Sheckler v. Auto-Owners Ins. Co., 2022 WL 17245548 (Ill. 2022).
The ability of a landlord’s property insurer to subrogate against a tenant for property damage caused by the negligence of the tenant varies greatly from state to state and often hinges on the specific language of the lease involved. There are generally three different approaches:
- A minority of states 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.
- Known as the “Sutton Rule”, some states hold 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. 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. There are three approaches used by trial courts in the country to resolve the implied co-insured “Sutton Rule” approach. These approaches include:
- the no-subrogation (or implied co-insured) approach, in which, absent an express agreement to the contrary, a landlord’s insurer is precluded from filing a subrogation claim against a negligent tenant because the tenant is presumed to be a co-insured under the landlord’s insurance policy;
- the pro-subrogation approach, in which a landlord’s insurer can bring a subrogation claim against a negligent tenant absent an express term to the contrary; and
- the case-by-case approach, in which courts determine the availability of subrogation based on the reasonable expectations of the parties under the facts of each case.
Illinois has until recently avoided per se rules with regard to the “Sutton Rule” (see Oklahoma) and taken a more flexible case-by-case approach, holding that a tenant’s liability to the landlord’s insurer for negligently causing a fire depends on the intent and reasonable expectations of the parties to the lease as ascertained from the lease as a whole. Dix Mut. Ins. Co. v. LaFramboise, 597 N.E.2d 622 (Ill. 1992). Dix was a case involving a residential lease. The Supreme Court said that although a tenant is generally liable for fire damage caused to the leased premises by his negligence, if the parties intended to exculpate the tenant from the negligently caused fire damage, their intent – as expressed in the lease agreement – will be enforced. To make this determination, the lease must be interpreted as a whole so as to give effect to the intent of the parties. Stein v. Yarnall-Todd Chevrolet, Inc., 241 N.E.2d 439 (Ill. 1968).
The court in Dix noted that the residential lease did not contain a provision expressly apportioning fault in the case of a negligently caused fire, so the Court construed the lease as a whole and concluded that it did not reflect any intent that the tenant would be responsible for fire damage. Absent any such intent, the court—applying equitable principles (because subrogation is an equitable doctrine)—held that a tenant is considered a co-insured with the landlord by virtue of having paid rent which contributed to the insurance premiums, and the subrogated insurer could not sue its own insured for subrogation.
The rule, therefore, appears to be that a tenant will be an implied co-insured and cannot be sued by the landlord’s subrogee for fire or other damage unless a contrary intent can be gleaned from the four corners of the lease itself. Auto Owners Ins. Co. a/s/o John Ellis v. Thomas Callaghan, 952 N.E.2d 119 (Ill. App. 2011). Where a lease reflects the parties’ intent to place the responsibility for water damage on the tenants, they will not be considered implied co-insureds. Pekin Ins. Co. v. Murphy, 2014 WL 6092187 (Ill. App. 2014).
The expansion of this implied coinsured fiction in Illinois was recently challenged in an appeal to the Illinois Supreme Court. In Sheckler v. Auto-Owners Ins. Co., 2022 WL 17245548 (Ill. 2022), the Shecklers leased a house from Ronald McIntosh. The lease agreement required the landlord to “maintain fire and other hazard insurance on the premises only” and required the tenant to “be responsible for any insurance they desire on their possessions contained in the leased premises.” The lease also contained an indemnification clause, which further exculpated McIntosh from any damages or injury occurring on the premises. Auto-Owners insured the landlord with a policy which included (1) first-party dwelling coverage and (2) third-party landlord liability coverage. The first-party dwelling coverage provided, in relevant part, coverage for fire damage to the premises. The third-party landlord liability coverage provided coverage for claims brought by third parties that the insured “becomes legally obligated to pay as damages because of or arising out of bodily injury or property damage.” The third-party landlord liability coverage also provided a duty to defend any claim or suit for damages covered by the policy. However, the third-party landlord liability coverage excluded from coverage “property damage to property occupied or used by an insured or rented to or in the care of, any insured.” The policy declarations listed McIntosh and his wife as the only named insureds. The landlord paid the premiums for the Auto-Owners policy out of the rent payments he received.
The rental property had a traditional gas stove and range. In late August 2015, the tenant notified the landlord that the oven and burner on the gas stove were not working. On August 26, 2015, the landlord hired Wayne Workman, an appliance service technician. Workman inspected the appliance and left the property to obtain a repair part. After Workman left, the tenants smelled gas and attempted to mask the odor by spraying a deodorizer before they then turned on the stove, which ignited, resulting in a fire that caused substantial property damage. As a result of the fire damage, Auto-Owners paid the landlord for damages and subrogated against Workman. Workman filed a contribution action against the tenants, who, in turn, tendered their defense to Auto-Owners. Auto-Owners rejected the tenant’s tender of defense based on the fact that the tenants were co-insureds under their policy. The tenants filed a declaratory judgment action in which the trial court ruled in favor of the carrier and found that it did not need to defend the tenants. On appeal, the tenants argued that they were “co-insureds” under Insurer’s policy because their rent payment had been used by the landlord to purchase his insurance. The lease also stated that the landlord would buy fire insurance for the entire building. The Court of Appeals agreed and reversed the trial court, finding that the tenants were co-insureds under the landlord’s policy. It held that Auto-Owners had a duty to defend the tenants from the worker’s third-party claim. The court said, “It is inequitable to find that there is no duty to defend in this case … On the facts of this case, finding that the insurer has a duty to defend its co-insured is a natural and necessary extension of Dix (see above) to prevent a subversion of its ruling.” The Court of Appeals held that carriers pursuing subrogation for damage to rental property will need to defend tenants from contribution claims just as they would have to defend contribution claims filed against the landlord. Auto-Owners appealed to the Illinois Supreme Court.
On November 28, 2022, the Illinois Supreme Court reversed the Court of Appeals, holding that the tenants were not insureds and, therefore, were not entitled to defense or indemnity. It rejected the Court of Appeals’ interpretation of Dix to mean that tenants are always “implied co-insureds” under a landlord’s property insurance policy. The Supreme Court distinguished Dix because it was a subrogation action that did not apply in this case because no “equitable principles” were at issue. The court in Dix applied equitable principles (because subrogation is an equitable doctrine) in order to arrive at the conclusion that a tenant is considered a co-insured with the landlord by virtue of having paid rent which contributed to the insurance premiums, and the subrogated insurer could not sue its own insured for subrogation.
This new ruling in Sheckler v. Auto-Owners confirms that the “implied co-insured” fiction which is created in cases in which a landlord’s property carrier attempts to subrogation property damage against one of the landlord’s tenants does not apply outside of the subrogation contest.
For a chart detailing the landlord/tenant subrogation law of all 50 states, see HERE. The author, Steve Smith, is licensed in Wisconsin and Illinois. For more information on subrogation involving landlords and tenants in any state, please contact Steve at firstname.lastname@example.org.
Stephen A. Smith is an insurance litigation attorney with Matthiesen, Wickert & Lehrer, S.C. His practice focuses on insurance litigation and subrogation, including automobile, property, workers’ compensation, and product liability. He is licensed to practice law in Illinois, Minnesota, and Wisconsin and is admitted to practice in all federal courts in Wisconsin, Illinois, and Indiana.