A recent Saskatchewan court ruling is a wake-up call to landlords that damages caused by their tenants’ drug operations are not likely to be covered under the landlord’s insurance policy – even if the landlord had no way of detecting them.
Although this court case unfolded in Saskatchewan, property owners across the country would be wise to read this decision, since the exclusion clause used in this insurance policy is common across Canada’s provinces, with the exception of Quebec.
The case concerned a retired married couple who owned an income property on Princess Street in Regina. The couple conducted an interview process and rented the home to new tenants in 2008, with no apparent reason to believe the tenants were involved in drug manufacturing. The tenants – a family of four with two children – behaved as “model tenants” and never missed a month’s rent.
On March 31, 2009, however, the home was severely damaged by an explosion and fire, which was later found to have been caused by the tenants’ attempts to produce cannabis resin. The landlords tried to collect on their $175,000 insurance policy, but their insurer refused to pay for the property damage, citing the exclusion in their property insurance policy regarding illegal drugs:
We do not insure: 15. Dwellings, outbuildings or personal property contained in them, used in whole or in part for the cultivation, processing, manufacture, distribution or sale of marijuana or any product derived or containing marijuana or any other substance falling under the Controlled Drugs and Substance Act Narcotic Control Regulations.
The landlords then sued their insurer, arguing that it would be unjust to deny coverage for a loss that they had no reason to see coming and could have done nothing further to prevent.
In his decision released in May, the superior court judge rejected this and other arguments and found in favour of the insurer. He noted that the drug exclusion was not “buried” in the entrails of the insurance policy or the insurance booklet but rather it was identified on the front page of a two-page renewal form.
Furthermore, the judge wrote that if landlords weren’t prepared to bear this risk of uninsured loss, they should consider getting out of the rental industry:
Finally, with respect to the hardship that the drug exclusion may present for landlords … landlords are not forced to remain in the business of renting out residential property. If they are not able or willing to bear the risk, they may need to reconsider their investment.
The claim against the insurer was dismissed and the landlords were ordered to pay the insurer’s legal costs of the nine-year legal battle. The judge decided that the landlords could proceed with their lawsuit against the tenants, although it was not clear whether the tenants would have the funds needed to pay.
The decision underlines the difficulty landlords face in insuring against drug-related damage to their properties. Since property insurance is not regulated in the same way that automobile insurance is, insurers are under no obligation to make such coverage available.
Landlords as a result will likely be hard-pressed to find coverage for drug-related damage on the market. Unless and until provincial legislatures intervene, this is a risk rental property owners may simply have to bear on their own.
Special to The Globe and Mail
Gord McGuire is a partner with Adair Goldblatt Bieber in Toronto, practising in all manner of civil litigation.