COURT OF APPEAL FOR ONTARIO
CITATION: 2224981 Ontario Inc. v. Intact Insurance Company, 2016 ONCA 870
DATE: 20161118
DOCKET: C61907
Blair, Epstein and Huscroft JJ.A.
BETWEEN
2224981 Ontario Inc. and 2047193 Ontario Inc.
Plaintiffs (Respondents)
- and -
Intact Insurance Company
Defendant (Respondent)
- and -
Zurich Insurance Company Ltd.
Defendant (Appellant)
Adam Grant, for appellant Zurich Insurance Company Ltd.
Thomas Donnelly, for respondents 2224981 Ontario Inc. and 2047193 Ontario Inc.
Amelia Leckey, for respondent Intact Insurance Company
Heard: November 4, 2016
On appeal from the order of Justice Mario D. Faieta of the Superior Court of Justice, dated March 15, 2016.
ENDORSEMENT
[1] This is an appeal from the decision of the motion judge on a special case stated pursuant to Rule 22 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194.
[2] The respondent 2224981 (“Eco-Lux”) conducted its manufacturing operations at premises leased from the respondent landlord, 2047193 (“the Owner”), pursuant to a month-to-month lease. A fire largely destroyed the premises on February 3, 2012 and Eco-Lux ceased production and stopped paying rent as a result. The premises were repaired as of November 1, 2012, some eight months later. By that time, Eco-Lux had gone out of business.
[3] Eco-Lux’s insurer, the respondent, Intact Insurance Company (“Intact”) provided coverage to Eco-Lux for lost profits pursuant to the property and business interruption policy it underwrote. The coverage was based on an estimate of the gross profits Eco-Lux would have made, less expenses, including the rent that Eco-Lux would have had to pay to the Owner.
[4] The Owner sought coverage for business losses – in particular, the loss of rental income between February 3, 2012 and November 1, 2012 – pursuant to its policy with the appellant Zurich Insurance Company Ltd. (“Zurich”). Zurich denied coverage on the basis that Eco-Lux was obligated to continue to pay rent during that period, despite the fire.
[5] Thus, an issue arose as to whether responsibility for the lost rent rested with Zurich, under the Owner’s policy; Intact, under Eco-Lux’s policy; or Eco-Lux in its own capacity.
[6] In order to resolve this issue the parties stated the following question in the court below pursuant to Rule 22:
Was Zurich entitled to deny coverage on the basis that there was no actual rental loss, since, in Zurich's view, Eco-Lux was obligated to pay rent to the Owner following the fire loss on February 3, 2012 until October 31, 2012?
[7] The motion judge found that the lease between Eco-Lux and the Owner was frustrated by the fire; that Eco-Lux’s obligation to pay rent ceased as a result; and that the Owner suffered business losses covered by the insurance policy. He declared that Zurich was required to pay the Owner’s losses.
[8] Zurich argues that all of these findings are in error. First, it acknowledges that a commercial lease may be frustrated, but submits that this lease was not frustrated because the disruption caused by the fire was temporary rather than permanent. Second, Zurich submits that Eco-Lux remained obligated to pay rent under the lease because the lease did not include an abatement provision and Eco-Lux never terminated the lease. Third, Zurich submits that the Owner’s loss was not caused solely by the fire and is not covered by the policy as a result. Zurich says that the loss was caused by Eco-Lux’s failure to pay the rent due under the lease and the Owner’s failure to take steps to enforce payment.
[9] We reject these submissions.
[10] The motion judge’s conclusion that Zurich is required to cover the Owner’s lost rental income as a business loss under the policy is correct, but we reach this conclusion for different reasons. In particular, it is not necessary to determine whether or not the lease was frustrated.
[11] As the motion judge noted, apart from the question of causation, Zurich admitted that the Owner’s loss of rental income was covered under its policy. The policy provided for business interruption loss (referred to as “Time Element Loss”):
Business Income Loss (at a “premises”)
We will pay for the actual Business Income Loss you sustain during the “period of indemnity” resulting from the necessary interruption of your business activities occurring at a “premises” if the interruption is caused solely by direct physical loss of or damage to “covered property”.
[12] It is not disputed that the Owner’s loss of rental income constitutes a Business Income Loss, as set out in other provisions in the policy: where the Owner’s business activities include renting the premises, “business income” includes “rental value”, and “rental value” is defined as meaning “total anticipated rental income from tenant occupancy”. [Emphasis added]
[13] Accordingly, the only issues the motion judge was required to determine were: (i) whether the loss of rental income resulted from the necessary interruption of the business (the unavoidable discontinuation of the business activities), and (ii) whether the necessary interruption was caused solely by the fire loss.
[14] There is no dispute that the leased premises were largely destroyed by the fire and that Eco-Lux ceased operations as a result. It follows that the “necessary interruption” was caused solely by the fire. The agreed statement of facts includes the following statement at para. 13:
As a result of the fire, Eco-lux stopped operations at the Property and ceased making rent payments to the Owner.
[15] Thus, the motion judge’s finding that the “interruption of the use of the building by Eco-Lux was caused solely by a covered cause of loss, namely, the fire”, was open on the record that was before him.
[16] Plainly, the Owner anticipated receiving rental income from Eco-Lux but did not receive it. That is sufficient to trigger the coverage for Business Income Loss under the policy, which, as noted above, defines “rental value” as including “total anticipated rental income from tenant occupancy”.
[17] Zurich was not entitled to deny coverage on the basis that Eco-Lux continued to be liable to pay rent for the relevant period, despite the fire. Even assuming that Eco-Lux remained legally obligated to pay rent following the destruction of the premises – an assumption that may be questionable given the doctrine of frustration – the Owner was under no obligation to pursue remedies against Eco-Lux before making a claim for business losses under its insurance policy with Zurich.
[18] Zurich was obligated to cover the claim for lost rent under its policy with the Owner, and payment of the claim under the policy allows Zurich to pursue Eco-Lux for the rent as a subrogated claim if it chooses to do so. The possible inability of Eco-Lux to satisfy a judgment does not allow Zurich to shift the loss to the insured Owner.
[19] Accordingly, the appeal is dismissed.
[20] Zurich shall pay costs of $15,000 to Eco-Lux and the Owner and of $4,500 to Intact, inclusive of taxes and disbursements.
“R.A. Blair J.A.”
“Gloria Epstein J.A.”
“Grant Huscroft J.A.”