Daily Development for Tuesday, April 9, 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; WAIVER OF SUBROGATION: Connecticut holds that "default interpretation" of residential or commercial lease is that subrogation rights of landlord's insurers against tenant are impliedly waived.

DiLullo v. Joseph, 2002 WL 437166 (Conn. 2002)

This opinion is useful for its thorough consideration of the authority and policies involving the question of implied waivers of subrogation. The court notes that there is some authority, stemming from Oklahoma, and generally known as the Sutton rule, to the effect that a tenant is an implied additional insured on the landlord's property insurance policy. The notion is that the parties expect and intend that the tenant is charged a rental sufficient to cover a single policy that protects both parties.

The Connecticut court concludes that the Sutton rule in fact goes too far, in that it adds an insurance obligation on the insured that the insured did not bargain for. It is one thing to imply a term into a lease between landlord and tenant, but quite another to use that lease as a basis for implicitly revising the terms of a separate contract of insurance.

Nevertheless, the court recognizes that waiver of subrogation is a part of the landlord/tenant agreement, and in fact it posits that both landlords and tenants believe that the insurance landlord typically obtains protects them against liability for negligent injury to the premises. Consequently, it does imply the waiver of subrogation into every lease, residential or commercial. Further, the court indicates that to find no such waiver would needlessly require every tenant in a multi-tenant building to insure itself against injury to the building, although the landlord has already done so, leading to economic waste.

The court rejects cases that elect to evaluate implied waivers of subrogation on a "case by case" basis. It acknowledges that there may be special circumstances where a departure from the "default rule" is appropriate, but concludes that in the vast majority of leases a waiver of subrogation is assumed. It specifically rejects, also, the recent holding of a Massachussets court that holds that the "default" rule should apply only to residential leases. Seaco Ins. Co. V. Barbosa, 761 N.E. 2d 946 (Mass 2002) (The DIRT DD for 2/14/02), commenting that "the considerations of economic waste, upon which we base our decision today, are likely to be compounded in a commercial setting involving a large number of tenancies."

The court emphasizes, of course, that the parties to any commercial lease are free to allocate insurance responsibility among themselves any way that they choose. The case addresses only the circumstances that arise when there has been no such allocation.

Comment: What do the parties intend about waiver of subrogation? Probably nothing. Unless advised by good lawyers, most commercial tenants are unlikely even to know the word, although it is very possible that landlords would understand. Even when represented by lawyers, the parties often come up with bizarre and confusing language pertaining to waiver of subrogation.

The editor has become convinced, however, that the "one loss/one policy" notion makes sense, and joins those lawyers who argue for a comprehensive mutual waiver of subrogation in every lease. The insurer's risk is really not increased significantly, and insurers' have accepted such waivers in most cases today.

The question here, of course, is whether the courts should move to finding such waivers in every lease. The editor is opposed to courts rewriting leases in general. But here the editor is persuaded that, even though tenants may never have heard the term "subrogation," in fact tenants assume that if the landlord has insurance, this insurance will cover negligent injury to the premises caused by the tenant. This, coupled with sensible notion that otherwise insurers are inappropriately enriched by being paid for risks that in fact are insured by others, leads the editor to side with the court.

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

Items reported here and in the ABA publications are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. The same is true of all commentary provided by contributors to the DIRT list. Accuracy of data and opinions expressed are the sole responsibility of the DIRT editor and are in no sense the publication of the ABA.

Parties posting messages to DIRT are posting to a source that is readily accessible by members of the general public, and should take that fact into account in evaluating confidentiality issues.

ABOUT DIRT:

DIRT is an Internet discussion group for serious real estate professionals. Message volume varies, but commonly runs 5 ‑ 10 messages per workday.

Daily Developments are posted every workday.

To subscribe to Dirt, send an e-mail to:

To:	ListServ@listserv.umkc.edu
Subject:	[Does not matter]
Text in body of message	Subscribe Dirt [your name]

To cancel your subscription to Dirt, send an e-mail to:

To:	ListServ@listserv.umkc.edu
Subject:	[Does not matter]
Text in body of message	Signoff Dirt

For information on other commands, send the message Help to the listserv address.

DIRT has an alternate, more extensive coverage that includes not only commercial and general real estate matters but also focuses specifically upon residential real estate matters. Because real estate brokers generally find this service more valuable, it is named "Brokerdirt." But residential specialist attorneys, title insurers, lenders and others interested in the residential market will want to subscribe to this alternative list. If you subscribe to Brokerdirt, it is not necessary also to subscribe to DIRT, as Brokerdirt carries all DIRT traffic in addition to the residential discussions.

To subscribe to Brokerdirt, send an e-mail to:

To:	ListServ@listserv.umkc.edu
Subject:	[Does not matter]
Text in body of message	Subscribe Brokerdirt [your name]

To cancel your subscription to Brokerdirt, send an e-mail to:

To:	ListServ@listserv.umkc.edu
Subject:	[Does not matter]
Text in body of message	Signoff Brokerdirt

DIRT is a service of the American Bar Association Section on Real Property, Probate & Trust Law and the University of Missouri, Kansas City, School of Law. Daily Developments are copyrighted by Patrick A. Randolph, Jr., Professor of Law, UMKC School of Law, but Professor Randolph grants permission for copying or distribution of Daily Developments for educational purposes, including professional continuing education, provided that no charge is imposed for such distribution and that appropriate credit is given to Professor Randolph, DIRT, and its sponsors.

DIRT has a WebPage at: http://www.umkc.edu/dirt/