For example, in United Fire & Cas. Co. v. Bruggeman, 505 N.W.2d 87 (Minn. App. 1993), the tenants rented space from the insured landlord without a written lease or contract, and without discussing any independent arrangement for insurance coverage. After a fire destroyed the property, the landlord's insurer commenced a subrogation action, claiming that the fire was negligently set by the tenants. The court held that the tenants were coinsured under the policy and, therefore, not candidates for subrogation.

In United Farm Bureau Mut. Ins. Co. v. Owen, 660 N.E.2d 616 (Ind. App. 1996), subrogation against the insured landlord's tenant for fire damage was barred by a release contained in the lease which was a general pre-loss absolution of the tenant from liability to the insured landlord. Only an express agreement that the tenants will be liable to the landlord's fire insurer in the event that the tenants cause fire damage to the landlord's property will suffice according to Nationwide Mut. Fire Ins. Co. v. Maurillo, 2003 WL 1486581 (Conn. Super. 2003) (unpublished).

The lease may contain a release that serves as a pre-loss waiver that precludes subrogation against the insured's tenant. When the lease contains an agreement for one party to maintain the property insurance covering both parties' interests, courts have read such agreements to mean that the insurance procured, rather than the negligent party, will be looked to in time of loss. Likewise, subrogation against tenants has not been allowed when landlords agreed to insure properties. There are, however, exceptions to both.

What happens when there is no agreement between the landlord and tenant regarding which must insure the property? The majority rule prohibits subrogation against a tenant in such an instance. Under the majority rule, absent an express agreement to the contrary, a tenant is an implied coinsured under the landlord's policy. Courts taking the minority position do allow subrogation on these facts. These courts have said that, in the absence of an express provision protecting the tenant from the consequences of its own negligence, a tenant is liable for its own negligence.

Jurisdiction

The conclusion to be drawn from an examination of the following two cases is that the status of a tenant as a proper defendant in a subrogation action brought by the landlord or its insurer varies depending upon the jurisdiction of the loss.

In Tri-Par Investments, LLC v. Sousa, No. 2-03-238, 268 Neb. 119, 2004 WL 1232038, N.W.2d (Neb. 2004), the insurer alleged that the fire had been the result of the tenant's negligence in failing to properly and adequately supervise her children, keep one child from playing with or using matches or lighters, and keep matches, lighters, and other ignition sources in a secure place that would be inaccessible to children. The insurer also claimed that the tenant breached the lease agreement by failing to pay for or repair the damage and by failing to take care of the premises and to keep them safe from fire. The insurer sought $50,020 for property damage and loss of rent.

The court found that the insurer had no subrogation rights against the tenant because the terms of the policy did not expressly confer such rights. It declared that the Sutton doctrine applied, which holds that a tenant is an implied coinsured under the landlord's policy with respect to fire damage to a leased residential premises. Under Sutton, an insurer has no right of subrogation against a tenant whose negligence causes fire damage in the absence of an express provision in the lease to the contrary.

The insurer had asked the court to adopt the modified rule set forth in 56 Associates ex rel. Paolino v Frieband, 89 F.Supp.2d 1893 (D. R.I. 2000), and Bannock Bldg. Co. v. Sahlberg, 887 P.2d 1042 (Idaho 1994), which would require it to examine the intentions of the landlord and tenant on a case-by-case basis in light of the particular provisions in the lease. Instead, the Nebraska court chose the per se rule set forth in Sutton.

The court said that the Sutton rule represents the better public policy. As an initial matter, a pure Sutton approach has the benefit of providing legal certainty. For example, the Sutton rule prevents landlords from engaging in gamesmanship when drafting leases by providing the necessary incentive for them, if they so desire, to place express subrogation provisions in their leases. If such provisions are placed in leases, tenants will be on notice that they need to purchase liability insurance. If such provisions are not included, insurers will pass the increased risk along to landlords in the form of higher premiums and landlords, in turn, will pass along the higher premiums to tenants in the form of increased rent. As the Sutton court did 30 years ago, the court acknowledges that this is almost certainly the current commercial reality.

In addition, the court believed that, absent an express agreement alerting them otherwise, the Sutton rule comports with the reasonable expectations of tenants. Moreover, the court said that the Sutton rule accounts for modern commercial realities by preventing the economic waste that will undoubtedly occur if each tenant in a multi-unit dwelling or multi-unit rental complex is required to insure the entire building against his own negligence. In sum, Sutton and its progeny represent the better-reasoned rule, according to the Nebraska court. Therefore, it holds that, absent an express agreement to the contrary in a lease, a tenant and his landlord are implied coinsureds under the landlord's fire insurance policy, and that the landlord's liability insurer is precluded from bringing a subrogation action against the negligent tenant.

Oregon

In Koch v. Spann, No. 002088; A119099, 2003 WL 23532371, P.3d (Ore. App. 2004), the tenant allegedly had started the fire that damaged the duplex. The tenant allegedly decorated a live Christmas tree with lit candles and sparklers, which caused the tree to catch on fire and which resulted in $215,242 of damage to the duplex. The insurer paid the insured $200,543 for claims under the policy and filed a subrogation action against the insured's tenant.

The Oregon court found that the lease held the tenant “responsible for any damages to premises and/or furnishings caused by [his] negligence” and required that he “assume all liability for damages other than ordinary wear and tear.” Therefore, to limit the tenant's liability to damage to his own personal property or to hold that the landlord waived its claims in the hands of its insurer would be contrary to the unambiguous provisions of the lease, the court said. It also would be contrary to Oregon landlord-tenant law, which provides that tenants may not “deliberately or negligently destroy” the premises (O.R.S. 90.325(8)) and allows landlords to sue its tenants for damages for violations of the statute (O.R.S. 90.400(11)).

The Oregon Supreme Court had not considered the Sutton doctrine. Prior Oregon cases, however, only declared waiver of subrogation claims when the landlord was contractually obligated to maintain fire insurance. Relevant cases include Waterway Terminals v. P.S. Lord, 406 P.2d 556 (Ore. 1965), in which a dispute between a contractor and a dock owner occurred over the contractor's negligence and the court held that the lease provision requiring the owner to purchase insurance barred its suit against the contractor, and Koenneck v. Waxwing Cedar Prod., 543 P.2d 669 (Ore. 1975), in which the lessor's action against the lessee was barred by a lease provision obligating the lessor to maintain “full fire insurance coverage on all the leased property for all of the parties” and holding that premiums were included in the monthly lease payments. Although the tenant argued that these cases did not foreclose adoption and application of the Sutton rule, the court declined to adopt it in light of the lease provisions at issue in this case, Oregon landlord-tenant law, and the general “presumption in Oregon that contracts do not create immunity from liability.”

One justice dissented on the basis of the lease provisions. Because the lease stated in more than one place that the tenant would be responsible for damage to his “personal property” and advised the tenant to purchase renter insurance to protect himself in the event of loss, it would “permit an inference that the parties intended that the [tenant] would be responsible for damage to his personal property only and not for damage to the premises.”

Courts are split on the question of how to handle subrogation by a landlord's insurer against a tenant, absent an express agreement. This is evident in other recent cases addressing the issue, including DiLullo v. Joseph, 2002 WL 437166 (Conn. 2002), North River Ins. Co. v. Snyder, 2002 ME 146, (Me. 2002), St. Paul Cos. v. Van Beek, 609 N.W.2d 256 (Minn. App. 2000), and Cambridge Mut. Fire Ins. Co. v. Crete, 2004 WL 484552 (N.H. 2004). Before making decisions involving landlord/tenant subrogation questions, claim people should check case law from their states.

This month's Coverage Analysis Column is prepared by the Property Loss Research Bureau as a service to Claims readers. It is designed to present information about case law and other authority applicable to the interpretation of insurance policy provisions. Every effort has been made to insure that the information provided is accurate. However, the opinions expressed here are for internal use only. They do not constitute a substitute for legal advice as to the law of a particular jurisdiction as applied in the full factual context of a particular claim.

The opinions expressed in this month's column are those of the staff of the Property Loss Research Bureau and do not necessarily represent the opinions of members or other insurers. The opinions of PLRB staff do not represent an indication or prediction of any future action or position of any member or other insurer. Readers should consult with management to determine their company's positions on the issues discussed in this column.

David W. Fox is editor of legal publications for the Property Loss Research Bureau.