Subrogation Woes – do the terms of your insured’s tenancy agreement prevent recovery?

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Sometimes loss events to occur at tenanted premises, and the insurer of landlord or tenant may settle the resulting claim(s) and then seek subrogation. Questions may then arise as to whether the landlord or tenant may rely on a terms in the underlying tenancy agreement to assert that it cannot be sued for the loss.

HSBC Institutional Trust Services (Singapore) Ltd (as trustee of AIMS AMP Capital Industrial REIT) v DNKH Logistics Pte Ltd [2023] SGHC(A) 13 was a case where the terms of the tenancy agreement defeated a subrogated recovery brought by the landlord’s insurer against the tenant after a warehouse fire.

The Claimant (and Appellant) was HSBC, the trustee of warehouse owner AIMS AMP. AIMS AMP had leased warehouse space to DNKH (Defendant / Respondent) and DKNH had allowed McCormick Ingredients Southeast Aisa Pte Ltd to store dried black peppercorns in part of the warehouse space. A fire broke out and it was believed that the fire was caused by spontaneous combustion of black peppercorns.

HSBC’s insurer (Great Eastern General Insurance Limited) provided an indemnity for the cost of repairing the warehouse and the sought to exercise its subrogation rights to claim against DNKH. The claim was initially brought for breach of contract and the tort of negligence. However, on the third day of the trial, insurers withdrew the negligent claim and proceeded solely on a contractual indemnity contained in an indemnity clause in the lease.  In defence of the claim, DNKH argued that it was only contractually obliged to indemnify HSBC in respect of losses suffered as a result of third-party claims brought against the HSBC.

In approaching HSBC’s claim, the High Court first noted that previous case law had established that indemnity clauses are to be construed strictly, and if a party seeks to exclude or limit its liability (or seeks to have its liability indemnified), it must do so in clear words. A court cannot, however, reject an exemption (or indemnity) clause if the words are clear and unambiguous and susceptible to one meaning only.

The indemnity clause in the lease required DNKH to indemnity the landlord against, amongst other things “all claims, demands, actions, proceedings, judgments, damages, losses, costs and expenses of any nature which the Landlord may suffer or incur as a result of or in connection with or caused by…..any occurrences in, upon or at the Premises or the use or occupation of the Premises…”

The High Court held that the above clause was “broad” since on a plain reading it seemed to catch all losses caused by an occurrence at the premises. It was therefore necessary, as a second step, to look at the relevant context to ascertain if the parties had objectively intended for fire damage caused by no fault of either party to fall within the indemnity clause. The court’s attention thus moved to looking at how the lease allocated risk and the obligation to insure.

Under the lease, the tenant was obliged to take out various insurance, including some in the joint names of landlord and tenant. Most pertinent was clause 3.6.1(ii) which imposed an obligation on the Tenant to insure against all risks and damage to the Premises as well as certain other categories of items enumerated therein. Clause 3.6.1(ii) was worded thus:

“3.6 Insurance

3.6.1 At all times during the Term … the Tenant shall, without demand and at its costs and expense, take out and keep in force the following insurance policies …:

…

(ii) an insurance policy in the joint names of the Landlord and the Tenant (which shall include a provision for waiver of subrogation against the Landlord) against all risks and damage to the Premises, all plant, equipment (including the mechanical and electrical equipment) and installations permanently affixed to the Premises, the furniture, plate and tempered glass, fixtures and fittings in the Premises and all parts thereof which the Tenant is obliged to keep in repair under the provisions of this Lease in such amounts and covering such risks as may from time to time be specified by the Landlord.”

The Court’s view was that the risks to be insured under clause 3.6.1(ii) were wide enough to cover the risk of fire at the Premises. However, the scope clause 3.6.1 (ii) then needed to be construed in the context of and with reference to the Landlord’s obligation to insure, which were set out as follows

4.3 Management of the Building

Subject always to the provisions of Clauses 5.1 and 5.2, the Landlord shall:

4.3.1 keep the structural elements (if any) of the Building in good repair and condition (fair wear and tear excepted);

4.3.2 insure and keep insured the Property (excluding fittings and fixtures installed by the Tenant) against damage by fire and such other risks as the Landlord may deem fit.

Clause 4.3 said that it would be the landlord who was to “insure and keep insured the Property (excluding fittings and fixtures installed by the Tenant) against damage by fire”. Therefore, the lease had allocated the risk of damage to the Premises (excluding the Tenant’s fixture and fittings) caused by fire to the Landlord by requiring the Landlord to procure insurance to cover the risk.  This was in keeping with clause 4.3.1 which said that the Landlord has a duty to maintain the structural aspects of the Building.

HSBC argued that a landlord’s bare covenant to insure for fire risk within a lease does not raise a conclusive presumption that the insurance was to inure for the benefit of the tenant as well as the landlord. However, the court was of the view that the issue of whether there was any intention to benefit the tenant was not engaged. Instead, the issue was one of construction of the lease, and in particular, how the lease allocates risk. The lease had allocated the risk to HSBC.

HSBC then argued that there was no exclusion of its insurer’s right of subrogation against the Tenant in clause 4.3.2. However, the court was of the view that this was not material to its analysis on the segregation of risk. In any event, any claim by the Landlord must arise from some breach, contractual or otherwise, by the Tenant and in the present case the fire arose from no negligence on the part of the tenant.

The court thus concluded that the commercial bargain reached the parties had envisaged that damage to the Premises (except for fittings and fixtures installed by the Tenant) caused by the fire, in the absence of the fault of either party, was to be recovered by the Landlord under its fire insurance policy procured pursuant to clause 4.3.2. Looking at the lease as a whole, it could not be that the landlord required this clause to cover losses arising from the Tenant’s breach of the lease. This is because the remedy for a tenant breaching its obligations in a lease is to sue the tenant for breach of contract. There is therefore no need for an indemnity clause. Further, applying the noscitur a sociis canon of interpretation the surrounding sub-clauses also pointed to the indemnity applying only where there was fault by the Tenant.

The indemnity clause was thus interpreted as being limited to providing HSBC with an indemnity against third party claims arising from the fault of the tenant and the subrogation failed.

This case provides an excellent case study on how the terms of a tenancy agreement may scupper insurer’s attempts to step into the shoes of one party to the tenancy agreement and claim against another party. A take home point for insurers and their lawyers is to ensure that the tenancy agreement is thoroughly considered before embarking on recovery.

Donald Spencer