



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.

Plaintiff
s (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-Luxs  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 Owners policy; Intact, under Eco-Luxs 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-Luxs 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 Owners 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 Owners 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-Luxs
    failure to pay the rent due under the lease and the Owners failure to take steps
    to enforce payment.

[9]

We reject these submissions.

[10]

The motion judges conclusion that Zurich is required to cover the
    Owners 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 Owners 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 Owners loss of rental income constitutes a
    Business Income Loss, as set out in other provisions in the policy: where the
    Owners 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 judges 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.


