The ability of a landlord’s property insurer to subrogate against a tenant for property damage caused by the negligence of the tenant depends on which state the loss occurs in and the nature and language of the lease involved. There are generally three different approaches:
- A minority of courts hold that, absent a clear contractual expression to the contrary, the insurance carrier will be permitted to sue a tenant in subrogation.
- Seeking to avoid a per se rule, in some states the ability to subrogate must be assessed on a case-by-case basis and governed by the intent and reasonable expectations of the parties under the terms of the lease and the facts of case.
- Most states follow the “Sutton Rule”, which says that, absent a clearly expressed agreement to the contrary, the tenant is presumed to be a co-insured on the landlord’s insurance policy and, therefore, the landlord’s insurance carrier has no right of subrogation against the negligent tenant. The rule of subrogation known as the “Sutton Rule” states that a tenant and landlord are automatically considered “co-insureds” under a fire insurance policy as a matter of law and, therefore, the insurer of the landlord who pays for the fire damage caused by the negligence of a tenant may not sue the tenant in subrogation because it would be tantamount to suing its own insured in violation of the anti-subrogation rule.
The “Sutton Rule” is derived from an Oklahoma Court of Appeals decision styled Sutton v. Jondahl, 532 P.2d 478 (Okla. App. 1975) and is the benchmark against which the landlord/tenant subrogation laws of most states are measured. It is the modern rule and the rule more and more states are moving toward.
Michigan follows “Sutton Rule.” The landlord’s insurer is not entitled, as subrogee, to bring an action against the tenant to recover for amounts paid to landlord for fire damage to the rental premises caused by the tenant’s negligence in absence of an express agreement between the landlord and tenant to the contrary. The landlord and tenant are considered co-insureds under the fire policy. N.H. Ins. Group v. Labombard, 399 N.W.2d 527, 531 (Mich. App. 1986). However, more recent decisions indicate that the Labombard decision applies only to negligence cases – not to cases based on breach of contract. Laurel Woods Apartments v. Roumayah, 734 N.W.2d 217 (Mich. App. 2007). In Roumayah, the lease stated, “Tenant shall also be liable for any damages to the Premises…that is caused by the acts or omissions of Tenant or Tenant’s guests.” The court held that the tenant was contractually liable for “any damage” caused by their acts, and that this was not limited to negligent acts. The landlord was allowed to pursue the tenant based on a breach of the lease agreement, notwithstanding Labombard. This was later extended to specifically include subrogation claims. American States Ins. Co. v. Hampton, 2008 WL 4724279 (Mich. App. 2008).
In Westfield, Inc. Co. v. Ritcher, No. 20-CV-12692, 2021 U.S. Dist. Lexis 94926 (E.D. Mich. 2021), a federal court limited the scope of a tenant’s protection from a subrogation suit by virtue of being an implied coinsured. The court held that the tenant was an implied coinsured—and thus shielded from a subrogation suit by the landlord’s insurance company—but only with regard to the tenant’s apartment. Under this ruling, Michigan law now clearly says that the Sutton Rule might protect the negligent tenant from a subrogation suit for damages to the tenant’s own apartment or condo, but it does not shield the tenant from a subrogation claim for damages to the rest of the buildings, the contents of other residents, and the landlord’s loss of profits/rents.
This new decision confirms that Michigan will provide subrogation opportunities in the landlord/tenant insurance arena. For a detailed chart on the law of landlord/tenant subrogation in all 50 states, see HERE. For questions about landlord/tenant subrogation, contact Gary Wickert at [email protected].