Daily Development for Tuesday, September 3, 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; IMPLIED WAIVER: Notwithstanding general language of "yield up" clause, requiring tenant to return premises in"good condition and repair," excepting only ordinary wear and tear, and notwithstanding general language that tenant is responsible for damage to the premises, courts will assume that landlord's property insurer has no right of subrogation against tenant for negligently caused fire unless "under the provisions of th lease, the parties' contrary intent is beyond question.

Towne Realty, Inc. v. Shaffer, 777 N.E. 2d 47 (Ill. App. 2002)

Residential tenant's negligence allegedly caused a fire leading to almost $700,000 in damages. The landlord sued for damages, but the court noted that all but $10,000 of the damages had already been paid by the landlord's insurer, so this was essentially a subrogation claim.

The lease provided that tenant was responsible for insuring tenant's own personal property, but did not provide that landlord had any insurance responsibilities or that there was any waiver of subrogation or liability against tenant (although there were some waivers favoring landlord). The lease further stated that tenant was to keep the premises in good order and repair, and return it in good condition and repair, ordinary wear and tear excepted.

The trial court found that the lease implicitly required the landlord to maintain fire insurance, and that tenant was a co-insured under the landlord's policy. Defendant, consequently, was not liable under a subrogation claim.

On appeal: Held: Affirmed.

The court noted the strong line of Illinois authority standing for the point that the best interpretation of an ordinary lease is that the parties do not intend that both sides will obtain fire insurance. Absent agreement to the contrary, the usual assumption is that the landlord will obtain the insurance. Since the tenant's rents pay for that insurance, the tenant should be treated as a co-insured.

Here, although the lease did not impose insurance requirements upon landlord, it did state that tenant would do nothing that might increase the premium on landlord's insurance, suggesting that the parties contemplated that landlord would obtain the insurance.

The court further noted that ambiguities in landlord-provided leases are to be construed against landlords, who have the superior bargaining position. Consequently, the somewhat ambiguous language in the lease imposing liability on the tenant for damage to the premises did not lead to the conclusion that the tenant was liable even for an event covered by landlord's insurance. Rather, the likely intent of the parties was that they could both rely upon the landlord's fire insurance. The likely intent of the insurer was that it would be required to pay for negligently caused fired, regardless of who was negligent. So the insurer would not be treated unjustly if it were denied a subrogation claim.

Comment 1: The case highlights the somewhat remarkable line of authority in Illinois, followed in some other jurisdictions that the courts will not only infer a waiver of subrogation in favor of tenant, but will in fact find that a tenant is a co-insured under the landlord's policy.

This case is not significantly different from a series of prior Illinois decisions that have reached the same conclusion. The landlord argued that there was a difference in this case because of the allocation of responsible for damage to the tenant, but this allocation was quite general, said the court, and did not deal specifically with insured damage.

Comment 2: The editor does not quarrel with the basic premise concerning subrogation, but is less comfortable with the Illinois rule concluding that the tenant is a co-insured. As a dissenter points out, if the negligently caused fire damaged personal property of another tenant in the same building, the tenant, would, of course be liable, as would its insurer. The dissenter asks whether the court's rule here would cover the tenant in that instance. The editor believes that the intent behind the rule would indicate that there should be coverage, and agrees with the dissent that this conclusion is reaching pretty far beyond the likely intent of the parties.

Comment 3: For cases from other jurisdictions that are more moderate that Illinois in this area, see the DiLullo v. Joseph, 2002 WL 437166 (Conn. 2002) (the DIRT DD for 4/9/02) and Seaco Insurance Company v. Barbosa, 435 Mass. 772, 2002 WL 170719 (2/05/02) the DIRT DD for 2/14/02. For one reaching as far as Illinois, see Lexington Ins. Co. v. Raboin, 712 A.2d 1011 (Del. Super. 1998), the DIRT DD 11/19/88.

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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