Subrogating Property Losses and Coinsured Status


Subrogating property losses, within the context of the landlord and tenant relationship, can add layers of complexity outside of the general issues that come with all property claims, such as cause and origin of the loss and actual damages incurred. Before expending costs and time, one issue worth analysis is figuring out exactly who can be pursued. Should there be an indication that the cause and origin of the loss stems from a commercial or residential tenant, the next place to turn to is the language of the lease, should one exist.

If there is an indication the cause and origin of the loss stems from a commercial or residential tenant, the next place to turn to is the language of the lease, should one exist.

The seminal Illinois case of Dix Mut. Ins. Co. v. LaFramboise provides guidance as to the Illinois Supreme Court’s posture when it comes to interpretation of whether a tenant is a coinsured under a landlords policy and thus immune from claims of subrogation. Dix Mutual Insurance Co. v. LaFramboise, 149 Ill. 2d 314, 597 N.E.2d 622 (1992). The tenancy at issue was that of one year and during said year, with approval from the landlord, the tenant attempted to strip paint from the exterior of the residence by heat application. This resulted in fire damages totaling $40,579.00, which was covered and paid by the landlord’s insurance company. Id. at 318. The court, in deciding whether to affirm the appellate court’s ruling to allow the insurance company to enforce it’s right of subrogation advised that it would require (1) that the landlord could maintain a cause of action against the tenant; and (2) it would be equitable to allow the insurance company to enforce a right of subrogation against the tenant. Id. at 319.

In order to meet the aforementioned elements, the court turned to the written lease between the landlord and tenant to examine if anything therein would exculpate the tenant from negligently caused fire damage. The relevant language of the lease read as follows:

(E)The Tenant will assume their [sic] own risk for their [sic] personal property and Landlord, J.S. Ludwig, will not be responsible for fire, wind, or water damage. Id. at 318. 

Failed Interpretation

The lease was not one of great complexity, and in fact, the above-referenced language was the only language that came close to addressing responsibility for losses, such as the fire loss that took place. The insurance company in the Dix case interpreted the last clause to support the party’s intent to place responsibility for fire damage on the tenant; however, the court held that such an interpretation fails to account for the spirit of the entire clause as a whole. Id. at 321. Instead the court found “[w]hen read as one complete sentence, it is obvious to us that the parties intended to expressly place responsibility for his own personal property on the tenant and to exempt the landlord from liability for damage to the tenant’s personal property.”  Id. at 321-322.

The glaring omission of the lease that was not lost on the court was the absence of language addressing the actual leased premises, as opposed to the tenant’s personal property. For the tenant, according to the court, silence is golden. The court, citing a prior opinion in Cerny-Pickas & Co. v. C. R. Jahn Co., reasoned that the cost of insurance to a landlord, or the value of the risk enters into the amount of rent. Dix at 322 (citing Cerny-Pickas & Co. v. C. R. Jahn Co. 7 Ill. 2d 393, 398, 131 N.E.2d 100, 104 (1955)). It is from this principle that Illinois courts, as well as a host of other jurisdictions, identify tenants in the absence of specific language to the contrary, as coinsureds, under the landlord’s policy of insurance.

Overcoming Coinsured Status

Upon review of the Illinois Supreme Court’s treatment of the plaintiff’s right of subrogation in Dix, it is clear that courts, and subrogation professionals alike, should look to the language of the lease in determining whether a right exists and recovery can be made. What does this language look like? Are there magic words?

Reliance upon the mutual waiver of subrogation rights contained in the lease

The Illinois Appellate Court’s Second District provided some further context and analysis on the issue. As for the case before them, the appellate court was provided a lease, which addressed and contemplated risk for bodily injury and property loss. In Pekin Insurance Co. v. Murphy, the appellate court reviewed the trial court’s order, dismissing the plaintiff’s property damage subrogation claim against defendant tenants for failing to state a claim entitling it to relief. Pekin Insurance Co. v. Murphy, 2014 IL App (2d) 140020-U. The trial court’s finding on this issue was in reliance upon the mutual waiver of subrogation rights contained in the lease and the holding in Dix stating tenants are “…at any time and at any place coinsureds with their landlord” with the “only exception being if the parties had a clear agreement to the contrary.” Dix Mut. Ins. Co. v. LaFramboise, 149 Ill. 2d 314, 326 (1992).

Subrogation professionals should look to the language of the lease in determining whether a right exists and recovery can be made.

The facts in Pekin involved a two-year lease between plaintiff’s insured and defendants. During the term of the lease, defendants left the property for a two-week vacation in California. Pekin Ins. Co., 2014 IL App (2d) 140020-U, 6. Prior to leaving the property, the defendants allegedly stuffed an inordinate amount of toilet paper down the toilet on the second floor of the home causing significant and severe water damage. Id. The claim further alleged that the defendants were notified by the alarm system on the property six times and refused to do anything to mitigate the issue. Id.

The language of the lease as it pertains to the mutual waiver of subrogation reads as follows:

“Whenever any loss, cost, damage or expense resulting from fire, explosion or other casualty or occurrence is incurred by either of the parties to this Lease in connection with the [p]remises, and such party is covered in whole or in part by insurance with respect to such loss, cost, damage or expense or such loss, cost damage or expense in insurable under a Special Cause of Loss form of property insurance, then the party so insured or insurable hereby releases the other party from any liability it may have on account thereof, provided that such release of liability and waiver of right of subrogation shall not be operative in any case where the effect thereof is to invalidate such insurance coverage or increase the cost thereof.” Pekin Ins. Co., 2014 IL App (2d) 140020-U, 4.

After looking to the lease as a whole and the “spirit of the agreement”, the appellate court reversed the trial court. The appellate court noted the following sections of the lease as reflecting the intent of the parties as it pertains to damage of the property from misuse or neglect:

“[Defendants] will make all repairs required to walls, windows, glass, ceilings, paint, plastering, plumbing work, pipes, and fixtures belonging to the premises, whenever such damage or injury to the same shall have resulted from [defendants’] misuse or neglect; and [defendants] agree[] to pay for any and all repairs that shall be necessary to put the premises in the same condition as when Lessee entered therein, reasonable wear, acts of God, and loss by fire excepted; and [Girkins] shall have the right to make said repairs and recover the cost of same from Lessee as rent.” Pekin Ins. Co., 2014 IL App (2d) 140020-U, 15.

The reviewing court found this provision to reflect unmistakable intent.

The reviewing court found this provision to reflect unmistakable intent. This means that the defendant tenants would be on the hook for misuse or neglect outside of certain instances such as acts of God, reasonable wear, and loss by fire. Id. This case, and specifically the lease, also serves as guidance in reviewing possible subrogation claims. The court placed an emphasis on having language that addresses who is to assume risk of loss and cost of repair to place the premises back in the same condition as when tenant entered premises. The court also took note of the language directing the tenants to secure general liability insurance coverage for property damage and bodily injury as opposed to coverage solely for their tenants own personal property. The court reasoned that had the parties not intended for defendants to be liable for damage to the property caused by their own negligence, the need for liability insurance as it pertains to the leased property would be unnecessary. Id. at 18.

Waiver of subrogation found to be susceptible to more than one reasonable interpretation

The court finally looked at the mutual waiver of subrogation. The defendants raised the waiver as an affirmative matter that would defeat the plaintiff’s claim. 735 ILCS 5/2-619(a)(9). The waiver in Pekin could have meant the demise of the plaintiff’s right of subrogation, had it conveyed a more clear intent of what might: (1) invalidate insurance coverage; or (2) increase the cost thereof. Id. at 22. Due to the ambiguous nature of the exceptions included in the waiver, the court found it susceptible to more than one reasonable interpretation. As a result, the waiver was not an issue they could decide as a matter of law. Id. at 24

The Pekin case highlights the real need for close attention to detail when a property or bodily injury claim arises involving a landlord and tenant.

The Pekin case highlights the real need for attention to detail when a property or bodily injury claim arises involving a landlord and tenant. Determining whether ‘coinsured’ status applies is a good place to start once the evidence obtained leads you to tenant negligence. To learn more about this analysis or to discuss a similar matter, contact an attorney from our property subrogation practice.