Western Heritage Insurance Company, which had issued a commercial property insurance policy to East Shore, paid for damage caused by the fire under the policy. Thereafter, Western Heritage filed a complaint in subrogation against the lessees, alleging that the fire was caused by their negligence.

The lessees moved for summary judgment. They argued they were implied co-insureds under the Western Heritage insurance policy and that Western Heritage consequently could not bring an equitable subrogation action against them.

For its part, Western Heritage argued that the lessees were not implied insureds given the language of the lease they signed with de Carion and that, in any event, they had no contractual relationship with East Shore, which was the only named insured under the Western Heritage insurance policy for the fire loss.

The trial court granted the lessees' motion, and Western Heritage appealed.

The Appellate Court's Decision

The appellate court affirmed.

In its decision, the appellate court explained that California law precluded a subrogation action by the fire insurance company of a lessor against a lessee where a lessee's negligence caused a fire, but the policy was intended to benefit the lessee. In such cases, the appellate court continued, the lessee was treated as an insured, despite the lessee not being a named insured on the policy. Because the insurance company may not seek subrogation against its own named insured (the lessor), it may not seek subrogation against the lessee, the appellate court reasoned.

The appellate court then found that the Western Heritage policy was maintained for the lessees' benefit and, therefore, that the trial court had correctly granted summary judgment in their favor.

First, the appellate court reasoned, the lease required the lessees to obtain only liability insurance, not fire insurance. According to the appellate court, the implication “was that fire insurance would be carried by the lessor, de Carion.”

The appellate court next observed that owners such as de Carion were prohibited by the East Shore Commercial Condominiums Owners' Association's Declaration of Codes, Covenants and Restrictions (“CC&Rs”) from purchasing an individual fire policy, as were “occupants” and “tenants” of the property to whom the CC&Rs applied. Therefore, the appellate court said, the lessees could not purchase their own first-party fire insurance for the structure (a structure in which they held no ownership interest).

Third, the appellate court continued, the yield-up clause in the lease provided that the lessees agreed to “surrender the Premises at the termination of the tenancy herein created, in substantially the same condition as they were on the Commencement Date, reasonable wear and tear, casualty, and any alterations, improvements, and/or additions which are the property of the Lessor under Paragraph 7 excepted.” (Emphasis added.) “Casualty” included damage from fire, the appellate court said.

Where a lease referred to the possibility of fire and there was no clear language or other admissible evidence showing an agreement to the contrary, a lease “should be read to place on the lessor the burden of insuring the premises . . . against lessor and lessee negligence,” the appellate court declared.

The appellate court was not persuaded by Western Heritage's contentions that de Carion and the lessees did not intend de Carion to obtain fire insurance for the lessees' benefit, that the lessees had a different insurable interest than de Carion (personal property versus the structure), and that the lease had no provision expressly requiring de Carion to obtain fire insurance. The fire insurance purchased by the association “was intended to be the only fire policy on the property and was for the benefit of the property's lessees absent language to the contrary in the lease,” the appellate court concluded.

The case is Western Heritage Ins. Co. v. Frances Todd, Inc., No. A152428 (Cal. Ct. App. April 2, 2019).