The basic concept of insurance subrogation is that when an insurer pays its insured for a loss, the insurer assumes the rights of its insured with respect to any claims against third parties who are responsible for the loss. In other words, subrogation permits an insurer to recover what it has paid to its insured under the insurance policy by “standing in the shoes” of the insured and bringing a suit against any primarily liable third parties. Given this relationship, an insurer can be subrogated only with respect to claims against third parties and, correspondingly, is barred from pursuing subrogation claims against its own insured.
In the landlord-tenant context the distinction between who is an insured and who is a true third party is not always clear. Some jurisdictions now regard a tenant as an ‘implied coinsured’ under the landlord’s fire insurance policy. For purposes of subrogation, this means that the landlord’s insurer is barred from pursuing a fire loss claim against a tenant who might have caused the fire.
Courts have identified several public policy considerations for treating a tenant, for purposes of subrogation, as an implied coinsured under the landlord’s fire insurance policy. Without such a rule, both the landlord and the tenant (or tenants) would need to purchase fire insurance coverage for the same insurable interest, resulting in a waste of economic resources. Further, if subrogation were permitted, a tenant in a multi-unit building would need to carry liability insurance in an amount sufficient to cover the value of the entire building, regardless of the portion of the building occupied by the tenant. Courts have also noted that insurance companies may adjust premiums to take into account that the property will be leased to tenants and that the tenant effectively pays a portion of the policy’s premiums through rent. In addition, with respect to residential tenants, courts have reasoned that such tenants ordinarily expect that the landlord will provide fire insurance for the realty (as distinguished from personal property), and that the insurer should not be allowed to shift a covered fire loss to the occupying tenant. See Sutton v. Jondahl, 532 P.2d 478, 482 (Ct. App. Okla. 1975).
The jurisdictions that have adopted the implied coinsured rule against subrogation have split into two general factions regarding its application. Some jurisdictions—including Massachusetts, New Hampshire, Maine, and Connecticut—have adopted a default rule against subrogation, at least with respect to residential tenants, and hold that the tenant is not liable in subrogation to the landlord’s insurer absent an “express agreement to the contrary” in the lease. What constitutes an “express agreement to the contrary” may vary by jurisdiction. Compare Peterson v. Silva, 704 N.E.2d 1163, 1165 (Mass. 1999) (“[A]bsent an express provision in a lease establishing a tenant’s liability for loss from a negligently started fire, the landlord’s insurance is deemed held for the mutual benefit of both parties.”) and Cambridge Mut. Fire Ins. Co. v. Crete, 846 A.2d 521, 524 (N.H. 2004) (“Absent an express agreement in a residential lease that places liability upon the tenant for the tenant’s own negligence in causing a fire . . . the tenant is considered a coinsured and is not obligated to subrogate the landlord’s insurer.”) with North River Ins. Co. v. Snyder, 804 A.2d 399, 400 (Me. 2002) (holding that a residential tenant may not be liable in subrogation to the landlord’s insurer “absent an express agreement in the written lease that the tenant is liable in subrogation for fire damage” to the property) and Middlesex Mut. Assur. Co. v. Vaszil, 900 A.2d 513, 518 (Conn. 2006) (holding that the landlord’s insurer has no right of subrogation against a tenant absent an “express agreement between the landlord and tenant that the landlord’s insurer has a right to subrogation”).
Other jurisdictions, such as Vermont, have adopted a “case-by-case” approach, which looks to the terms of the lease as a whole to determine if it was reasonably anticipated by the parties that the tenant would be liable in subrogation to the landlord’s insurer in the event of a fire loss. Relevant lease provisions include those that cover fire insurance, the parties’ responsibilities in the event of a fire loss, and the parties’ maintenance and repair obligations. As with the default rule, jurisdictions applying the case-by-case approach may vary with respect to the treatment of specific lease terms in considering whether the landlord’s insurer has a right of subrogation against the tenant. See, e.g., Union Mut. Fire Ins. Co. v. Joerg, 824 A.2d 586, 591 (Vt. 2003) (adopting a case-by-case approach, but holding that a provision in the lease that requires the landlord to carry fire insurance on the leased premises is determinative on the issue of subrogation and bars the insurer’s recovery in subrogation against the tenant).
Not all jurisdictions that have adopted the implied coinsured rule, or some variation of it, for residential tenancies have extended the rule to commercial tenancies. In Massachusetts, for example, the courts have not extended the implied coinsured rule to commercial tenants. The courts reason that commercial tenants tend to be more sophisticated with respect to lease provisions and, unlike residential tenants, ordinarily purchase liability insurance. See Seaco Inc. Co. v. Barbosa, 761 N.E.2d 946, 950 (Mass. 2002) (declining to extend the implied coinsured rule against subrogation to commercial tenancies). Other jurisdictions, such as Connecticut and Maine, have applied the rule against subrogation with respect to both residential and commercial tenancies. See DiLullo v. Joseph, 792 A.2d 819, 822-823 (Conn. 2002) (rejecting the implied coinsured rationale, but adopting the default rule against subrogation with respect to commercial tenancies based on public policy considerations); Cambridge Mut. Fire Ins. Co. v. Granite Bay Care, Inc., No. CV-13-386, slip op. p. 5-6 (Me. Super. Ct. Nov. 17, 2014) (Order on Motion for Summary Judgment).
The variations between jurisdictions and the uncertainty that can result from ambiguous lease terms underscore the importance of carefully drafting lease agreements. Risk may be avoided, or at least reduced, by including lease terms that clearly set forth the insurance obligations and responsibilities of the landlord and the tenant in the event of a fire loss. In addition, the landlord and the tenant can avoid potential disputes over subrogation rights by including the other party as an additional insured under an insurance policy. Regardless of how the parties choose to address this issue, clarity is key.
If, unfortunately, there is a loss due to fire, all parties should review the lease, their own insurance policies, and the relevant law of their jurisdiction. A full understanding of the implied coinsured doctrine early on might avoid costly legal battles (or unnecessary settlement payments).
If you have any questions about how your jurisdiction might apply the implied coinsured doctrine, insurance coverage matters, subrogation issues, or negotiating and drafting key terms of a lease, please do not hesitate to contact us. Our attorneys regularly handle these types of matters throughout New England and New York, as well as in other jurisdictions. Our attorneys’ work in the matter of Cambridge Mut. Fire Ins. Co. v. Granite Bay Care, Inc., resulted in the expansion of the implied consent doctrine in Maine.