Subrogation professionals are seeing more and more cases involving a landlord’s carrier wanting to subrogate against a negligent tenant who caused damage to the leased premises. 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:
(1) 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.
(2) 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.
(3) 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:
(1) 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;
(2) 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
(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.
Until recently, Pennsylvania had only one case speaking to this issue. In Remy v. Michael D’s Carpet Outlets, 571 A.2d 446 (Pa. Super. 1990), the court held that if the lease requires the landlord to provide fire insurance, the landlord’s carrier cannot subrogate against the tenant. If the lease requires the tenant to obtain fire insurance, the landlord’s carrier can subrogate. It depends on the lease language. To determine whether a tenant is a co-insured under his landlord’s lease and, therefore, immune for a subrogation action by the landlord’s insurance company, Pennsylvania applies “the case-by-case approach.” Under this approach “courts determine the availability of subrogation based on the reasonable expectations of the parties as expressed in the lease under the facts of each case.” Id. To make that assessment “the court will look to the lease agreement between the landlord and the tenant.” Thomas v. Jones, 249 A.3d 1138 (Pa. Super. 2021).
In the 2019 Superior Court decision of Joella v. Cole, 221 A.3d 674 (Pa. Super. 2019), the landlord’s (Joella) insurance company (Erie Insurance Exchange) filed a subrogation suit against a tenant (Cole) to recover damages from a fire caused when Cole ran an extension cord across metal hinges to a microwave. Joella, who carried insurance through Cole responded by arguing that the lease required Joella to maintain fire insurance and, therefore, she was an implied co-insured. The lease provided that the tenant had the right to maintain fire insurance to cover property not covered by the landlord’s policy. Until this decision, Remy had been the only case discussing the issue. The trial court held that the reasonable expectation of the tenant was that she was an implied co-insured under the policy. On appeal, however, the Superior Court noted that while the Erie policy did not mention the tenant, it did say that the landlord would secure insurance for the building and the tenant had a right to get her own policy. Therefore, where the lease required the landlord to maintain insurance on the building, the reasonable expectations of the parties was that the tenant is an implied co-insured under the Erie policy and Erie cannot pursue the tenant in subrogation.
Later, in Westminster American Ins. Co. v. Bond, 2023 WL 8884252 (Pa. Super. 2023), the landlord, Tofalli, leased both a commercial space and a residential space to the tenant, Bond. The leases required the tenant to obtain insurance for personal property, but it did not require the landlord to obtain fire insurance on the property. The lease provided that “… Landlord’s insurance does not cover Tenant, Tenant’s property, or Tenant’s guests. Tenant is advised to obtain property and liability insurance to protect Tenant, Tenant’s property, and Tenant’s guests who may be injured while on the property.” Bond began using and remodeling the attic space of the building even though neither she nor her business had rented it. Bond removed the door between the attic space and her apartment, used various electrical power sources, burned candles and sage, and smoked in the attic. A fire started, and Westminster paid $375,872 to the landlord and filed a subrogation suit against the tenant. The tenant, relying on Joella, argued it was a statutory coinsured under the leases and they could not sue her. She argued that since the leases did not require Tenants to purchase fire insurance for the premises, they had a reasonable expectation that they were implied “co-insureds” under Landlord’s fire insurance policy. The trial court agreed and dismissed the case. The Landlord appealed. On appeal, the Superior Court reversed, noting that the leases were silent on the landlord’s obligation to obtain fire insurance on the property. It said that the trial court erred when it rewrote the leases to add a provision that the landlord was obligated to obtain fire insurance on the property. Without rewriting the leases, the tenant could not reasonably expect that they were implied co-insureds on the landlord’s insurance policy.
The Westminster decision reiterates that whether a subrogating insurer can pursue a tenant will depend on the reasonable expectations of the parties as expressed in the lease. Where a lease is silent on a landlord’s obligation to procure fire insurance, neither a tenant, nor a subrogation professional analyzing a lease, should rewrite the terms of the lease to determine the tenant’s “reasonable expectations.”
On December 4, 2023, the Superior Court further expanded on landlord/tenant subrogation and the “reasonable expectations” mentioned in Westminster. In Mut. Benefit Ins. Co. v. Koser, 2023 WL 8360563 (Pa. Super. 2023), reargument granted, opinion withdrawn, 2024 WL 174472 (Pa. Super. Jan. 17, 2024), fire damaged a leased home after the tenant left a cancel burning. The landlord’s carrier filed a subrogation suit against the tenant. The lease specifically addressed insurance, indicating that the landlord was responsible for obtaining insurance on the dwelling and the landlord’s personal property, and tenants were “encouraged” to procure separate insurance for their personal property. The lease also addressed liability for damage to the leased property, stating generally that the tenants were responsible for damage caused by the tenants’ negligence. The trial court dismissed the case noting that the lease made the tenant an implied coinsured because the tenants had a “reasonable expectation of being co-insureds on Landlord’s insurance policy.” The court noted that the lease effectively provided that the landlord was to be responsible for insurance on the building, and the tenants were encouraged to procure separate insurance coverage for property they owned.
The landlord’s carrier appealed to the Superior Court, claiming that the lease did not create a reasonable expectation that the tenant would be an implied co-insured because it required each party to insure their respective interests. Moreover, it contained language holding the tenant liable for damages. The court relied on Remy v. Michael D’s Carpet Outlets, and Joella v. Cole, above, both of which declared that the landlord could sue the tenant absent an express lease provision to the contrary. In reaching its decision, the Remy dealt with a lease which required the tenant, but not the landlord, t to purchase and maintain its own liability insurance, including coverage for property damage. In Joella, the court determined that the reasonable expectation of the parties was that the landlord would only look to the insurance policy, and not directly to the tenant, for recovery of property damage caused by a fire.
In Koser, the lease required each party to insure their respective property by purchasing appropriate insurance. The carrier claimed that the use of the terms “respective financial interests” and “appropriate insurance” required both the landlord and the tenant to buy coverage for the property. The Superior Court rejected this argument, finding that the insurance provision merely required the parties to obtain first party property insurance not liability insurance. It affirmed the trial court’s decision that the tenants were implied co-insureds under the landlord’s insurance policy, precluding the carrier from subrogating against the tenant. The court felt that none of the provisions were compelling enough to override tenant’s expectation that the landlord had agreed to be responsible for maintaining insurance on the Premises and his personal property — they would be protected by the landlord’s policy if they accidentally started a fire. But that is not the end of the story.
Pennsylvania is struggling with the difficulty of determining the intent of litigants in these landlord/tenant subrogation cases. So much so, in fact, that on January 17, 2024, the court granted a rehearing en banc (in front of all members of the Superior Court). This means that the entire decision in Koser has been withdrawn and the Superior Court will gather nine of its judges in an effort to finally hammer out some practical benchmarks and guidelines that subrogation professionals can work with. The Superior Court consists of 15 judges. It is usually the final arbiter of legal disputes in Pennsylvania, although the Pennsylvania Supreme Court may grant a petition to review a decision of the Superior Court when there is an issue over which there is great uncertainty and disagreement. Landlord/tenant subrogation may well qualify. An opinion of the court en banc is binding on any subsequent panel of the appellate court in which the decision was rendered.” Pa. R.A.P. 3103(b).
For questions about this article or subrogating in Pennsylvania, please contact MWL partner Jim Busenlener at jbusenlener@mwl-law.com. For a chart detailing the laws in all 50 states regarding landlord/tenant subrogation, see HERE.
