Daily Development for
Tuesday, September 8, 1998

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

There is no DD for Labor Day, September 7, 1998.

LANDLORD/TENANT; INSURANCE; TENANT LIABILITY FOR LANDLORD'S INSURED LOSS: Absent an agreement to the contrary, a tenant may be liable to its landlord for loss of rent as a result of damage to the property caused by the tenant, even when landlord has acquired rental interruption insurance.

Osborne v. Chapman, 574 N.W.2d 64 (Minn. 1998).

The tenant negligently caused a fire in the home that the tenant leased, resulting in the landlord's loss of approximately eight months of rental income. The landlord sued the tenant for the lost rent, even though the landlord was pursuing, and eventually won, a claim against the insurer for lost rent coverage.

The Court of Appeals held that the landlord could not sue the tenant for lost rent because a tenant is a coinsured with the landlord for the purpose of shielding the tenant from liability for insured losses and the landlord had insurance coverage for lost rent. It cited Minnesota and Oklahoma authority which had held that a landlord and tenant are implicit coinsured's of the landlord's policy for purposes of barring the insurer's subrogation claims against the tenant for damage to the premises.

On appeal: Reversed. The "implied coinsured" concept does not apply to the landlord's loss lost rent insurance.

In reversing the lower court ruling, the Supreme Court distinguished lost rent insurance from casualty insurance, reasoning that casualty insurance is obtained for the benefit of both the landlord and tenant whereas lost rent coverage is obtained solely for the landlord's benefit. Thus, while the landlord and tenant may be coinsureds for purposes of casualty insurance, they are not coinsureds for purposes of lost rent insurance. Since there was evidence that the parties had agreed to allocate responsibility for maintaining insurance coverage for lost rents, the court remanded for a determination as to whether such an agreement was made.

Note that this was not a 100% win for the landlord position. The landlord had argued that the cases involving subrogation claims ought to be limited to the subrogation issue, but the court declined this invitation and affirmed that in the appropriate case i.e. a case involving casualty insurance, the tenant would be viewed as a coinsured. As noted, it refused to extend the reasoning to rental interruption claims.

Comment: The editor has no quarrel with the outcome here. But the editor would go further and set aside the predisposition of the court to find a coinsured relationship for casualty insurance absent some concrete evidence that the parties intended that one policy cover both interests. Of course, the landlord likely will use the tenant's rental payments to acquire insurance, but can it really be said that the tenant is a coinsured if the landlord is not required under the contract to apply the insurance proceeds for the benefit of the tenant?

In most jurisdictions, absent some language in the lease providing otherwise, the tenant continues to be liable for the rent even if the building is destroyed. The tenant ought to recognize its exposure and see to it that its potential loss of use as well as its liability for lost rents are covered. The rule concerning "implied coinsureds" may be a forgiving one for careless tenants, but does not track rational business behavior, as legal rules affecting business relationships ought to do.

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 16, 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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