Across the country, landlord/property owners’ insurance carriers’ efforts to subrogate against tenants who cause damage to the owners’ property has become a heavily-litigated issue—with mixed results. 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.
- 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 many 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.
In Delaware, the law with regard to the Sutton Rule has been slowly crystallizing. Generally, a fire insurer is not entitled, as subrogee, to bring a subrogation action against a tenant to recover amounts paid to the landlord for fire damage to rental premises caused by the tenant’s negligence in absence of an express agreement between the landlord and tenant to contrary. So clearly, the terms of the lease must be closely scrutinized. The landlord and tenant are co-insureds under the fire policy. Lexington Ins. Co. v. Raboin, 712 A.2d 1011, 1016 (Del. Super. Ct. 1998). In Lexington, the tenants caused a fire by installing a ceiling fan in violation of the landlord’s rules and regulations. The Lexington court surveyed the law of multiple jurisdictions in holding that the “trend of modern jurisprudence holds that fire insurance secured by the landlord has been obtained for the mutual benefit of landlord and lessee.” In Deloach v. Houser, 2018 WL 5899080 (Del. Super. 2018), the insurer for an apartment complex joined a suit filed by two tenants against a third tenant who caused a fire. The court affirmed that the Sutton Rule is the rule followed in Delaware.
On July 18, 2023, the Delaware Supreme Court yielded a decision in Donegal Mut. Ins. Co. v. Thangavel, 2023 WL 4605076 (Del. 2023). In that case, an apartment owner’s property carrier sued tenants for $77,704.06 to repair the water damage caused by the tenants when they accidentally hit a sprinkler head while flying a drone inside the apartment. The lease provided:
- NO LIABILITY FOR LOSS OR DAMAGE TO TENANTS’ PERSONS OR PROPERTY; INDEMNITY TO LANDLORD.
(a) Tenants agree to be solely responsible for all loss or damages to Tenants or their property or to any other person which may be situated in the Rental Unit and storage area; gross negligence of Landlord, its servant, agents or employees excepted[.] In addition, Tenants agree to indemnify and save Landlord harmless from any and all loss occasioned by the tenant’s breach of any of the covenants, terms and conditions of the Agreement, or caused by the tenant(s) family, guests, visitors, agents or employees ….2
(b) Tenant agrees to procure and maintain adequate content and liability insurance in an amount not less than $300,000.00 to afford protection against the risks herein assumed ….
- TENANT RESPONSIBLE FOR DAMAGES.
Tenant by accepting this agreement covenants and agrees that tenant will be responsible for all damages accidentally, maliciously, intentionally, or negligently caused by the tenant, tenant’s family, guests or invitees to any of the property of the landlord.
The Superior Court (Delaware’s trial court) ruled in the tenants’ favor at summary judgment, holding that the Sutton Rule applied because, although it could have, the lease did not clearly express an intent to hold the tenants liable for the landlord’s damages. On appeal, the Delaware Supreme Court affirmed. It held that fire insurance secured by the landlord is obtained for the mutual benefit of landlord and lessee. Therefore, in the absence of an express agreement or provision in the lease that would place liability on the tenant for the tenant’s negligence in causing the fire, the landlord’s carrier cannot obtain subrogation against the tenant. The court pointed out that, practically speaking, tenants contribute to the cost of the landlord’s fire insurance premiums through their rental payments. The court said that the landlords could have held out for an agreement that the tenant would furnish fire insurance on the premises, but they did not. They elected to purchase the coverage. To suggest the fire insurance does not extend to the insurable interest of an occupying tenant is to ignore the realities of urban apartment renting. Prospective tenants ordinarily rely upon the owner of the dwelling to provide fire protection for the realty (as distinguished from personal property) absent an express agreement otherwise.
According to the Supreme Court, it would not likely occur to a reasonably prudent tenant that the premises were without fire insurance protection or if there were such protection it did not inure to his benefit and that he would need to take out another fire policy to protect himself. The court also noted that for purposes of preventing subrogation, residential tenants are “co-insureds”, absent some clearly expressed intent in the lease to the contrary. The court said this conformed to the usual expectations of the parties with regard to the assignment of risk of loss for fire, the practical effect of which is that rental payments contribute to the cost of the landlord’s fire insurance premiums, the mutual benefits derived by the parties from dividing respective liabilities, and the efficiency of not carrying duplicative insurance coverage on the same property.
In another 2023 federal court decision, a residential lease where the landlord could have but did not allocate the burden of a loss due to fire on her property to the tenant, and the landlord did not impose liability on the tenant for negligence in causing a fire or impose an obligation to purchase insurance. State Farm Fire and Casualty Company v. Lauzon, 2023 WL 1991827 (D. Del. 2023). The court in Lauzon dismissed the subrogation action against the tenant because the landlord did not impose liability on the tenant for negligence in causing a fire nor impose an obligation to purchase insurance. The insurer, instead, agreed to insure for fire loss, and argued the court should construe missing language in the lease to infer the tenant should be obligated to pay the insurer in subrogation when the landlord and tenant never agreed to the tenant being obligated to pay the landlord for negligence causing a fire in the leased property. The federal court followed Delaware law in holding that a tenant is assumed to be a co-insured under the landlord’s home insurance policy absent contrary language in the lease with the tenant.
The Thangavel decision reminds us all that in order to subrogate against a tenant in Delaware, the first place you must look is the language of the lease agreement. Because the laws differ from state to state, MWL has compiled a chart which details the landlord/tenant subrogation laws throughout the country. It can be found HERE. For any questions regarding subrogating against tenants, contact Lee Wickert at leewickert@mwl-law.com.
Lee R. Wickert is a senior associate attorney in our Austin, Texas branch office. Lee was located in in our Wisconsin office, but transferred to our Austin, Texas branch office when it was opened in May 2019. Lee’s practice focuses on insurance litigation, subrogation, workers’ compensation, health insurance and ERISA, automobile insurance, property and casualty, and insurance coverage. Lee is a graduate of the University of Wisconsin-Milwaukee and obtained his law degree at Marquette Law School and his M.B.A. at Marquette University. Lee is licensed to practice in Texas and Wisconsin.
