Insurer has a hard time subrogating against possiblynegligent landlord
A company in Tennessee leased a storage facility. A shed owned bythe landlord and located next to the leased premises caught fire in1998, allegedly because of the landlord's and rental agent'snegligence. The fire spread to the leased property, causingsubstantial damage to the tenant's personal property. The insurerpaid the tenant more than $1.1 million for the loss, thensubrogated against the landlord and its rental agent.

The lease's insurance provision stated, in part, “(a) Tenant, atits sole cost and expense, but for the mutual benefit of Landlordand Tenant, shall during the term of this lease keep the leasedpremises insured against loss under a Broad Form ComprehensiveGeneral Liability Insurance Policy which insures against claims forbodily injury, death, or property damage, occurring on, in, orabout the leased premises and on, in, or about the adjoiningstreet, property and passageways …. (b) Tenant shall effect for itsown account any insurance on its equipment, inventory, and otherpersonal property.”

The lease also contained an indemnity provision stating, inpart, “Lessee shall indemnify Lessor against all expenses,liabilities, and claims of every kind, including reasonable counselfee, by or on behalf of any person or entity arising out of either(1) a failure by Lessee to perform any of the terms or conditionsof this lease, (2) any injury or damage happening on or about thedemised premises.”

The landlord and rental agent responded to the insurer'ssubrogation efforts by filing a motion for summary judgment inwhich they argued the carrier could not subrogate against thembecause they were additional insureds under the tenant's policy.The insurer responded that its subrogation rights did not arisefrom the comprehensive general liability policy, which contained anadditional insured endorsement. Rather, they arose from a separateproperty policy issued to the tenant for which the landlord andrental agent were not additional insureds. The insurer provided anaffidavit from its underwriting manager, who said the tenant boughta package policy, consisting of multiple lines of coverage:property, comprehensive general liability, crime and inland marine.Under the package policy, the agent, on behalf of the insured,submitted separate applications for each line of coverage. As aresult of the fire, the tenant made a claim under its propertypolicy coverage–which did not cover the landlord. The insurercontended that since the fire originated outside the leasedpremises and was unrelated to the insured's use and operation ofthe leased premises, the liability coverage, under which thelandlord and rental agent enjoyed additional-insured status, wasnot triggered.

The trial court, however, found for the landlord and rentalagent. It said the lease required the tenant to obtain insurancethat named the landlord and rental agent as additional insureds forthe mutual benefit of the parties. The insurance was to insureagainst liability for property-damage claims occurring on, in orabout the leased premises and on, in or about the adjoining street,property or passage- ways. Therefore, the court said, the state'santi-subrogation rule applied. As a matter of law, the insurer wasnot permitted to pursue subrogation against the defendants, whowere its own insureds.

The carrier appealed the ruling, raising two issues: 1) Whetherthe anti-subrogation doctrine applies when (a) the lease expresslymakes the landlord an additional insured only under thecomprehensive general liability coverage, but (b) that same leaseexpressly requires the tenant to obtain property insurance coverageon its own personal property solely for its own account. 2) Whetherthe lease's indemnity clause applied only to third parties and didnot exculpate the landlord and rental agent from their ownnegligence.

The appeals court noted that after an insurer has paid a loss,it generally “is entitled to be subrogated pro tanto toany right of action which the insured may have against a thirdperson whose negligence or wrongful act caused the loss.” [44Am.Jur.2d Insurance ? 1794 (1982)] (Pro tanto means“only to that extent.”)

The appeals court noted that the lease at issue unambiguouslyrequired the tenant to obtain property insurance for its property“solely for its own use and benefit,” and that the tenant did justthat. The landlord and rental agent were not additional insuredsunder this property insurance, the appeals court said.

The appeals court noted that the trial court had held that thelanguage of the lease showed that the parties intended for theinsurance purchased by the tenant to be for the parties' mutualbenefit. “We agree with this conclusion only to the extent that theTrial Court was referring to the comprehensive general liabilityportion of the insurance policy,” the appeals court said. “To theextent that the Trial Court was referring to the property insuranceportion of the insurance policy, we conclude that the Trial Courtwas in error.”

In regard to the carrier's second issue regarding the scope ofthe applicability of the lease's indemnity clause, the appealscourt decided the matter needed to be considered by the trialcourt. The insurer agreed that the trial court previously hadn'truled on this issue, because its grant of summary judgment wasbased on the anti-subrogation rule.

The appeals court noted that if the trial court finds that,under the indemnity clause, the tenant is prohibited from filing aclaim against the landlord or rental agent for damage to thetenant's property, then the insurer, “as subrogor likewise is soprohibited.”

On the other hand, if the trial court finds that such a claimwas permissible, then the trial court would have to determine if alawsuit filed by the tenant against the landlord or rental agentwould trigger the comprehensive general liability portion of theinsurance policy. Under that part of the policy, the appeals courtsaid, it was clear that the landlord and rental agent wereadditional insureds.

“The Trial Court must determine if, pursuant to thecomprehensive general liability policy coverage, (the insurer)would have a duty to defend or indemnify the Landlord or RentalAgent in a claim brought by the Tenant for its property damageunder the particular facts of this case,” the appeals court said.“If the answer to this question is yes, (the insurer) cannot pursuea subrogation action against its insureds, the Landlord and RentalAgent.”

Phoenix Insurance Co. v. Estate of Ganier, No.M2005-02107-COA-R3-CV (Tenn.App. 08/07/2006) 2006. TN.0001130(www.versuslaw.com).

Don Renau is a retired agent and practicing attorney inLouisville, Ky. As an attorney, he consults on a variety of issues,including business formation and estate planning, for agencies andbusinesses in Kentucky. He can be reached at drenau@thepoint. netor, by fax, at (502) 805-0702.