Is Damage by Tenants Covered Under a Landlords Policy

ISSUE:

The insured landlord rented a home to the tenant under a two-year lease. Upon entering the premises at the end of the lease, the landlord discovered that the tenant had done a "remodeling" job in the kitchen which involved the knocking down of walls, the removal of cupboards, and repainting in black. The remodeling job was never completed because the walls and cabinets had not been fully replaced. Around the house there was also other damage including holes in the walls from pictures, a very badly stained bathtub due to lack of cleaning, broken windows, and dirty carpets and walls. The tenant also ripped out a medicine cabinet and a ceiling fan, leaving a hole in the wall and the wires from the fan dangling.

The landlord is insured under a CP 00 10 10 91 and a CP 10 30 10 91. He has made a claim for the remodeling claiming that he will not be able to rent the home with the kitchen in this condition because of the black walls and also because the quality of the work was so poor. He has also made claim for the other damage to the premises done by the insured. Is the insured entitled to recover the expenses necessary to repair these damages?

ANALYSIS:

Since the CP 10 30 policy provides open perils coverage, any accidental damage claimed by the landlord will be covered unless there is a relevant exclusion. The two exclusions which show possible relevance to the loss are the wear and tear exclusion and the faulty workmanship or renovation exclusion.

One factor which must be considered is whether the lease entered into by the parties contained a provision concerning remodeling. If there was no redecorating or remodeling restriction in the lease and no terms requiring the tenant to tender the premises in substantially identical condition excepting wear and tear, then the tenant was within his legal rights in returning the apartment as he did. There is a case supporting the proposition that where a party acts according to its legal rights with respect to property, the owner of the property cannot complain of a fortuitous loss with respect to that property. See Intermetal Mexicana v. Insurance Co. of N. Am., 866 F.2d 71 (3d Cir. Pa. 1989), where a nonfortuitous loss occurred when, during a business dispute, a creditor took possession of a debtor's property pursuant to a valid court order. However, when the debtor obtained a reversal of that order and the creditor refused to surrender the equipment, the creditor's conversion of the equipment was fortuitous. If the lease did not authorize or prohibit remodeling, the loss caused by the remodeling could arguably be considered a business risk assumed by the landlord and not a fortuitous loss covered under the policy.

In considering whether the faulty workmanship exclusion is applicable to the loss, one issue is whether the exclusion would apply to a remodeling job that is partially completed and abandoned, but the work to date was of good quality, or whether it would only apply if the work itself was somehow inadequate. In Allstate Ins. Co. v. Smith, 929 F.2d 447 (9th Cir. Cal. 1991), the court held that the exclusion applied only to a flawed product rather than a flawed process.

Another issue is whether the exclusion should be applied to the faulty workmanship of any person or whether it should be confined to the workmanship performed by or authorized by the insured. In Husband v. Lafayette Ins. Co., 635 So.2d 309 (La. App. 1994), under similar facts, the court held that the faulty workmanship or renovation exclusion did not apply to shoddy renovations performed by a tenant without the permission of the homeowners because the court found the exclusion applicable only to faulty workmanship authorized by the insured. Under the reasoning of this case, the faulty workmanship exclusion would not apply to the renovations done by the tenant since they were not approved by the insured.

The Husband case also addressed the other aspect of this loss, which is the application of the wear and tear exclusion. That case held that the shoddy renovations done by the tenant went way beyond normal wear and tear and amounted to tenant abuse which was not excluded by the policy. In Northwestern Nat'l Cas. Co. v. Khosa, Inc., 520 N.W.2d 771 (Minn. App. 1994), the tenant of a commercial building tore out fixtures and removed personal property from the premises of the insured landlord. The court did not rule on the applicability of the wear and tear exclusion to the loss, but noted in dicta that this type of damage amounted to more than ordinary wear and tear. Probably the more reasonable approach is to limit the wear and tear exclusion to ordinary types of things which would happen with the ordinary use of a rented premises. Therefore, in this scenario, such things as holes in the walls from pictures and dirty walls and carpeting would reasonably be excluded as wear and tear. Every landlord should expect to patch holes, repaint, and clean carpeting on a periodic basis. The remodeling and ripping out of the ceiling fan and medicine cabinet would amount to much more than normal wear and tear. The question of coverage for the broken windows and the scum in the tub is a little more difficult. While it is not unusual for a tenant to accidentally break a window or to not clean a bathtub that well, the degree of the damage or neglect will have to be considered. Multiple broken windows and a permanently damaged bathtub would probably not be considered wear and tear.

This type of claim is also commonly presented under named peril forms such as a DP-2. The question which arises under these forms is whether there is an applicable peril for such damage. Again, depending on the degree of the damage, it might fall under the vandalism peril. If the tenant disregarded the consequences which were certain to follow from his conduct at the premises, it could be considered vandalism. However, if the damage is the type that is expected from use by tenants, it would be considered only wear and tear and not covered under the vandalism peril.