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On December 28, 2018, the Indiana Court of Appeals issued a decision which continues to leave property subrogation involving landlords and tenant very much up in the air and subject to a case-by-case evaluation. In the case of Youell v. Cincinnati Ins. Co., 2018 WL 6816772 (Ind. App. 2018), a landlord and a tenant entered into a commercial lease that provided that the landlord would insure the building and the tenant would insure its personal property inside the building. When the building was later damaged by a fire, the landlord’s insurance company subrogated and the tenant argued that the landlord’s agreement to obtain property insurance was an agreement to provide both parties with the benefits of insurance and expressly allocated the risk of loss in case of fire to insurance, thereby barring a subrogation action. The Court of Appeals ruled that the landlord could not subrogate due to the expectations of the parties as exhibited by the terms of the lease.
The lease addressed insurance obligations with the following terms:
A. If the Leased Premises or any other party [sic] of the Building is damaged by fire or other casualty resulting from any act or negligence of Tenant or any of Tenant’s agents, employees or invitees, rent shall not be diminished or abated while such damages are under repair, and Tenant shall be responsible for the costs of repair not covered by insurance.
B. Landlord shall maintain fire and extended coverage insurance on the Building and the Leased Premises in such amounts as Landlord shall deem appropriate. Tenant shall be responsible, at its expense, for fire and extended coverage insurance on all of its personal property, including removable trade fixtures, located in the Leased Premises.
C. Tenant and Landlord shall, each at its own expense, maintain a policy or policies of comprehensive general liability insurance with respect to the respective activities of each in the Building with the premiums thereon fully paid on or before due date, issued by and binding upon some insurance company approved by Landlord, such insurance to afford minimum protection of not less than $1,000,000 combined single limit coverage of bodily injury, property damage or combination thereof. Landlord shall be listed as an additional insured on Tenant’s policy or policies of comprehensive general liability insurance, and Tenant shall provide Landlord with current Certificates of Insurance evidencing Tenant’s compliance with this Paragraph. Tenant shall obtain the agreement of Tenant’s insurers to notify Landlord that a policy is due to expire at least [ten] (10) days prior to such expiration. Landlord shall not be required to maintain insurance against thefts within the Leased Premises or the Building.
The plaintiff argued that the court should look to LBM Realty, LLC v. Mannia, 19 N.E.3d 379 (Ind. App. 2014), and allow subrogation. In LBM Realty, the court allowed subrogation. However, the lease in that case did not require the landlord to maintain property insurance and only “recommended” that the tenant obtain renter’s insurance; as a result, the parties’ expectations with respect to liability for damage to the leased premises was unknown. In Youell, however, the lease unambiguously provided that the landlord would insure the building. Accordingly, the test set forth in LBM Realty (whether a landlord can subrogate depends on the case-by-case approach and a tenant’s liability depends on the reasonable expectations of the parties to the lease as ascertained from the lease as a whole). Instead, Morsches Lumber, Inc. v. Probst, 388 N.E.2d 284 (Ind. App. 1979) controlled (when lease requires that landlord will insure the building and tenant will insure its personal property, this was an agreement to provide both parties with the benefits of the insurance and expressly allocated the risk of loss in case of fire to insurance). The court in Youell reversed and remanded with instructions for the trial court to grant the tenant’s motion to dismiss.
Much of the confusion in Indiana comes from a tumultuous evolution of the law regarding the subrogation of property losses involving landlords and tenants. The 1996 Court of Appeals decision in United Farm Bureau Mut. Ins. Co. v. Owen, 660 N.E.2d 616 (Ind. App. 1996) appeared to announce that Indiana had avoided the inflexible application of the “Sutton 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 states are moving toward. 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.
However, in 2012, the Court of Appeals in LBM Realty, LLC v. Mannia, 981 N.E.2d 569 (Ind. App. 2012) (first appeal before remand) backtracked and stated that while Indiana law does not preclude a subrogation action by a landlord’s insurer against a tenant, the court in Owen did not adopt a case-by-case approach. Rather, Owen merely affirmed a trial court’s entry of summary judgment in favor of a tenant and against an insurer who sought subrogation for a claim it paid to its insured (who was the tenant’s landlord) because the specific language of a lease provision at issue released the tenant from property damage liability to the landlord, thereby precluding the insurer – who steps into the shoes of its insured – from raising a subrogation claim.
On remand, the Indiana Court of Appeals in LBM Realty, LLC v. Mannia, 19 N.E.3d 379 (Ind. App. 2014) once again changed the landscape of landlord/tenant subrogation in the Hoosier State. The Mannia decision was reviewing a trial court order which declared that Indiana had adopted the “no subrogation” approach and noted, that in Owen, the Court of Appeals did not discuss or adopt any of the three subrogation approaches used by courts around the country:
(1) The no-subrogation (or implied co-insured) approach (i.e., the “Sutton Rule”), 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;
(2) The pro-subrogation approach, in which, absent an express term to the contrary, a landlord’s insurer is allowed to bring a subrogation claim against a negligent tenant; and
(3) 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.
Instead, the question of whether Indiana would adopt a rule regarding subrogation claims by a landlord’s insurer against a negligent tenant was never raised. The Mannia decision also noted that question had not been raised in other cases where an insurer brought a subrogation claim against an insured’s tenant for property damage. Cincinnati Ins. Co. v. Davis, 860 N.E.2d 915 (Ind. App. 2007); St. Paul Fire & Marine Ins. Co. v. Pearson Const. Co., 547 N.E.2d 853 (Ind. App. 1989), trans. denied.
On October 28, 2014, the court in Mannia for the first time officially announced that whether subrogation could be brought by a landlord’s insurer against a negligent tenant was to be determined by a case-by-case approach based on the reasonable expectations of the parties as reflected in the lease agreement. It depends on the reasonable expectations of the parties to the lease as ascertained from the lease as a whole and any other admissible evidence. In determining the expectations of the parties as articulated in the lease, courts should look for evidence indicating which party agreed to bear the risk of loss for a particular type of damage in question.
On December 28, 2018, the Court of Appeals in Youell said that if a lease obligates a tenant to procure insurance covering a particular type of loss, such a provision is evidence that the parties reasonably anticipated that the tenant would be liable for that particular loss, which would allow an insurer who pays the loss to bring a subrogation action against the tenant. Hoosier Ins. Co. v. Riggs, 92 N.E.3d 685 (Ind. App. 2018). This appears to provide more predictability to subrogation potential than the previous case-by-case basis approach. It also underscores that the lease agreement remains Exhibit 1 in any subrogation investigation or litigation.
Despite the ruling in Youell, landlord/tenant subrogation in Indiana still remains very subjective, with the “intent” of the parties being determined on a case-by-case basis looking to the terms of the lease and any other admissible and relevant evidence. Lease terms vary greatly. Therefore, it remains a state in which liability carriers are free to deny subrogation claims, arguing that subrogation is not allowed based on the facts and the lease. Indiana is a state which requires creative advocacy and legal posturing from day one. A chart detailing the laws in all 50 states regarding the subrogation of property damage by a landlord’s property insurer against a tenant and/or his or her liability carrier, can be found HERE. For questions regarding the handling of landlord/tenant property subrogation claims in Indiana or any other state, contact Gary Wickert at [email protected].