Subrogation: Insured or Not Insured

The very recent Illinois case, Towne Realty, Inc. v. Shaffer, 773 N.E.2d 47 (Ill. App. 4th District 2002), reaffirmed Illinois' rule that, in certain circumstances, a tenant will be deemed a co-insured on its landlord's insurance policy; as such, the landlord's insurance company is prevented from subrogating against the tenant (that is, against one of its insureds). More specifically, when a lease, whether explicitly or implicitly, indicates that the landlord will look solely to its own insurance against the risk of loss to its property, then the tenant will not be liable for an insured property loss (absent a contrary indication of the parties' intention). When a lease fails to address waiver of subrogation squarely, such a rule purports to give effect to the parties 'probable and customary intent' that the tenant not be subject to an insurer's subrogated claim for property loss. This 'probable' intent, of course, does not necessarily reflect the insurer's intent, but any qualms the court in Towne may have had in this regard could have been assuaged by the insurer's acceptance of a premium in exchange for the acceptance of such risk.

Delaware courts have expressly joined the 'majority' opinion in the residential settings and, in at least one unreported case, have done so in the commercial setting. See Lexington Insurance Co. v. Raboin, 712 A.2d 1011 (Del. Super. 1998) and Deardorff Associates, Inc. v. Paul Nos. Civ.A. 96C-10-260-JOH, 97C-01-237-JOH, 1999 WL 458777 (Del. Super. May 6, 1999).

In Lexington, the court examined a tenant's status as an implied 'co-insured' in the context of a residential lease. The court here dissected the provisions of the lease, observing that 1) the tenant was solely responsible for fire and hazard damage to its own property; 2) the tenant was required to surrender the unit in good condition 'reasonable wear and tear and damage by acts of God or fire excepted'; 3) the tenant was not responsible for procuring fire insurance for the building; 4) the landlord was responsible for procuring general fire and hazard insurance for the building; and 5) the tenant was responsible for any increases in the landlord's insurance premium arising from the tenant's breach of any building rules.

After examining the lease 'as a whole,' the court determined that the clear implication was that the parties allocated the risks of loss between them ' the landlord to bear the risk of loss to the building and the tenant to bear the risks loss to its own property only. The court summarized the allocation of risk, noting that the 'trend of modern jurisprudence holds that fire insurance secured by the landlord has been obtained for the mutual benefit of landlord and lessee ' the reasonable expectations they derive from their privity under the lease, their respective insurance interests in the property ', the commercial realities under which landlords insure the leased premises and pass on the premium in costs in the rent, the recognition that most fires are caused by negligent conduct and the requirement that insurers reimburse for fires caused by their insured's negligence. Thus, in the absence of an express provision that places liability on the tenant for the tenant's negligence for causing a fire, the landlord's insurance carrier cannot obtain subrogation against the tenant.'

New Jersey is notably more antagonistic to the majority rule. In Zoppi v Traurug, 598 A.2d 19 (N.J. Super. 1990), a tenant under an oral lease argued that the rent paid to the landlord, together with the fact that the tenant was not required to carry insurance, rendered the tenant co-insured under the landlord's insurance policy. The tenant's argument relied on a Michigan case involving a hotel and its guest and the guest's reasonable expectation that its hotel charge would be used to cover the hotelier's expenses, including the purchase of insurance. (See Wausau Underwriters Insurance Company v. Cook, 455 NW 2d 309 (Mich. App 1989)). Thus, the tenant argued that it could similarly have expected that the landlord would pay for its insurance from the rent proceeds and, consequently, the tenant would be protected by the antisubrogation rule. The Zoppi court responded tartly: 'In my opinion, the hotel and/or its insurance carrier could more reasonably have expected the [guest] to have been responsible for the consequences of his own negligence, a substantial common law predicate.' The court then reasoned that, as there was no 'binding case law or reason in common sense,' when a landlord has a claim against a tenant, the existence of insurance obtained and paid for by the landlord, with funds not restricted by the lease, for the benefit of the landlord, the tenant will not be exculpated from the consequence of negligent conduct, unless the parties have expressly contemplated a different conclusion. Not stopping there, the court considered any contrary rule to 'fly in the face of common sense and public policy '. The contrary inference is that in all landlord-tenant relationships no express waiver of the right of subrogation would be needed because it will be implied as a matter of law. Subrogation is an equitable remedy based on the common law concept that the burden for ultimate discharge of an obligation ought to rest on the one who in good conscience ought to pay.' (citations omitted). One wonders though whether 'common sense' would dictate a different conclusion when, as is fairly common, a landlord is required by the lease to purchase property insurance while enjoying the luxury of passing the cost of such insurance onto the tenant.

It should be noted, nonetheless, that in some circumstances, New Jersey case law has recognized a tenant to be an implied co-insured on its landlord's policy. In Foster Estates, Inc. v. Wolek, 252 A.2d 219 (N.J. Super. 1969), a lease required the tenant to buy fire and hazard insurance protecting the landlord's building. The tenant bought the requisite policy, but failed to name itself as an additional insured. When fire struck, the insurer paid the landlord as the insured and sought subrogation against the tenant. The court, extending a rule prohibiting subrogation by the mortgagee's insurer against the mortgagor when the insurance is purchased at mortgagor's expense, held that (absent express agreement to the contrary) when a policy insuring the landlord is obtained and paid for by the tenant, the tenant is a co-insured, even though it is not expressly named in the policy.

Pennsylvania has yet to make a clear statement regarding the rule. In Remy, a tenant argued that it was a co-insured on its landlord's fire insurance policy. The court rejected this argument, observing that nothing in the landlord's fire insurance policy supported such a claim. While the court was not generous enough to quote the terms of the lease, it did note the following: 1) the lease did not require the landlord to purchase insurance for the protection of the tenant (although it makes no mention whether the landlord was required to purchase insurance for the building); and 2) the lease did require the tenant to provide its own property insurance (although it is unclear whether such property insurance must cover the building or the tenant's personal property). The court concluded that 'under these circumstances, there is neither rule of law nor principle of equity which prevents the landlord ' from recovering against a tenant whose negligence has caused fire damage '.' (emphasis added). The italicized language begs the question of what circumstances would lead equity to prevent such a recovery? The Remy case does not seem to forestall the possibility that, if the facts line up in a more conclusive manner, Pennsylvania will join the majority camp.

Although reading through the case law can leave the practitioner with more questions than answers, one thing remains clear: addressing the issue of an insurer's subrogated claim expressly, and carefully, will lead to the achievement of the parties' 'actual' rather than 'probable' intent ' at least the intent of the landlord and the tenant. The insurer can also count on one thing: regardless of the express terms of its own policies, the insurer may have more insureds than it originally envisioned, which is probably not the insurer's 'actual' intent.

Ivy Wagner is an associate at the Wayne, PA office of Saul Ewing, concentrating in the areas of real estate and land use. Dennis Bower is an associate in the real estate department at Saul Ewing's Philadelphia office.

Real estate lawyers have recently been reminded of the importance of carefully crafting 'waiver of subrogation' and 'release of liability' provisions in leases. For instance, in a recent New York case, The GAP, Inc. v. Red Apple Companies, Inc., 282 A.D.2d 119 (N.Y. App. Div. 2001), such express clauses saved the landlord from liability to its tenant's insurance company; unfortunately, the provisions did not relieve the landlord from responsibility for the cost of its tenant's insurance deductible ' a million dollar mistake.

Absent express covenants waiving subrogation and releasing insured claims, however, landlords and tenants can achieve the same end ' ie, protection from an insurer's subrogated claim ' by requiring that each name the other as an 'additional insured' on its respective policy. As the Pennsylvania Superior Court explained with eloquent economy: 'Subrogation is an equitable doctrine; and, therefore, equitable principles apply in determining whether subrogation is available. By definition subrogation can arise only against third persons to whom the insurer owes no duty. It follows and, indeed, is now well established that an insurer cannot recover by means of subrogation against its own insured.' Remy v. Michael D's Carpet Outlets , 571 A.2d 446, 452 (Pa. Super. 1990) (citations omitted) , aff'd on other grounds , 637 A.2d 603 (1993). Indeed, this 'antisubrogation' rule has even been stretched so far as to estop subrogation when the 'insured' is insured by the insurance carrier under a different insurance policy. Fidelity and Guaranty Insurance Underwriters, Inc. v Joseph Banks Construction Co. Inc., 14 F. Supp. 2d 704 (M.D. Pa. 1998). Like the express waiver of subrogation clauses, this approach to protecting against an insurance carrier's subrogation of claims requires conscious decisions by the parties ' insisting on being named as an 'additional insured' on the other party's policy or having the prescience to procure insurance from the same insurer as the other party.

What happens, however, when parties fail to waive subrogation rights, release each other from insured claims, or name the other as an additional insured? Are insurance carriers then unfettered in subrogating to a claim and seeking compensation from a negligent party?

The very recent Illinois case, Towne Realty, Inc. v. Shaffer , 773 N.E.2d 47 (Ill. App. 4th District 2002), reaffirmed Illinois' rule that, in certain circumstances, a tenant will be deemed a co-insured on its landlord's insurance policy; as such, the landlord's insurance company is prevented from subrogating against the tenant (that is, against one of its insureds). More specifically, when a lease, whether explicitly or implicitly, indicates that the landlord will look solely to its own insurance against the risk of loss to its property, then the tenant will not be liable for an insured property loss (absent a contrary indication of the parties' intention). When a lease fails to address waiver of subrogation squarely, such a rule purports to give effect to the parties 'probable and customary intent' that the tenant not be subject to an insurer's subrogated claim for property loss. This 'probable' intent, of course, does not necessarily reflect the insurer's intent, but any qualms the court in Towne may have had in this regard could have been assuaged by the insurer's acceptance of a premium in exchange for the acceptance of such risk.

Delaware courts have expressly joined the 'majority' opinion in the residential settings and, in at least one unreported case, have done so in the commercial setting. See Lexington Insurance Co. v. Raboin , 712 A.2d 1011 (Del. Super. 1998) and Deardorff Associates, Inc. v. Paul Nos. Civ.A. 96C-10-260-JOH, 97C-01-237-JOH, 1999 WL 458777 (Del. Super. May 6, 1999).

In Lexington, the court examined a tenant's status as an implied 'co-insured' in the context of a residential lease. The court here dissected the provisions of the lease, observing that 1) the tenant was solely responsible for fire and hazard damage to its own property; 2) the tenant was required to surrender the unit in good condition 'reasonable wear and tear and damage by acts of God or fire excepted'; 3) the tenant was not responsible for procuring fire insurance for the building; 4) the landlord was responsible for procuring general fire and hazard insurance for the building; and 5) the tenant was responsible for any increases in the landlord's insurance premium arising from the tenant's breach of any building rules.

After examining the lease 'as a whole,' the court determined that the clear implication was that the parties allocated the risks of loss between them ' the landlord to bear the risk of loss to the building and the tenant to bear the risks loss to its own property only. The court summarized the allocation of risk, noting that the 'trend of modern jurisprudence holds that fire insurance secured by the landlord has been obtained for the mutual benefit of landlord and lessee ' the reasonable expectations they derive from their privity under the lease, their respective insurance interests in the property ', the commercial realities under which landlords insure the leased premises and pass on the premium in costs in the rent, the recognition that most fires are caused by negligent conduct and the requirement that insurers reimburse for fires caused by their insured's negligence. Thus, in the absence of an express provision that places liability on the tenant for the tenant's negligence for causing a fire, the landlord's insurance carrier cannot obtain subrogation against the tenant.'

New Jersey is notably more antagonistic to the majority rule. In Zoppi v Traurug, 598 A.2d 19 (N.J. Super. 1990), a tenant under an oral lease argued that the rent paid to the landlord, together with the fact that the tenant was not required to carry insurance, rendered the tenant co-insured under the landlord's insurance policy. The tenant's argument relied on a Michigan case involving a hotel and its guest and the guest's reasonable expectation that its hotel charge would be used to cover the hotelier's expenses, including the purchase of insurance. ( See Wausau Underwriters Insurance Company v. Cook , 455 NW 2d 309 (Mich. App 1989)). Thus, the tenant argued that it could similarly have expected that the landlord would pay for its insurance from the rent proceeds and, consequently, the tenant would be protected by the antisubrogation rule. The Zoppi court responded tartly: 'In my opinion, the hotel and/or its insurance carrier could more reasonably have expected the [guest] to have been responsible for the consequences of his own negligence, a substantial common law predicate.' The court then reasoned that, as there was no 'binding case law or reason in common sense,' when a landlord has a claim against a tenant, the existence of insurance obtained and paid for by the landlord, with funds not restricted by the lease, for the benefit of the landlord, the tenant will not be exculpated from the consequence of negligent conduct, unless the parties have expressly contemplated a different conclusion. Not stopping there, the court considered any contrary rule to 'fly in the face of common sense and public policy '. The contrary inference is that in all landlord-tenant relationships no express waiver of the right of subrogation would be needed because it will be implied as a matter of law. Subrogation is an equitable remedy based on the common law concept that the burden for ultimate discharge of an obligation ought to rest on the one who in good conscience ought to pay.' (citations omitted). One wonders though whether 'common sense' would dictate a different conclusion when, as is fairly common, a landlord is required by the lease to purchase property insurance while enjoying the luxury of passing the cost of such insurance onto the tenant.

It should be noted, nonetheless, that in some circumstances, New Jersey case law has recognized a tenant to be an implied co-insured on its landlord's policy. In Foster Estates, Inc. v. Wolek, 252 A.2d 219 (N.J. Super. 1969), a lease required the tenant to buy fire and hazard insurance protecting the landlord's building. The tenant bought the requisite policy, but failed to name itself as an additional insured. When fire struck, the insurer paid the landlord as the insured and sought subrogation against the tenant. The court, extending a rule prohibiting subrogation by the mortgagee's insurer against the mortgagor when the insurance is purchased at mortgagor's expense, held that (absent express agreement to the contrary) when a policy insuring the landlord is obtained and paid for by the tenant, the tenant is a co-insured, even though it is not expressly named in the policy.

Pennsylvania has yet to make a clear statement regarding the rule. In Remy, a tenant argued that it was a co-insured on its landlord's fire insurance policy. The court rejected this argument, observing that nothing in the landlord's fire insurance policy supported such a claim. While the court was not generous enough to quote the terms of the lease, it did note the following: 1) the lease did not require the landlord to purchase insurance for the protection of the tenant (although it makes no mention whether the landlord was required to purchase insurance for the building); and 2) the lease did require the tenant to provide its own property insurance (although it is unclear whether such property insurance must cover the building or the tenant's personal property). The court concluded that 'under these circumstances, there is neither rule of law nor principle of equity which prevents the landlord ' from recovering against a tenant whose negligence has caused fire damage '.' (emphasis added). The italicized language begs the question of what circumstances would lead equity to prevent such a recovery? The Remy case does not seem to forestall the possibility that, if the facts line up in a more conclusive manner, Pennsylvania will join the majority camp.

Although reading through the case law can leave the practitioner with more questions than answers, one thing remains clear: addressing the issue of an insurer's subrogated claim expressly, and carefully, will lead to the achievement of the parties' 'actual' rather than 'probable' intent ' at least the intent of the landlord and the tenant. The insurer can also count on one thing: regardless of the express terms of its own policies, the insurer may have more insureds than it originally envisioned, which is probably not the insurer's 'actual' intent.

Ivy Wagner is an associate at the Wayne, PA office of Saul Ewing, concentrating in the areas of real estate and land use. Dennis Bower is an associate in the real estate department at Saul Ewing's Philadelphia office.