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Daily Development for Thursday, February 14, 2002

 

By: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

 

LANDLORD/TENANT; INSURANCE; SUBROGATION; IMPLIED SUBROGATION RIGHT:  Massachusetts distinguishes between commercial and residential lease subrogation rights; commercial leases decided on case-by-case basis.

 

Seaco Insurance Company v. Barbosa,,435 Mass. 772, 2002 WL 170719 (2/05/02)

 

http://www.masslaw.com/masup/1002402.htm

 

Tenant allegedly caused a fire through its negligence.  Landlord's insurer paid under the fire policy and sued tenant through subrogation.  The superior court granted tenant summary judgment, stating that tenant was an implied co-insured because its rents had been the source of landlord's payment of the insurance premiums.  The superior court relied on the recent Peterson v. Silva 428 Mass. 751 (1999).

 

Peterson involved a form residential lease, but the case contained sufficiently general language to suggest that it applied to all Massachusetts leases (". . . absent an express provision in a lease establishing a tenant's liability for loss from a negligently started fire, the landlord's insurance is deemed held for the mutual benefit of both parties." and "The reasonable expectation of the defendants, and all tenants, is that their rent includes the landlord's cost for fire insurance, and that any damage to the property from fire is covered by that insurance.  It surely is not in the public interest to require all the tenants to insure the building which they share, thus causing the building to be fully insured by each tenancy.").

 

The Supreme Judicial Court reversed.  Acknowledging that the Peterson approach "represents something of a trend that includes commercial as well as residential tenancies," the court noted a distinct split of authority around the country and held that the better view is that subrogation in commercial leases should be based on a case by case determination of the intent of the parties.

 

The court said that commercial parties tend to be more sophisticated and generally buy their own insurance.  Earlier commercial lease cases rejecting subrogation claims relied on tenant's payment of CAM that included fire insurance premiums, or a yield up clause excepting wear and tear and damage by fire or other casualty.  The court described those cases as reflecting the intent of the particular parties rather than standing for a general judicial doctrine.  It suggested that in this case the requirement for public liability insurance and the requirement that the tenant "yield up" the property in good condition suggested that the parties did not intend that the tenant be protected by the landlord's insurance policy.  Finding no clear intent of the parties in this case, the court remanded the case for trial.

 

Reporter Comment 1:  This is pretty big news in Massachusetts, perhaps reviving subrogation actions that insurers and counsel previously decided were not worth pursuing after  Peterson.  Nationally, it highlights a significant split of authority and reinforces the caution that one size of lease may not fit all jurisdictions.

 

Reporter Comment 2:  As for the intent of these sophisticated commercial parties, I am told (not reported in the decision) that the parties are very small time businesspeople who do not speak English, at least as a first language, and that the lease most likely was a lawyer's simple form lease.  In attempting to divine the intent of the parties, the court reprinted various unremarkable provisions relating to repair, damage after fire, insurance and yield-up, and found them to be inconsistent and ambiguous.  Not surprising.  I would suggest that the overwhelming majority of lease provisions, simplest to sophisticated, preprinted to overnegotiated, addressing insurance, waiver of subrogation, negligence, and indemnification are inconsistent, bewildering, and often impenetrable.  In any case, they do not reliably reflect the intent of the parties or the insurance coverage they obtain.

 

Reporter Comment 3:  One of the lease provisions quoted in the decision required the tenant to obtain "public liability insurance in the amount of $250,000 to $500,000, including property damage in the amount of $100,000 . . .."  The court noted in the decision that the property damage clause was crossed out and initialed by the parties.  I am told that this point was the subject of intense briefing and questioning at oral argument, and I assume this point will cause mischief at the trial.  If I am correct that property damage coverage associated with tenant's public liability insurance does not apply to the subject matter of this case, then I would suggest that even if a review of the lease would reveal the intention of the parties, the court is looking in the wrong place.

 

Editor's Comment 1: The Editor agrees with the Reporter that lease provisions often are confused, and made more so when interpreted by lawyers and judges who lose sight of their basic objectives of these provisions, as the Reporter suggests in Comment 3.  But the Editor stresses that it is these documents with which we must work.  Parties in the commercial marketplace, and their counsel, must be required to get things right or suffer the consequences.

 

The alternative is to let the judges, as "philosopher kings," dictate the terms to the parties.  As judges are neither philosophers nor kings, this is a very, very bad idea.  Not only are they likely to make things worse as often as they improve things, since few of them have any commercial background, but case by case solutions to problems rarely assist the parties to commercial transactions in crafting clear decisions.  Give us a rule and let us negotiate around it and live with the consequences when we don't.  But spare us from unpredictable, ad hoc decision making that condemns us to extensive litigation every time a disagreement arises.

 

Editor's Comment 2: How does the Editor's philosophy apply here? First, neither the "yield up" clause nor the requirement for public insurance have very much to do with the question of whether the parties intended to waive subrogation against the tenant.  In fact, since in the present market, it costs nothing for the landlord to waive subrogation against the tenant, and since to require two insurance policies on the same risk is wasteful, it ought to be a very rare case in which the court finds that the parties didn't intend to waive subrogation.  The court's obvious misunderstanding of the purpose of these other clauses in this case gives the Editor very little confidence that courts will be capable of gleaning the parties' intent from the documents.  If the courts are given discretion in this area, they're likely to do more harm than good.

 

The Editor would prefer a rule that says that waiver of subrogation is assumed unless there is express evidence otherwise.

 

On the other hand, the editor would be quite comfortable with a rule that for subrogation to be waived, the instruments ought to be specific on the point.

 

It's only money - and the rules operate harshly only against those parties foolish enough to embark on commercial enterprises without employing competent counsel.  That's like driving drunk without a seatbelt.  We'd rather adverse consequences didn't result, of course, but at some point individual responsibility has to count for something.

 

Editor's Comment 3: As to residential leases - that's not real estate law anymore anyway.  It's consumer law.  Protectionism is common and expected.

 

The reporter for this DD is Kenneth Ingber of the Massachusetts bar.

 

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1‑6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

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