted that there was no scope for any
further insurable interest in the preservation of the building. Again, I cannot
accept this submission.
To conclude
that by virtue of the provisions of the lease the defendants had no interest in
the continued existence of the building in which they were carrying on their
business is in my view untenable, and if one were dealing with the tenant of a
flat in the upper storeys of an apartment block with a similar lease, such a
submission would be virtually unarguable. In order to refute it one has only to
quote part of the classic definition of insurable interest given by Lawrence J
in Lucena v Craufurd (1806) 2 Bos & PUL 269, HL at p 302:
A man is
interested in a thing to whom advantage may arise or prejudice happen from the
circumstances which may attend it . . . And whom it importeth, that its
condition as to safety or other quality should continue . . . To be interested
in the preservation of a thing, is to be so circumstanced with respect to it as
to have benefit from its existence, prejudice from its destruction . . .
In my view,
without the need for further elaboration, the provisions of the lease cannot
have the effect that the defendants were thereby deprived of any insurable
interest in the continuing existence of the building or ceased to be exposed to
any prejudice if it were destroyed.
I therefore
conclude, in agreement with the learned judge, that the defendants are right in
their submission that the insurance effected by the plaintiffs enured for their
benefit as well as for that of the plaintiffs themselves. All the Canadian and
American decisions to which I refer later proceeded on this basis.
However, in my
view, this does not decide the real issue between the parties. This is whether
the terms of the lease, and the full indemnification of the plaintiffs by their
receipt of the insurance moneys, preclude them from recovering damages in
negligence from the defendants or whether the plaintiffs’ right to recover such
damages remains unaffected. In the former case the plaintiffs’ insurers would
obviously be equally precluded from bringing the present action in the name of
the plaintiffs by virtue of their rights of subrogation. This is the issue
which has been much litigated in Canada and the United States. The learned
judge was not referred to any of these decisions — which all went in favour of
the tenants, but in most cases only by a majority — and their citation on this
appeal resulted from the researches made by Mr Harvey on behalf of the defendants,
who had not appeared below. The only English authority cited to the judge in
this connection was the decision of Lloyd J in Petrofina (UK) Ltd v Magnaload
Ltd (supra). That decision is of considerable importance to
insurances in the field of the construction industry, but for the present
purposes it is at most only of indirect relevance and distinguishable on its
facts. In that case Lloyd J followed with approval a decision of the Supreme
Court of Canada in Commonwealth Construction Co Ltd v Imperial Oil
Ltd [1977] 69 DLR (3d) 558 which he regarded as indistinguishable. The
feature which distinguishes those cases from the present case and from the
Canadian and American cases mentioned below is that the defendants were
coinsured with the plaintiffs under the same policy. They were accordingly not
restricted to the contention that the insurance had been effected in part for
their benefit, as the defendants are in the present case.
Being
coinsured with the plaintiffs under the same policy, it necessarily followed
that the plaintiffs’ insurers in these two cases were unable to assert any
right of subrogation.
The position
in the Petrofina case was briefly as follows. The main contractors for
the construction of an extension at an oil refinery took out a contractors’
all-risks insurance policy indemnifying the insured against loss and damage to
the property in question. The definition of the persons insured included the
plaintiffs, the main contractor and the subcontractors, and the defendants were
one of the subcontractors on the site. Due to alleged negligence on the part of
the defendants, a gantry became displaced and fell so as to cause considerable
damage to the plaintiffs’ work in progress. They claimed against the insurers
under the policy, who duly paid the plaintiffs’ claim. The insurers thereupon
brought an action in the name of the plaintiffs against the defendants,
claiming damages for negligence. The preliminary issue which came on for trial
was whether the insurers had the necessary right of subrogation to sue in the
name of the plaintiffs. It was held that since the defendants were coinsured
with the plaintiffs, and since the main contractor had been entitled to effect
the insurance upon the whole of the property in the name or on behalf of all
the insured, including the defendants, the insurers had no right of subrogation
to bring the action in the name of the plaintiffs. In summarising the judgment
in this brief fashion I am conscious that I am not doing justice to all the
issues with which it dealt. I have already briefly touched upon some of them in
the earlier parts of this judgment. But they are not directly material for
present purposes, and subject to one immaterial point at p 136E of the report,
which it was unnecessary to explore, neither Mr Turner nor Mr Harvey suggested
that this judgment was open to any criticism. However, both were also agreed
that it is distinguishable from the present case, since the defendants in the
present case cannot claim to have been coinsured with the plaintiffs. In
addition, the plaintiffs and defendants in the present case are contractually
bound by the lease between them, and there is accordingly the further issue
whether the terms of the lease preclude the plaintiffs from recovering damages
from the defendants on the ground that the fire covered by the plaintiffs’
insurance had been caused by the negligence of the defendants.
This was the
issue which was hotly contested between landlords’ insurers and tenants or
their insurers in similar circumstances in the Canadian and American cases. In
these cases the tenants were also not coinsured with the landlords under the
insurance effected by the latter, so that the position in that regard was the
same as in Mumford v Wheler (supra), although no issue as to subrogation
arose in the latter case. The issues raised by a trilogy of cases which reached
the Supreme Court of Canada can broadly be summarised as follows. First, no one
appears to have questioned the right of the tenants to contend that the
landlords had insured the premises for the benefit of the tenants as well as of
the landlords. All the judgments are therefore in line with the ratio of the
decision in Mumford v Wheler. However, what divided the members
of the Supreme Court on each occasion was the question whether this fact,
together with other provisions in the leases similar to those in the present
case, was sufficient to entitle the court to conclude that the tenant was also
exonerated from liability in negligence. The terms of the leases in these three
cases
than the lease in the present case, and markedly less so in the second and
third cases. The majority of the Supreme Court, led by Laskin CJ in each of
these cases, decided the issue in favour of the tenant. The minority, in each
case led by Grandpre J, held in favour of the landlords by applying the
principles concerning exemption clauses to the leases, in particular the
decision of the Privy Council in Canada Steamship Lines Ltd v The
King [1952] AC 192. The minority view, in effect, was that sufficient
content could be given to the landlords’ covenant to insure the premises
against fire by concluding that the purpose of the covenant was to assure the
tenants that funds for the reinstatement of the premises would be available,
and that in these circumstances the provisions of the lease did not go far
enough to exclude the tenants’ liability in negligence, since there was no
provision to this effect.
I do not
propose to lengthen this judgment by examining each of these three Supreme
Court decisions in detail, since the provisions of the leases differed to some
extent in each case and the judgments also had to take account of an earlier
decision of the Supreme Court and other decisions below. The three cases in
question were Agnew-Surpass Shoe Stores Ltd v Cummer-Yonge
Investments Ltd [1975] 55 DLR (3d) 676, Ross Southward Tire Ltd v Pyrotech
Products Ltd [1975] 57 DLR (3d) 248 and T Eaton Co Ltd v Smith
[1977] 92 DLR (3d) 425. The provisions of the lease in the first of these were
most closely in line with those in the present case; the tenant’s repairing
covenant excluded the obligation to repair damage caused by fire as here, but
the tenant’s obligation to contribute to the cost of the insurance arose only
in the event of any increase in premiums due to structural changes or
alterations made by the tenant. In the subsequent cases the tenant’s position
under the terms of the lease was still less favourable in comparison with the
present case, but the majority nevertheless decided in his favour. In each of
the cases the minority concluded that the absence of any provision expressly or
impliedly exonerating the tenant from negligence was fatal, but the majority
view was that there was no need for any such provision, since it was
sufficiently clear from the terms of the leases and the landlords’ covenant to
insure against fire, including fire caused by the tenants’ negligence, that the
landlord could not maintain an action for negligence against the tenants, and
that the landlords’ insurers’ right of subrogation could therefore equally not
be enforced. In order to summarise the position under the law of Canada for
present purposes I think that it is sufficient to refer to the decision of the
Supreme Court, Appeal Division, of Nova Scotia in Greenwood Shopping Plaza
Ltd v Neil J Buchanan Ltd [1979] 99 DLR (3d) 289. In that case the
landlord’s insurers sought to overcome the effect of these decisions in favour
of the tenant by including among the defendants the employees of the tenant who
had been responsible for the fire. It was held that the employees were entitled
to the same protection as their employer, the tenant, but for present purposes
the tenant’s own position is all that matters. The judgment of the court began
by summarising the general position under the law of Canada as the result of
these three cases. In this connection MacKeigan CJNS summarised the reasons for
concluding that in the light of the decisions of the Supreme Court the tenant’s
employees were not liable in the following way:
The essential
reason can be put quite simply: cl 14 of the lease is a covenant with and for
the benefit of the tenant Buchanan that the landlord Greenwood will keep the
building insured against loss by fire, including fire caused by anyone’s
negligence. The tenant can rely on the landlord’s covenant to insure and can
refrain from insuring against any liability to the landlord for its own
negligence. The landlord must then look only to its own insurance if it suffers
loss and cannot sue the tenant for loss that it had promised to insure. The
landlord’s insurer has, by subrogation, no greater right than has its insured
and thus it also cannot sue the tenant for any insured loss.
He went on to
say that the issue had been put beyond doubt by the third of the Supreme Court
decisions, T Eaton & Co Ltd v Smith (supra) and quoted a
number of passages from the judgment of Laskin CJ as follows:
It is settled
law that the exception of fire in a repairing covenant does not exculpate a
tenant from liability for a fire caused by its negligence or that of a person
for whose negligence it is vicariously liable. If it can escape this liability
in the present case, it can only be on the basis that the landlord’s covenant
to insure is a covenant that runs to the benefit of the tenant, lifting from it
the risk of liability for fire arising from its negligence and bringing that
risk under insurance coverage.
Had the
landlord insured without giving a covenant to that effect in the lease, the
tenant’s risk of liability for fire resulting from negligence would be
unquestionable; and if the landlord collected from his insurer, the latter
would have an equally unquestionable right of recovery from the tenant in a
subrogated action.
. . . where
the covenant to insure is not at large but is, as in this case, a covenant with
the lessee that the landlord will keep the buildings on the premises
insured against loss by fire, it must be given effect against liability for
fires arising from the tenant’s negligence because otherwise, as a covenant
expressly running to the benefit of the tenant, it would have no
subject-matter.
This is not a
case where one has to consider whether there is some provision exonerating one
contracting party from liability to the other for the former’s negligence.
Rather it is a case where a supervening covenant has been given and taken to
cover by an insurance policy the risk of loss from a fire caused by negligence.
An insurer could not refuse to pay a claim for loss by fire merely because the
fire arose from the insured’s negligence. I can see no reason why its position
can be any better against a tenant, whose negligence caused loss by fire, if
the lease with the landlord makes it clear that a policy was to be taken out by
the landlord to cover such fires, and a policy is written which does so. In
short, the insurer can claim only by subrogation under the lease.
This is the
position in Canada, and the same view has prevailed in the United States. In
the section of ‘Landlord and Tenant’ in the Corpus Juris Secundum, para
376, the position is summarised as follows under the heading ‘Insurance by
Lessor’:
Where the
covenant requires the lessor to maintain insurance to provide against loss by
fire or storm, it has been construed as protecting both parties, especially
where it further provides that the lessor is to use as much of the proceeds as
is necessary for reconstruction in the event of fire or storm, and the lessee
can rely on the covenant even if the fire is caused by his negligence, or the
negligence of his employees . . .
The leading
authority to which we were referred in support of this citation was General
Mills Inc v Goldman (1950) 184 Fed Rep (2d) 359, a decision of the
Court of Appeal of the Eighth Circuit, and certiorari was denied by the Supreme
Court. Other decisions cited to us were Fred A Chapin Lumber Co v Lumber
Bargains Inc (1961) 11 Cal Rep 634, General Accident Fire & Life
Assurance Corp v Traders Furnisher Co (1965) 401 Pac Rep (2d) 157
and New Hampshire Insurance Co v Fox Midwest Theatres Inc (1969)
Kan 457 Pac Rep (2d) 133.
I would
respectfully follow and adopt the reasoning which has prevailed in this
impressive series of North American authorities. Mr Turner’s argument that we
should not do so followed the minority line of Grandpre J in the Canadian
Supreme Court that the purpose and subject-matter of the landlord’s covenant to
insure and reinstate the demised premises out of the policy moneys were to
relieve the tenant of his corresponding repairing obligations and to ensure
that the necessary funds for reinstatement would be available. Accordingly,
applying general principles of exemption from liability as illustrated in Canada
Steamship Lines Ltd v The King (supra), an exemption from liability
for a fire caused by negligence could not be regarded as also inherent in the
lease, since it would require an express exemption to have this effect.
I would not
accept this line of argument. An essential feature of insurance against fire is
that it covers fires caused by accident as well as by negligence. This was what
the plaintiffs agreed to provide in consideration of (inter alia) the
insurance rent paid by the defendants. The intention of the parties, sensibly
construed, must therefore have been that in the event of damage by fire,
whether due to accident or negligence, the landlords’ loss was to be recouped
from the insurance moneys and that in that event they were to have no further
claim against the tenants for damages in negligence. Another way of reaching
the same conclusion, on which Mr Harvey also relied, is that in situations such
as the present the tenant is entitled to say that the landlord has been fully indemnified
in the manner envisaged by the provisions of the lease and that he cannot
therefore recover damages from the tenant in addition, so as to provide himself
with what would in effect be a double indemnity. Although the receipt of
insurance moneys by an innocent party is of course normally no defence to a
wrongdoer (Bradburn v Great Western Railway Co (1874) LR 10 Ex
1), Mr Harvey relied on a number of passages in Parry v Cleaver
[1970] AC 1 to show that considerations of ‘justice, reasonableness and public
policy’ (per Lord Reid at p 13) may require exceptions to this general
principle. I do not think it necessary to elaborate upon this line of argument
in the present case save to say that I accept it and regard it as complementary
to the conclusion which is to be derived from the construction and effect of
the terms of the lease itself, as indicated above. I should also add, for the
sake of completeness, that I cannot accept Mr Turner’s reliance on another
decision of Lloyd J in The Yasin [1979] 2 Lloyd’s Rep 45.
lease because (a) the persons interested in the cargo were to have the sole
benefit of the insurance in question, (b) this was to be taken out by the
shipowners in the event of the vessel used under the charter being more than 15
years old and was thus unconnected with any possible cause of action against
the owners under the charter party, and (c) the charter expressly provided that
the provision of this policy was not to constitute a waiver of the owners’
obligation to provide a vessel complying with the terms of the charter (see cl
41 at p 47). It can therefore be seen at once that the position was essentially
and expressly different from the position in the present case.
My conclusion
is accordingly that the plaintiffs have no right to recover damages in
negligence from the defendants for the destruction of the building by fire,
with the result that their insurers have no relevant right of subrogation. I
would therefore dismiss this appeal.
Agreeing,
GLIDEWELL LJ said: I wish only to comment on an argument advanced by Mr Turner
which he based on a short passage in the speech of Lord Reid in Parry v Cleaver
[1970] AC 1. At p 15E Lord Reid said:
It is
rational to make the extent of the defendant’s liability depend on remoteness
from his point of view — on what he knew or could or should have foreseen. But
it is, to my mind, an irrational technicality to make that depend on the
remoteness or closeness of relationship between the plaintiff’s source of loss
and source of gain. Surely the distinction between receipts which must be
brought into account and those which must not must depend not on their source
but on their intrinsic nature.
In The
Yasin [1979] 2 Lloyd’s Rep 45 Lloyd J quoted this among a number of
passages from the speeches in Parry v Cleaver, leading to his
conclusion that the proceeds of the insurance policy were different in kind
from the loss which the plaintiffs had suffered by reason of the defendants’
breach of contract in providing an unseaworthy vessel. Mr Turner argues that in
this case also the insurance money was different in kind from the plaintiffs’
loss.
In an earlier
passage in his speech in Parry v Cleaver Lord Reid said at p 14D
to E:
As regards moneys
coming to the plaintiff under a contract of insurance, I think that the real
and substantial reason for disregarding them is that the plaintiff has bought
them and that it would be unjust and unreasonable to hold that the money which
he prudently spent on premiums and the benefit from it should enure to the
benefit of the tortfeasor.
Lord Pearce
said at p 37C to D:
It seems to
me possible that on those grounds there might be some difference of approach
where it is the employer himself who is the defendant tortfeasor, and the
pension rights in question come from an insurance arrangement which he himself
has made with the plaintiff as his employee.
In the present
case it was the defendants who paid an appropriate part of the insurance
premium on a policy which the plaintiffs took out under a contractual
obligation to the defendants, and the defendants were therefore entitled to the
benefit of that policy. Thus the reason advanced by Lord Reid for disregarding
the insurance moneys in Parry v Cleaver does not apply.
As Kerr LJ has
said, it is of the essence of fire insurance that it covers damage from fires
caused by negligence as well as by accident. Where a building is tenanted, such
negligence may often be that of the tenant or his servants. Thus in this case
the risk which led to payment of the insurance moneys was one of the risks
envisaged in the agreement between the parties that the plaintiffs should take
out the insurance. Both receipts and loss were of the same nature. This
argument therefore fails, and the appeal should be dismissed.
CROOM-JOHNSON
LJ agreed with both judgments and had nothing further to add.
The appeal
was dismissed with costs; leave to appeal to the House of Lords was refused.
