Sutton Button: Subrogation by a Landlord's Insurer Against a Tenant – Claims Magazine

Two more jurisdictions have recently weighed in on the issue of subrogation involving landlords and tenants. Nebraska reinforced and adopted the Sutton doctrine as applied to residential tenancies. That doctrine holds that a residential tenant is an implied coinsured under the landlord's policy in the absence of an express provision to the contrary, and bars subrogation by the landlord's insurer. See Sutton v. Jondahl, 532 P.2d 478 (Okla. App. 1975). Oregon did not expressly reject the Sutton rule but clearly was unwilling to apply a per se rule barring subrogation.

SUBROGATION INVOLVING OTHER INSURED

Subrogation is the right of the insurer to stand in the shoes of the insured in order to pursue recovery from any third parties who are legally responsible for the insured's loss. A defendant in a subrogation action can be any third party who has legal responsibility for the loss. However, not all potential defendants can be named as defendants in a subrogation action. Commonly, an insurer is prohibited from bringing an action against certain defendants on the theory that the potential defendant is actually an insured under the policy, and the insurer cannot subrogate against its own insured under the same policy. There is often variance among different jurisdictions on the issue of whether certain types of individuals and entities are proper subrogation defendants. The most common examples include controversies involving property owners and contractors, and landlords and tenants. These parties are sometimes given the status of implied coinsured.

SUBROGATION INVOLVING LANDLORDS AND TENANTS

Case law in some jurisdictions prohibits or permits landlord-tenant subrogation actions on broad principles, while other jurisdictions base their views on provisions of the lease involved. Results may be affected by whether a lease is residential or commercial or whether a lease is oral or written. Several courts have found that the fact that a tenant has procured property insurance applicable to the loss is significant in permitting the landlord's insurer to pursue its subrogation rights against that tenant.

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 coinsureds under the policy and, therefore, not amenable to a subrogation action. 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 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 an agreement to mean that the insurance procured, rather than the negligent party, will be looked to in time of loss. Likewise, subrogation against the tenant has not been allowed where the landlord agreed to insure the property. Although, there are 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.

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 and/or its insurer varies depending upon the jurisdiction of the loss.

NEBRASKA CASE

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 (1) properly and adequately supervise her children, (2) keep one child from playing with or using matches or lighters, and (3) 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, citing Sutton v. Jondahl, 532 478 (Okla. App. 1975) 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 which bars subrogation by the insurer unless the lease expressly says that the tenant agrees to it.

The court said 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 a provision is placed in their lease, tenants will be on notice that they need to purchase liability insurance. If such a provision is not included in their lease, 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 court in Sutton 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 multiunit dwelling or multiunit rental complex is required to insure the entire building against his or her own negligence. In sum, Sutton and its progeny represent the better-reasoned rule, according to the Nebraska court. Therefore, it hold that absent an express agreement to the contrary in a lease, a tenant and his or her landlord are implied coinsureds under the landlord's fire insurance policy, and the landlord's liability insurer is precluded from bringing a subrogation action against the negligent tenant.

OREGON CASE

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 cause damage to the duplex in the amount of $215,242. The insurer paid the insured $200,543 for claims under the policy and filed a subrogation action against the insured's tenant.

The Oregon appellate court did not expressly reject the Sutton rule but clearly was unwilling to apply a per se rule barring subrogation. Although Sutton reflects the majority view, there are a number of courts in the minority that have criticized Sutton and have either rejected it or modified it to consider waiver only on a case-by-case basis based on the particular language of the lease provisions between the landlord and the tenant.

Here, the 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. However, prior Oregon cases have only declared waiver of subrogation claims when the landlord has been contractually obligated to maintain fire insurance. See, e.g., Waterway Terminals v. P.S. Lord, 406 P.2d 556 (Ore. 1965) (in a dispute between a contractor and a dock owner over the contractor's negligence, 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) (lessor's action against lessee was barred by lease provision obligating the lessor to maintain "full fire insurance coverage on all the leased property for all of the parties and 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. Since 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."

CONCLUSION

Courts are split on the question of how to handle subrogation by a landlord's insurer against a tenant, absent an express agreement. Claims people should check case law from their state. Some other recent cases addressing this issue include: 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), Cambridge Mut. Fire Ins. Co. v. Crete, 2004 WL 484552 (N.H. 2004), and 56 Associates v. Frieband, 89 F. Supp.2d 189 (USDC D. R.I. 2000).