Subrogating property losses within the context of the landlordand tenant relationship can add layers of complexity outside of thegeneral issues that come with all property claims, such as causeand origin of the loss and actual damages incurred.

Before investing money and time, one issue worth analysis isfiguring out exactly who can be pursued. Should the cause andorigin of the loss stem from a commercial or residential tenant,the next place to turn to is the language of the lease, should oneexist.

It's in the lease

The seminal Illinois case of Dix Mut. Ins. Co. v. LaFramboiseprovides guidance as to the Illinois Supreme Court's posture whenit comes to interpretation of whether a tenant is a coinsured undera landlord's policy and thus immune from claims of subrogation.

The tenancy at issue was that of one year and with approval fromthe landlord, the tenant attempted to strip paint from the exteriorof the residence by heat application. This resulted in fire damagestotaling $40,579, which were covered and paid by the landlord'sinsurance company.

The court, in deciding whether to affirm the appellate court'sruling to allow the insurance company to enforce it's right ofsubrogation advised that it would require: (1) that the landlordcould maintain a cause of action against the tenant; and (2) itwould be equitable to allow the insurance company to enforce aright of subrogation against the tenant.

In order to meet these elements, the court turned to the writtenlease between the landlord and tenant to see if anything thereinwould release the tenant from negligently caused fire damage. Therelevant 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 beresponsible for fire, wind, or water damage.

The lease was not complex, and this verbiage was the onlylanguage that came close to addressing responsibility for losses,like the fire loss that occurred. The insurance company in the Dixcase interpreted the last clause to support the party's intent toplace responsibility for fire damage on the tenant; however, thecourt held that such an interpretation fails to account for thespirit of the entire clause as a whole.

Instead, the court found “[w]hen read as one complete sentence,it is obvious to us that the parties intended to expressly placeresponsibility for his own personal property on the tenant and toexempt the landlord from liability for damage to the tenant'spersonal property.”

The glaring omission of the lease not lost on the court was theabsence of language addressing the actual leased premises, asopposed to the tenant's personal property. For the tenant,according to the court, silence is golden. The court, citing aprior opinion in Cerny-Pickas & Co. v. C. R. Jahn Co., reasonedthat the cost of insurance to a landlord, or the value of the riskenters into the amount of rent. It is from this principle thatIllinois courts, as well as a host of other jurisdictions, identifytenants in the absence of specific language to the contrary, ascoinsureds under the landlord's policy of insurance.

When damage occurs to a property, the language in the lease candetermine whether or not subrogation is an option. (Photo:Shutterstock)

Overcoming coinsured status

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

The Illinois Appellate Court's Second District provided somefurther context and analysis on the issue. As for the case beforethem, the appellate court was provided a lease, which addressed andcontemplated risk for bodily injury and property loss. In PekinInsurance Co. v. Murphy, the appellate court reviewed the trialcourt's order, dismissing the plaintiff's property damagesubrogation claim against defendant tenants for failing to state aclaim entitling it to relief.

The trial court's finding on this issue was in reliance upon themutual waiver of subrogation rights contained in the lease and theholding in Dix stating tenants are “…at any time and at any placecoinsureds with their landlord” with the “only exception being ifthe parties had a clear agreement to the contrary.”

The lease determines subrogation rights

The facts in Pekin involved a two-year lease between plaintiff'sinsured and defendants. During the term of the lease, defendantsleft the property for a two-week vacation in California. Prior toleaving the property, the defendants allegedly stuffed aninordinate amount of toilet paper down the toilet on the secondfloor of the home, causing significant and severe water damage. Theclaim further alleged that the alarm system on the propertynotified the defendants six times, but they refused to do anythingto mitigate the issue.

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

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

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

“[Defendants] will make all repairs required to walls, windows,glass, ceilings, paint, plastering, plumbing work, pipes andfixtures belonging to the premises, whenever such damage or injuryto the same shall have resulted from [defendants'] misuse orneglect; and [defendants] agree to pay for any and all repairs thatshall be necessary to put the premises in the same condition aswhen Lessee entered therein, reasonable wear, acts of God, and lossby fire excepted; and [Girkins] shall have the right to make saidrepairs and recover the cost of same from Lessee as rent.” [PekinIns. Co., 2014 IL App (2d) 140020-U, 15.]

Tenants should always read the lease agreement since itdetermines what expenses they are responsible for in the event ofdamage. (Photo: Shutterstock)

What the provision said

The reviewing court found this provision to reflect unmistakableintent. This means that the defendant tenants would be on the hookfor misuse or neglect outside of certain instances such as acts ofGod, reasonable wear and loss by fire. This case, and specificallythe lease, also serves as guidance in reviewing possiblesubrogation claims.

The court placed an emphasis on having language that addresseswho is to assume risk of loss and cost of repair to place thepremises back in the same condition as when the tenants enteredpremises. The court also took note of the language directing thetenants to secure general liability insurance coverage for propertydamage and bodily injury as opposed to coverage solely for theirtenants own personal property. The court reasoned that had theparties not intended for defendants to be liable for damage to theproperty caused by their own negligence, the need for liabilityinsurance as it pertains to the leased property would beunnecessary.

The court finally looked at the mutual waiver of subrogation.The defendants raised the waiver as an affirmative matter thatwould defeat the plaintiff's claim. The waiver in Pekin could havemeant the demise of the plaintiff's right of subrogation, had itconveyed a more clear intent of what might: (1) invalidateinsurance coverage; or (2) increase the cost thereof.

Due to the ambiguous nature of the exceptions included in thewaiver, the court found it susceptible to more than one reasonableinterpretation. As a result, the waiver was not an issue they coulddecide as a matter of law.

Details matter

The Pekin case highlights the real need for attention to detailwhen a property or bodily injury claim arises involving a landlordand tenant. Determining whether 'coinsured' status applies is agood place to start once the evidence obtained leads you to tenantnegligence.

Kevin F. Keeley ([email protected]) is anassociate attorney with the civil litigation law firm Keis GeorgeLLP, practicing primarily subrogation and insurance defense. Along-standing member of the Small Business Advocacy Council, Keeleyadvocates on behalf of small businesses and fosters strategicrelationships between small business owners and communityleaders.