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The Doctrine of Implied Co-Insureds
Over the past several decades, federal and state courts nationwide have heard cases where the implied co-insureds doctrine has been asserted and have come to totally different conclusions. The doctrine holds that an insurer may not bring suit by way of subrogation against a tenant who negligently or willfully causes damages to property insured under an insurance policy procured by a landlord on the ground that the tenant is a co-insured under that policy. Recently, the U.S. District Court for the Southern District of New York considered a case involving the implications of the implied co-insureds doctrine and the events of Sept. 11, 2001.
In Industrial Risk Insurers v. Port Authority of NY & NJ, 387 F.Supp.2d 299 (S.D.N.Y. 2005), the court considered whether aspects of the implied co-insureds doctrine precluded an insurer from filing suit by way of subrogation against a tenant in the 7 World Trade Center building, adjacent to the twin towers, which stored fuel in several fuel tanks located inside the building. The insurer alleged that the tenant's gross negligence in storing the fuel contributed to the inferno that destroyed 7 World Trade Center when flaming debris from the collapsing twin towers ignited the building. The tenant countered that the implied co-insureds doctrine, as adopted by the New York courts, prevented the insurer from maintaining a subrogation suit against the tenant. Ultimately, the court held in favor of the tenant and dismissed the insurer's subrogation claim against the tenant.
Most implied co-insured cases are not as dramatic and high profile as the Industrial Risk Insurers case described above. However, to landlords, tenants and the insurance industry, even the average implied co-insured case has important implications. At its essence, a typical case raising the applicability of the implied co-insureds doctrine involves the following situation: A tenant ('Tenant'), through its own negligence, or the negligence of its agent or employee, causes catastrophic damage to its leased premises (and, in some cases, other portions of the building or real property owned by the landlord). The Tenant's landlord ('Landlord') holds a policy of property insurance covering the damages sustained to its property and makes a claim for such damages against its insurer ('Insurer'). The lease between Landlord and Tenant is silent with respect to the parties' obligation to obtain a waiver of subrogation from each party's insurer. (A mutual waiver provision would probably also preclude a landlord's insurer from subrogating against a negligent tenant causing the casualty damage, because a subrogated insurer ”stands in the shoes of an insured, and has no greater rights than the insured. … ” Hanover v. Honeywell, 200 F.Supp.2d 1305, 1309 (Okla. 2002), quoting Couch on Insurance, '222:5 (Rev. 3rd Ed., 2000). If the parties to a lease have waived any means of recovery against one another for damages caused by the negligence of each party, a subrogated insurer 'standing in the shoes' of the insured party cannot seek recovery against the party.
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