Daily Development for Monday, November 14, 2005
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

LANDLORD/TENANT; INSURANCE; SUBROGATION; TENANT AS IMPLIED CO-INSURED: Maryland rejects concept that tenant is implied co-insured and automatically immune from subrogation claim by landlord’s insurer where tenant negligence causes loss to premises - subrogation may be barred where tenant legitimately expects that landlord will rely solely on insurance, but analysis is case by case.

Rausch v. Allstate Insurance Co., 882 A.2d 801 (Md. 2005)

There were two cases here - both residential tenancies.  The leases did not contain waiver of subrogation clauses commonly found in commercial leases.  In both cases, the court assumed that the tenant had negligently caused significant fire damage to the landlord’s premises.  The court addressed a rule that some have characterized as a majority rule that tenants are immune from subrogation suits from the landlord’s insurer, even where there is no waiver of subrogation clause, because the cost of insurance is a component of the total rent, and thus the tenant pays rent upon which the landlord relies in buying insurance.  Therefore, the tenant is an “implied co-insured.”

In one of the cases here, there was some evidence in the lease that the landlord and tenant had agreed contractually that the tenant would be liable to the landlord, at least, if the tenant negligently damaged the premises.  There was a “yield up” clause that required that the premises be returned in the same condition as received, except for ordinary wear and tear.  There was a clause requiring the tenant the acquire and maintain insurance to cover any losses to the tenant due to fire in the premises and requiring the tenant to obtain “adequate liability insurance.”  There was language cancelling the lease if the premises were rendered uninhabitable by fire.  And, perhaps most significant, there was a clause stating that tenant was responsible “for any and all damages to the Property caused by any act of negligence of Tenant,” and making the tenant responsible for all repairs, replacements and related services of tenant negligently damages the Premises.

There was also, however, a clause indicating that tenant would comply with the fire safety requirements of any insurance policy maintained by landlord, suggesting of course that the parties anticipated that the landlord would have such insurance.

In the second case, the lease again provided that the tenant would be liable to the landlord for the results of tenant negligence.  It said nothing about the landlord procuring insurance.  In fact, in both cases, the landlord did have an insurance policy which paid a substantial portion of the damages in question (caused by tenant negligence) and the insurance companies were seeking to make subrogated claims. 

The court said that the law was reasonably clear that it was possible for the landlord’s  insurer to have the right to make a subrogated claim against tenant.  Subrogation law reached that far.  It also acknowledged that there had to be a claim available to the landlord against the tenant in order for subrogation to arise.  But in this case that requirement seemed to exist.  . 

The court further stated that the question was not whether the tenant was liable to the landlord for negligent injury to the premises, but whether the tenant would be liable to the insurer.  It noted that there might in many cases be a question as to whether the parties reasonably anticipated that the landlord would rely upon the landlord’s insurance as compensation for any such damage.  Of course, as stated, in many circumstances, commercial leases expressly provide for waiver of subrogation.  But the court  noted that, even in the absence of an express waiver of subrogation in the lease,  many courts had been persuaded that the economic reality of the situation compelled the conclusion that the that the tenant’s rent was paying the cost of  the landlord’s  insurance.  As a consequence, these courts have concluded that the landlord and tenant implicitly  intended that the tenant be a “co-insured,” even when the lease specifically imposed liability on tenant to landlord for !

ied acts of negligence.  There can be no claim by an insurer against such a “co-insured” party. 

But the court, after considerable analysis, including citing many of the relevant cases, concluded that the “implied co-insured” rule should not be the rule in Maryland.  Rather, the court would look on a case by cases basis to ascertain what the parteis had in mind with respect to tenant-caused injury.  It commented: “courts have no business adding insured to an insurance policy in order to achieve their perception of good public policy.” 

In the end, although the court concluded that Maryland would not follow the “implied additional insured” theory and that it would look at these matters on a case by case basis, it included two important caveats that will enable effective planning in many circumstances - case in which, notwithstanding the failure of the lease to waive subrogation claims, a court nevertheless should not permit subrogation, even though the tenant is negligent and might be liable to the landlord for uninsured claims:

[1] “If, under the lease or by some other commitment, the landlord has communicated to the tenant an express or implied agreement to maintain fire insurance on the leased premises, absent some compelling provision to the contrary, the court may properly conclude that, notwithstanding a general "surrender in good condition" or "liability for negligence" clause in the lease, their reasonable expectation was that the landlord would look only to the policy, and not to the tenant, for compensation for fire loss covered by the policy. That expectation would constitute an implied commitment in the lease to relieve the tenant of liability to the extent of the policy coverage and it, too, would therefore preclude a subrogation claim.”

[2] “If the leased premises is a unit within a multi-unit structure, absent a clear, enforceable provision to the contrary, a court may properly conclude that the parties anticipated and reasonably expected that the landlord would have in place adequate fire insurance covering the entire building and, with respect to damage caused by the tenant's negligence to parts of the building beyond the leased premises, would look only to the policy, to the extent of its coverage, for compensation. That expectation has a rational and practical basis. Whatever general common law liability a tenant may have for damage to another person's property caused by the tenant's negligence, it is not likely, unless faced with a very clear contractual obligation to the contrary, that the tenant is thinking beyond the leased premises or, as a practical matter, would be able to afford, or possibly even obtain, sufficient liability insurance to protect against such an extended loss. Nor should the law!

rage the economic waste that would result from multiple layers of insurance by the individual tenants to cover the same loss.”

The court remanded both cases before it for n individual determination as to whether subrogation is appropriate.

Comment 1: The case, which relies heavily on Friedman on Leases (albeit the 4th (non-Randolph) edition - harrumph) also cites and discusses most of the leading cases on both sides of the question, and is an excellent resource for information on how this split is developing around the country.

Some cases find that the tenant is a complete co-insured, and others find simply that subrogation claims cannot be brought.  Many, as the court notes, do not involve liability claims as clear as those involved in the present case. 

Comment 2: The problem with “case by case” determinations, of course, is that there is no predictability.  Parties can’t allocate risks by bargaining nor adequately predict and efficiently protect themselves against risks that do exist.  But is this a case where predictability would make much difference?  Remember we’re already excluding cases in which the parties have bargained for a waiver of subrogation.  If they didn’t enter into a waiver, then are they really in need of a predictable rule as to whether subrogation will be available anyway?

Comment 3: Waivers of subrogation are virtually “freebies.”  Most insurers don’t object to them (the risk is the same anyway in commercial leases, at least) and thus all lawyers on both sides should seek to obtain such mutual waivers.  The cases where there won’t be waivers are cases like these, where it is unlikely that the tenants had the sophistication or bargaining power to have much to say about the terms of the lease, and the landlord consequently has no incentive to confer subrogation protection against the tenant even though, in many cases, again, it would do the landlord little harm. 

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