Cambridge Mutual Fire Insurance Company v. Crete, 2004 WL 484552 (N.H., March 15, 2004)

An insurer for a landlord of residential property brought a subrogation action against the tenant of the property alleging that he had negligently caused a fire by careless smoking. Paired with the insurer’s subrogation interest were direct claims brought by the landlord to recover uninsured losses. Following the principles and public policy concerns as stated in Sutton v. Jondahl, 532 P.2d 478 (Okla.Ct. App.1975), the New Hampshire Supreme Court found that neither the insurer nor the landlord had a right to seek recovery of damages against the tenant.

The court relied solely on what it referred to as “the Sutton doctrine” to support its decision. Under that doctrine, a residential tenant is presumed to be a “co-insured” of their landlord with respect to fire damage to the leased residential premises. Combined with the principle that an insurer may not subrogate against its own insured, the resulting conclusion is that an insurer has no right of subrogation against a residential tenant whose negligence causes fire damage. Likewise, the Sutton decision stated that a landlord may not seek to hold a tenant liable for the landlord’s uninsured fire damages.

The rationale for the both court decisions was perceived as basic fairness. The courts contended that when a carrier provides fire insurance to a residential dwelling, it should expect to protect the insurable interest in the entire structure, including the discrete parts possessed by tenants. The courts found that placing the burden on the building owner to procure insurance for the whole building – including that space that individual tenants occupy – is the fairest approach, as well as the best way to spread the risk. The reasoning was expressed as follows:

1. A reasonable residential tenant expects that a landlord will provide fire insurance to protect the tenant's property.

2. A reasonable insurance company should expect to provide coverage for fire damage that may result from the actions of a tenant of its insured.

3. An insurance company should reasonably expect to pay for damage caused by fires resulting from tenant negligence.

4. A landlord can spread the cost of the insurance premium to the tenant as a business expense and, therefore, can take this into consideration when establishing the rent rate.

5. It would be unfair for a tenant to carry fire insurance for an entire building in which he/she only rents a portion, and a tenant would lack the knowledge necessary to know how much coverage was needed.

6. Requiring both landlord and tenant to have insurance covering the entire building would result in multiple policies and, thus, economic waste.

To summarize, the courts found that a landlord in a residential building is in the best position – practically, as well as according to the noted public policy concerns – to procure insurance for the entire building. In reaching this conclusion, the courts assumed that the landlord has a degree of business and property valuation knowledge greater than that of the typical tenant. Therefore, the landlord was viewed as better able to purchase the right insurance in sufficient amounts and the opportunity to pass on a portion of the cost of the insurance to the tenant. In sum, the courts found that these basic reasons adequately support its decision.

It is important to note that the New Hampshire Supreme Court also found that a landlord and tenant are free to negotiate a rental agreement contract that would include a provision regarding alternate coverage for fire damage. For such a provision to be acceptable by the court, however, it must explicitly state the following:

1. Tenant is not considered a co-insured of a landlord under any fire insurance policy obtained by the landlord;

2. Tenant must obtain his or her own fire insurance for the leased premises; and

3. Tenant is liable for fire damages caused by tenant's negligence.

If these provisions are explicitly set forth in a lease, then the insurer for the landlord can pursue subrogation against a negligent tenant. But, absent such an express explicit agreement in the residential lease (i.e. one that places liability upon the tenant for the tenant's own negligence in causing a fire), a tenant is considered a co-insured and is not vulnerable to subrogation by the landlord's insurer.

By way of attempting to satisfy this requirement by the court, landlord and its insurer argued that tenant should be held liable under the following language that did appear in the lease (and that often appears in residential leases):

Tenant must take good care of the Leased Premises and all equipment and fixtures contained therein. Tenant is responsible and liable for all repairs, replacements, and damages caused by or required as a result of any acts or neglect of the Tenant, Occupants, invitees or guests. If Tenant fails to make a needed repair or replacement, Landlord may do it and add the expenses to the rent.

The court observed that this paragraph did not explicitly state that the tenant was not considered a co-insured of the landlord under any fire insurance policy obtained by the landlord. It went on to state that the paragraph does not explicitly require the tenant to obtain his or her own fire insurance for the leased premises, and that it did not address the specific issue of the tenant's liability for fire damages caused by the tenant's negligence. The court concluded that this provision was not an express agreement or provision that negates the presumption that the tenant is a co-insured of the landlord for purposes of any fire insurance coverage on the leased premises.

Finally, as to the landlord’s uninsured losses, the court found that such claims, too, could not be pursued against the tenant. To support this decision, the court again employed the Sutton decision’s rationale and reasoned that a landlord is unable to recover his or her uninsured losses from a negligent tenant because:

1. There would be less incentive for landlords to get adequate fire insurance;

2. Unknowledgeable tenants would have to purchase additional fire insurance not only for the leased premises, but also for landlords’ personal property on the premises (of which the typical tenant would not have knowledge);

3. This may result in multiple insurance policies on the same property, which would result in economic waste; and

4. And it is reasonable for a tenant to presume that a landlord has procured adequate fire insurance for the real property as well as the landlord-owned property on the premises.

Based on these reasons, the court found that, like the subrogated losses, the uninsured losses of the landlord were not recoverable from the tenant.

Practice Tips:

1. To directly overcome this anti-subrogation holding requires the cooperation of insurance agents/brokers and underwriters to ensure that explicit language consistent with that stated by this court is contained in residential lease agreements for insured property. Such an effort, however, would probably go against the recent trend seen in many insurance company policies to include subrogation waiver provisions, so as to limit the inconvenience to underwriters and brokers caused by the existence of subrogation waiver language in property leases.

2. On the other hand, a very aggressive and proactive insurance carrier looking to improve subrogation recoveries and limit net losses would be wise to insist that residential landlords the companies insure have the above-described explicit language in their leases. This is the only way to protect an insurer's subrogation interest, as well as the best way to protect landlords that might have uninsured damages of their own.

3. As “the Sutton doctrine” adopted by the New Hampshire Supreme Court in this case has recently been followed by a majority of states across the country, the national importance of these otherwise seemingly isolated decisions should be kept in mind.

4. Recovery professionals should understand the law in this regard for any and all jurisdictions within which they operate. Knowledge as to the viability (or lack of viability) of such claims is important so that resources are not wasted in an attempt to establish liability on the part of a suspect tenant, and so that resources can be well used to try and determine alternate subrogation targets. If a subrogation specialist has any questions about the law in a particular jurisdiction, then proper subrogation counsel should be contacted.