Daily Development for Friday, January 19, 2007
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin Kansas City, Missouri dirt@umkc.edu

STRICT LIABILITY; RIGHTS OF SUBROGATION:  A provision in a lease which holds the tenant liable for all damages, “intentional or non intentional” does not impose strict liability on that tenant without additional evidence that the parties intended to impose such liability.

Allstate Ins. Co. v. Watson, 195 S.W.3d 609 (Tenn. 2006): 

Defendant was a tenant of a residential duplex.  A fire caused damage to the duplex in the amount of $25,788.47, and insurer Allstate paid the loss to its insured, the landlord/owner of the duplex.  Allstate brought suit against the tenant asserting subrogation rights as the landlord’s insurer. 

The language of the lease provided that the tenant was “responsible for all damages to the apartment, intentional or non intentional.”  The trial court ruled that the tenant did not intentionally or negligently cause the fire damage but held the tenant strictly liable for the damage under the terms of the lease.  The Court of Appeals reversed, holding that the insurer had no right of subrogation against a tenant because the tenant and landlord are deemed co-insureds.  Allstate appealed to the Supreme Court. 

The Tennessee Supreme Court dodged the issue of whether the “implied co-insured” doctrine applies in this case, as it concluded that the tenant had no liability even if the landlord did have a subrogation right, since the lease imposed liability on the tenant only for intentional or negligent acts causing damages, and there was no showing that the tenant’s intentional or negligent acts caused the fire here.

The court, of course, was called then to interpret what the parties meant by stating that tenant was responsible for all damages to the apartment, “intentional or non-intentional.”  It held that  that the phrase “intentional or non intentional,” was ambiguous here, as it could mean that tenant was strictly liable or that tenant was liable for its negligence, but not for damages unrelated to intentional or negligent acts of tenant. 

The court applied established rules of construction and parol evidence to determine the intent of the parties.  It relied on statements from the defendant and the non-lawyer who drafted the lease on behalf of the landlord that it was not their intent that the tenant be strictly liable for damage to the property.  The drafter stated that the intent was to hold the tenant responsible for damages resulting from some degree of fault on the tenant’s part.  Therefore, the Court held that the damage provision of the lease only provided for liability in instances of intentional or negligent damage by the tenant.  Because tenant was not liable to landlord under the lease, there was no basis for subrogation, and the Court did not reach the issue of whether the landlord and tenant are co-insureds.

Comment 1: Why did Allstate bother to appeal this $25,000 damages case?  Probably because it couldn’t let stand that the tenant enjoyed “implied co-insured” status (based upon the fact that the landlord presumably used tenant’s rent to pay the lease, when the lease imposed liability for damages directly on the tenant.  This is an important and widely recognized qualification on the growing doctrine making residential tenants (and often commercial ones as well) implied co-insureds or otherwise immune from subrogation as against their landlord’s insured. 

Comment 2: If that indeed was Allstate’s motive, it lost the battle but won the war, since the Supreme Court did not affirm the concept that a tenant enjoys implied co-insured status even for damages as to which the lease specifically provides the tenant will have liability. 

Comment 3: The implied co-insured doctrine was most recently discussed on DIRT in the DD for 11/14/05, and the editor recently has added an extensive new section to the Randolph Edition of Friedman on Leases dealing with the subject.  Section 9.11.  It’s in the third supplement to the Fifth Edition, and should be in your library if you’re properly keeping up and feeding royalties to the Editor.

Comment 4: Under the implied co-insured doctrine, the issue of whether a tenant is liable for his own negligently caused damage is a tricky one.  Normally, a comprehensive policy will insure against damages caused by the insured’s negligence, and by extension from that of a co-insured.  Therefore, if the “implied co-insured” doctrine is really based upon policy, then there should be no subrogation available to the landlord’s insurer. 

On the other hand, if the doctrine is based upon some inference drawn from the parties’ probable intent (included the insurer’s probable intent), then perhaps where the landlord specifically  reserves the right to sue the tenant, the landlord’s insurer should have the same right.  Note that this isn’t a question of whether the landlord might have the right to sue the tenant, since when the lease is silent the tenant may be liable for its own negligence, bur rather whether the landlord has specifically stated that the tenant will be liable.  It’s a subtle distinction, but subtlety is what implied leasing doctrines are all about. 

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