Property InsuranceBy: Tracy E. Stevenson Chuhak & Tecson P.C. Chicago
Landlord or Tenant - Who Pays for the
Housing trends suggests that more people are choosing to rent rather than owning a home. Generally, when such trends develop, related laws follows. Thus, courts are called upon to determine the manner in which one’s rights and duties are to be determined. In that regard, courts have been taking a fresh look at which party (or whose insurer), the landlord or the tenant, is responsible for the damages caused by the negligent acts of a tenant.
Current case law has shown some deviation from the prior line of decision that have held that a landlord/building owner’s insurer must provide coverage for property damage caused by the negligent acts of a tenant. With that deviation, however, two issues have also arisen. First, can the insurer pursue a subrogation action against the tenant to recover its expenditures? Second, what is the basis for the determination as to whether subrogation is a viable action?
This article will examine recent trends that are developing in this area in an effort to predict the future of the law in the state of Illinois.
Does Subrogation Exist in the Equitable World of Landlord v. Tenant?
Illinois law recognizes the doctrine of subrogation and its applicability to insurers in certain instances. The doctrine of subrogation, succinctly stated, is “a method whereby one who has involuntarily paid a debt or claim of another succeeds to the rights of the other with respect to the claim or the debt so paid.” Dix Mutual Insurer v. LaFramboise, 597 N.E.2d 622, 625, 149 Ill. 2d 314 (1992); citing 34 Ill. L. & Prac. Subrogation § 2 (1958). To assert a right of subrogation, the subrogor (for our purposes here the insurer) must step into the shoes of, or be substituted for that individual’s or business’ debt that the insurer has paid and can only enforce those rights which the latter could enforce. See, Continental Casualty Company v. Polk Brothers, Inc., 120 Ill. App. 3d 395, 397, 457 N.E.2d 1271 (1983). Under the common law doctrine, an insurer may assert a right of subrogation against a tenant only if (1) the landlord has a right to maintain a cause of action against the tenant; and (2) equity would allow the insurer to enforce this right of subrogation. Thus, one can only be made whole or recover an expenditure wrongfully paid.
Does the Procurance of Insurance Automatically Equate to Liability?
The principles of subrogation are premised on general principles of equity. Further, subrogation by an insurer acts to avoid unjust enrichment and seeks to assure that a tortfeasor will not receive the windfall of being absolved from liability merely because an innocent insured has obtained and paid for insurance for his or her own benefit. For example, in the landlord/tenant relationship, a landlord property owner invariably provides property insurance covering the entire building to protect his own interests in the property itself. However, it is not uncommon for the building to be damaged due to negligence attributed solely to a tenant residing within the premises. Thus, the question is raised: can the landlord and/or its insurer recover those expenditures paid out for such damage from the party at
fault, the negligent tenant? The answer used to be “no.” Currently, the answer in Illinois is a resounding “maybe.”
One of the first cases in which the Illinois Supreme Court addressed the issue was Cerny-Pickas & Co. v. C. R. Jahn Company, 7 Ill. 2d 393, 131 N.E.2d 100 (1955). There, the landlord sued its tenant to recover for property damage caused by a fire started due to the tenant’s negligence. The Court ultimately looked to the specific language in the lease agreement to determine first whether equity allowed such an action. The Cerny lease provided that the landlord would pay for fire insurance on the building, but that the tenant would keep the premises in good repair and return the property in good condition. The landlord argued that the language of the lease prohibited the tenant from escaping all responsibility for its own negligence in causing the damage to the property.
The Court ruled that if it upheld the landlord’s argument, it would be necessary for both parties to carry insurance. The tenant would have to insure against fire due to his negligence and the lessor against other causes. Therefore, in this instance, absolving the tenant from liability was not construed to be against public policy because equity did not require dual coverage. Importantly, the Court further stated that the parties “consciously figured on the rentals to be paid by the tenant as the source of the fire insurance premiums and intended the cost of insurance was to come from the tenants, therefore, in practical effect, the tenant paid the cost of the fire insurance.” Cerny-Pickas & Co. v. C.R. Jahn Company, Id. at 104.
The Cerny court’s reasoning which established the “intention” of any two parties to a lease, has become a touchstone for the determination of most cases on this topic. The Cerny Supreme Court further ruled that “because it would be incongruous to require both the landlord and the tenant to obtain fire insurance on the same premises, and because the tenant in essence pays for the insurance out of his rent, the tenant, as a matter of law, is exculpated from liability for negligently causing fire damage to the building where the landlord procures insurance thereon, and the landlord must, therefore, look solely to the insurer for reimbursement of such losses” (emphasis added.) Id, at 105. Thus, the Supreme Court, as early as 1955, created law that a tenant’s rent pays for a landlord’s insurance and if nothing in a lease exonerates him, he becomes tantamount to a “coinsured” under the landlord’s insurance policy, and subrogation can not lie against the “insured” tenant.
Eventually courts, including the First District Appellate Court in Englehardt v Triple X Chemical Laboratories, 53 Ill. App.3d 926, 369 N.E.2d 67 (1977), began to specifically refer to exculpatory clauses within leases in the interests of equity when such a case was brought before them. The language contained within most leases places upon the tenant the duty to “yield up the premises in good condition.” The Englehardt lease contained additional language in which the landlord specifically was to provide payment for “loss by fire and casualty” not caused by lessee. The Court in Englehardt distinguished this language from the Cerny lease and ruled that the intent of the parties was to hold the tenant liable for his own negligent acts in the event, specifically, of fire caused by the tenant. The court ruled that the lessor could sue the tenant for damages attributable to the tenant’s negligence, and that the insurer had a right to subrogation.
Accordingly, a trend developed causing a shift away from the Cerny Court’s finding that tenants as a matter of law are innocent co-insureds. The Englehardt court boldly addressed the Cerny court’s analysis relative to the implied intent in all lease agreements that tenants are automatically deemed to be coinsureds, and specifically ruled in a contrary manner given the case facts before them.
In 1992, the Illinois Supreme Court in Dix Mutual Insurer v. LaFramboise,149 Ill. 2d 314, 597 N.E.2d 622(1992) heard a case in which an insurer brought a subrogation action against its insured’s tenant to recover money paid as a result of fire damage to the insured landlord’s property purportedly caused by the sole negligence of the tenant. The insurer argued that the tenant was liable on the basis that while the lease did not contain a provision expressly relieving the tenant for damage due to fire, it did contain the general exculpating language that the tenant return the premises in good condition. The
Dix Court rejected this argument and mandated review based upon interpretation of “the lease as a whole.” The Court held that the lease as a whole did not reflect any intent that the tenant would be responsible specifically for fire damage to the realty.
The Dix Court then went one step further. After considering the lease language (in accordance with the prevailing trend), the Court ruled that based upon “the landlord’s conduct in taking out a fire insurance policy to cover the leased premises, the tenant became, in fact, a co-insured.” The Court ultimately ruled that “both the landlord and the tenant intended that the policy would cover any fire damage to the premises no matter who caused it, and, to conclude otherwise, would defeat the reasonable expectations of the parties.” Dix Mutual Insurer v. LaFramboise, 597 N.E.2d 622 at 626. Because the Court expressly found that the tenant and the landlord were coinsureds, the insurer could not bring a subrogation action against the negligent tenant. “It is well settled that an insurer may not subrogate against its own insured or any person or entity who has the status of a coinsured under the insurance policy. Reich v Tharp, 176 Ill. App. 3d 496, 521 N.E.2d 530 (1987).
The Dix Court appears to have retreated back to the earlier Cerny Court’s finding of automatic liability for the landlord when it apparently gave more weight to the action of the landlord in purchasing insurance for its own benefit, than to the language of the lease. While on its face, the Court’s ruling may appear to be adverse to an insurer’s subrogation rights, the Dix Court held that an action for subrogation by an insurer against a tenant may be viable given the right circumstances. Thus, if lease agreements are written to specifically set forth the parties’ intent that the tenant be held responsible for negligently causing damage to property by fire (or otherwise) then, a subrogation action may lie. The issue turns on the manner in which a given court interprets the intent of the parties at the time they entered into the lease agreement. Ultimately, this equates to legal rulings based upon subjective analysis.
The Second District Appellate Court, in Nelson v. Greenberg, 237 Ill. App. 3d. 125, 603 N.E.2d 1237 (1992), supported the position that a tenant can be liable for negligently causing damage if such intent is evidenced in the lease. There, the lease language expressly stated, “tenants will be charged for all breakage.” The Second District Court relied on the Dix Supreme Court decision when it held that one must look to the language of the lease first. In Nelson, a case involving fire damage allegedly caused by the tenant, the lease failed to specifically address the responsibility of damage in case of fire. Unlike the Dix Court, the Court in Nelson found that the lease as a whole demonstrated “that it was the intent of the parties that the tenant be liable for . . . losses resulting from the tenant’s negligence. Therefore, the tenant may be liable for fire damage caused by his own negligence.” Nelson v. Greenberg, 603 N.E.2d 1237, 1240.
The facts of the Nelson case are remarkably similar to those of the Dix case, although the courts ultimately reached opposite conclusions. These two decisions support the premise that the final determination as to whether a subrogation action is viable, lies with the Judges’ finding of fact relative to the interpretation of the lease language and the intent of the parties.
More recently, the First Appellate District heard American National Bank & Trust Company v. Edgeworth, 249 Ill. App.3d 52, 618 N.E.2d 899 (1993), a case in which an insurer brought an action on behalf of its insured against a tenant who had negligently caused a fire in the apartment building. Again, the Court looked to the lease agreement in question in support of its opinion. The lessor in that case placed language in the lease agreement which provided exclusively that “in the event that any repair or replacement is necessitated by any negligence or wilful act of [a] tenant, [the] tenant shall on demand reimburse the owner for the costs thereof.” Despite what appears to be plain language in the lease making the tenant liable for its own negligence, the American Bank Court relied , instead, on the portion of the lease which required the landlord to procure fire insurance. Making no attempt to determine the intent of the parties in entering into the lease, the Court held as a matter of law, that the tenant could not be responsible for negligently or accidently causing fire damage to the apartment
building when the landlord procures insurance for the building. In effect, the American National Bank & Trust Company v. Edgeworth court looked to the plain language of the lease, as required by legal precedent then chose to ignore half of the language.
In a decision fraught with inconsistency, the Court found that the language of the lease controlled in that it required that the landlord to purchase fire insurance thus causing the landlord to be responsible for repairs. Yet, in its ruling, the Court ignored the language of the lease which provided explicitly that the tenant reimburse the landlord for any repair or replacement cost necessitated by the negligent act of the tenant. The Court ordered that no action could lie, and the landlord’s insurer was ordered to pay for the repairs to the damaged property. Currently, this is the prevailing law in the First District for the State of Illinois. The steps which other courts have taken that mandate consideration of the lease language and the intent of the parties have seemingly been set back to 1955 standards.
Subrogation is Permitted for the Intentional Acts of an Insured/Tenant
Importantly, the Court has adopted a much more definitive rule applicable to the intentional acts of tenants which result in property damage. The Court in LaSalle National Bank v. Massachusetts Bay Insurer, 958 F.Supp. 384 (N.D. Ill. 1997) discussed that under Illinois law, the anti-subrogation rule would generally bar a homeowner’s insurer from asserting a subrogation claim against a coinsured.
In LaSalle National Bank, the insurer attempted to recoup payments made to a coinsured wife on a
claim for fire loss caused by the husband’s intentional rather than negligent acts. In examining the issue of whether an insurer may recover against its own insured, the Court found that because the policy in question had an exclusion for intentional acts, i.e., arson, the insurer could in fact assert a subrogation claim against its own insured because the risk was not covered by the insurance. Thus, the court’s view was that only where a risk is covered by an insurance policy is an insurer barred from subrogating against its insured.
The LaSalle National Bank court adopted language from both the Reich and Dix holdings yet acknowledged that those cases dealt not with intentional acts but with negligently caused property damage. The LaSalle National Bank Court also noted the Supreme Court’s caution that “the right of subrogation is an equitable right and a remedy which rests on the principle that substantial justice should be obtained by placing ultimate responsibility for the loss upon the one against whom in good conscience it ought to fall.” Thus, subrogation is allowed to prevent injustice and unjust enrichment, but will not be allowed where it would be inequitable to do so. There is no general rule which can be laid down to determine whether a right of subrogation exists since this right depends on the equities of each particular case. Citing Dix, 597 N.E.2d at 624.
For its opinion, the LaSalle Bank court relied upon the Wisconsin Appellate Court’s analysis in Madsen v. Threshermens Mutual Insurer, 149 Wis. 2d 594, 439 N.W.2d 607 (1989), a case in which the owners of a restaurant purchased a fire insurance policy which expressly excluded intentional acts caused by an insured. Ultimately, fire destroyed the restaurant and the insurer paid out the balance due to the mortgagee, but refused to pay anything to the restaurant owners/ insureds. Considering the intentional nature of the fire set by the insured, the Court stated “ordinarily, an insurer does not have a right of subrogation or indemnification against its own insured. In this instance, adhering to this principle would defeat a purpose of subrogation, which is to ultimately place the loss on the wrongdoer. Here, the wrongdoer and the insured are the same person, the insured owner, thus, requiring the owner to reimburse the insurer for the act would appropriately place the loss on the wrongdoer.” Madsen at 610. Other reported cases, although few, in the context of arson by a coinsured agree that an insurer has a right of subrogation against the insured arsonist.
The law in this area appears mired in the Supreme Court’s early decision that, by default, a tenant is deemed a coinsured under a landlord’s policy of property insurance merely because the tenant pays
rent, notwithstanding whether the rent is actually offered as payment for insurance premiums. The arguments against the equitable nature of this premise are slowly causing a trend in which the courts consider the language of the lease agreements, and especially the intent of the parties.
Seemingly, more often in the future insurers will be able to recoup their payouts from negligent tenants if the plain language of the lease is examined and considered, and if courts can be convinced that equity does in fact allow subrogation against wrongdoers who were aware of the risks and the liabilities at the time of the rental. It may be a slow process, but courts appear to have set the stage for an increasing number of subrogation actions by insurers against negligent tenants.
ABOUT THE AUTHOR: Tracy E. Stevenson is a litigation attorney with the Chicago firm of Chuhak and Tecson, P.C., concentrating in medical malpractice defense and insurance defense. She has defended cases on behalf of physicians and hospitals and represented various major insurance companies in claims for personal injury. She is licensed in Michigan as well as Illinois.