Daily Development for
Thursday, November 19, 1998
by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
INSURANCE; SUBROGATION; LEASES: Even where lease does not provide that tenant's lease payments will be used to acquire casualty insurance, residential tenant will be deemed coinsured under landlord's casualty policy, so that insurer cannot bring subrogation claim where casualty caused by tenant's negligence or by tenant's actions specifically breaching the lease.
Lexington Ins. Co. v. Raboin, 712 A.2d 1011 (Del. Super. 1998).
A landlord's property insurer brought a subrogation action against tenants to recover for fire loss. The tenants moved for summary judgment on the basis of the antisubrogation rule.
The insurance company alleged that the fire originated in an apartment occupied by three university students. In particular, there was a problem in the wiring in the ceiling fan that had been installed by one of two of the three students. Installation of the ceiling fan was a violation of the lease's rules and regulations.
The lease provided that tenant was to be solely responsible for all loss or damage to the rental unit and stated that the tenant agreed to procure liability insurance to afford protection against the assumed risks. In addition, the lease provided that the tenant was to indemnify and save the owner harmless from any and all loss occasioned by the tenant's breach of the lease. In addition, the lease provided that the tenant was to surrender the rental unit in good condition and repair (fire excepted).
In analyzing the rights of each party, the Court recognized that the lease contemplated a division of risk between the landlord and its tenant, but there was no indication that the tenant was responsible for, or required to, provide fire insurance for the landlord's realty. Consequently, the Court looking at the whole document and not interpreting any particular provisions in isolation, found an implication that the landlord was to carry fire and hazard insurance for protection of the building. Therefore the court concluded that the landlord had assumed the risk of fire to the realty, while the tenants assumed the risk to person and property.
This left the Court with the question of whether the tenant was also an implied coinsured under the landlord's fire policy for the purposes of subrogation by the landlord's carrier against the tenant. This is relevant because no right of subrogation exists against an insured, coinsured, or where the wrongdoer is an insured under the same policy.
Prior Delaware case law had dealt with a dispute between two sophisticated parties of equal bargaining power. In this case, that of a residential lease, the landlord assumed the dominant position of the relationship, drafted the lease, and determined all its terms and conditions. In such a case, the Court concluded that it would not look at the language of the lease tilting responsibility away from the landlord and toward the tenant, but but rather at whether the lease's implied allocation of risk of fire to the landlord establishes the tenant as a coinsured on the landlord's policy.
To answer that question, the Court followed the trend of jurisprudence which appears to hold that fire insurance secured by a landlord has been obtained for the mutual benefit of landlord and tenant. According to the Court's analysis, this is because of the following reasonable expectations that the parties derived from their privity under the lease: (a) their respective insurable interests in the property; (b) the commercial realities under which landlords insure the premises and pass on the premium cost in rent; (c) the recognition that most fires are caused by negligent conduct; and (d) the requirement that insurer's are reimbursed for fires cause by their insured's negligence. Thus, according to the Court, in the absence of an express agreement or a provision in the lease that would place liability under tenant for the tenant's negligence in causing a fire, the landlord's carrier cannot obtain subrogation against the tenant. Moreover, there is inefficiency to carry duplicate insurance coverage on the same property.
Comment: There are commercial cases that hold that where insurance premiums are paid as part of "additional rent," the tenant is an additional insured. Many laywers the editor has informed about this case have a hard time accepting that concept, as they view these payments simply as a form of rent. But remember that the landlord's interests aren't implicated here, and the insurance company really is insuring against the risk of certain things happening, and a subrogation claim against a provably negligent tenant is virtually a windfall to them.
But this case goes one step beyond the "additional rent" cases and holds that where the landlord elects to obtain insurance, without any requirement or expectation under the lease that it do so, the tenant is an additional insured. The same result is accomplished by the standard "mutual waiver of subrogation" clause that appears in many leases, and that insurancers live with. But absent such a clause, this case does stretch the traditional contract relationships, notwithstanding the fact that the result is OK from a policy standpoint. Would the court have gone this far in a commercial case?
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