Daily Development for Monday, March 8, 1999
by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
DD 3/8 Tenant a Co Insured of Landlord's Insurance
LANDLORD/TENANT; INSURANCE; LIABILITY; SUBROGATION: Fire insurance secured by a landlord is obtained for the benefit of landlord and tenant. Thus, in the absence of an express agreement or lease provision, a landlord's carrier can not obtain subrogation against the tenant.
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 insurance company alleged that the fire originated in an apartment occupied by three university students. In particular, the wiring in the ceiling fan that had been installed by one or 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 "content and liability" insurance to afford protection against the assumed risks. Lastly, 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). The tenants moved for summary judgment on the basis of the antisubrogation rule.
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. Consequently, the landlord was found to have assumed the risk of fire to the realty, while the tenants assumed the risk to personal 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. No right of subrogation exists against an insured, coinsured, or where the wrongdoer is an insured under the same policy. Although prior Delaware case law 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 cases, a Court looks not at the exculpatory clause in the lease, but rather whether the lease's implied allocation to the landlord of risk for a fire establishes the tenant as a coinsured on the landlord's policy.
The Court followed what it viewed as the majority the trend of jurisprudence which appears to hold that fire insurance secured by a landlord is obtained for the mutual benefit of landlord and tenant. According to the Court's analysis, this is because of (a) the reasonable expectations that the parties derive from their privity under the lease; (b) their respective insurable interests in the property; (c) the commercial realities under which landlords insure the premises and pass on the premium cost in rent; (d) the recognition that most fires are caused by negligent conduct; and (e) the requirement that insurers reimburse their insured for fires caused 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 on the tenant for the tenant's negligence in causing a fire, the landlord's carrier cannot obtain subrogation against the tenant. Moreover, it is inefficienct to require tenants to carry duplicate insurance coverage on the same property.
Comment 1: It is unclear whether the court would apply this rule in the commercial as well as the residential context, but the editor reads the case as establishing the same principles for both. The court's emphasis upon the fact that this was a residential lease with limited freedom of contract was a response to the argument that contract provisions exculpating a party from its own negligence are narrowly construed. The court viewed that proposition as inapplicable to residential tenants, but went on to say that this case was not about exculpation clauses in any event, but about the principle that, unless the documents are clear to the contrary, a tenant is a coinsured on the landlord's casualty insurance and no subrogation can lie.
Comment 2: The court acknowledged contra authority in Arkansas, Idaho, Illinois, Iowa, Kentucky, and New Jersey.
Comment 3: Could the same argument be used to make both mortgagors and mortgagees coinsureds under the mortgagor's insurance policy, even when the documents are silent? If the mortgagee requires the mortgagor to obtain insurance, isn't this an allocation of responsibility to the mortgagor to obtain insurance beneficial to both?
Following the reasoning still further, can the tenant recover gainst the insurance company for coverage listed in the policy that might reach damages suffered by the tenant but not the landlord? What, if, for instance the landlord's insurance contains personal property coverage, in addition to real properyt coverage. In the instant case, the court held that the parties had allocated to the tenant the risk of insuring its own property. But, since the landlord had acquired a single insurance policy that included some contents coverage, would this benefit run to the tenant?
Comment 4: Let's turn the question around. If the parties have allocated risk as done in this transaction, and the tenant's negligence damages personal property owned by the landlord, but the landlord's insurance covers such damage, is the insurer entitled to subrogation?
In both this instance and the instance cited in comment 3, the parties understand that the landlord is obtaining insurance with monies received as rent. How specific does this understanding have to be as to the exact type of insurance?
Or is the problem really that premising a legal rule on a fiction will just lead to the building of larger and larger air castles until the entire edifice collapses in a puff?
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