Leases: Insurance Trap for the Unwary
What is the average tenant’s expectation as to what would happen if he were to damage his landlord’s insured property and the landlord collected insurance proceeds from the landlord’s insurance company? Would the tenant expect to be sued by the landlord? Probably not, since the landlord already recovered for the damage. Would the tenant expect to be sued by the landlord’s insurance company? Again, probably not, primarily because it would be the unusual tenant to even think of the question, and if he did, he might wrongly assume that the landlord’s insurance protects him. However, under New Jersey law, the tenant should be prepared for just such a suit.
The reality is that the law creates a significant trap for the unwary occupant of a multiple-occupancy property based on the following typical fact pattern:
A tenant in a multi-tenanted property can, through his negligence, damage a far larger percentage of the property than the tenant occupies.
Few leases contain a waiver by landlord of claims against tenant or a requirement that the landlord obtain a waiver of subrogation from the landlord’s insurance company; even fewer leases contain mandatory reciprocal waivers of claims by one tenant against other tenants or a requirement that a tenant obtain a waiver of subrogation from the tenant’s insurance company in favor of other tenants.
Tenants will not want (or be able to afford) to incur the expense of insuring the entire building and its contents; nor could they, even they wanted to, according to Gwen Packard of KRA Insurance Agency, Inc., who advises that the limits on renter’s liability insurance are relatively low.
The landlord’s and other tenants’ insurance will generally provide no protection for the negligent tenant because, after the companies pay their insureds’ claims, barring a waiver of claim or a waiver of subrogation, they will seek to subrogate to their insureds’ claims and sue the negligent tenant.
Effectively, the average tenant enters into a lease without realizing that he is exposed to a wipe-out risk if he is unfortunate enough to significantly damage the property and/or its contents.
The recent case of Community Ass'n Underwriters of America, Inc. v. McGillick, 2010 WL 5467673 (D.N.J.) illustrates this problem. James and Theresa Otte rented their condominium to their son and three others (including named defendant McGillick). At a party held by the tenants, a fire broke out and condominium-association property was damaged. The condominium association’s insurance company (the above-named plaintiff) paid the association’s claims and then (through subrogation) sued the tenants. Two of the tenants then filed a third-party complaint against the Ottes, claiming that they had failed to safely maintain the condo unit. The Ottes made a motion for summary judgment based on the fact that, while the condominium association’s insurance policy itself did not contain a waiver of subrogation, the condominium association’s public offering statement and bylaws both contained a requirement that insurance policies obtained by the association contain such a waiver as to claims against unit owners.
Firstly, the court found that, as a general matter under New Jersey law, a carrier paying an insurance loss is entitled to subrogation against the tortfeasor responsible for any damage to the insured. There is no suggestion that there is any exception in a residential context. Then, the court noted that the rights of the subrogated insurer can rise no higher than the rights of its insured, i.e., because the subrogated insurer’s rights are derivative from the insured’s rights, they can be no greater than the insured’s rights.
The court then held that:
The condominium association’s public offering statement did not constitute a contractual requirement that the condominium association acquire insurance policies containing waivers of subrogation in favor of the Ottes (as owners).
While the bylaws might constitute such an obligation, the bylaws could not be imputed to bind the condominium association’s insurance company; cf., Continental Ins. Co. v. Omar Boraie, 288 N.J.Super. 347 (1995), which bars the insurance company from subrogating where the insured was required (but failed) to obtain a waiver of subrogation.
At the most, the Ottes might have a breach of contract claim against the condominium association for failing to obtain the waiver; this last holding apparently concludes that the promise to obtain a waiver of subrogation is not the equivalent of a waiver by the insured of the actual claims covered by the insurance (which would effectively undercut the subrogation since, as the court acknowledged, the rights of the subrogated insurer can rise no higher than the rights of its insured).
Presumably had the association actually waived the claims without obtaining the agreement of the insurance company (in the form of a waiver of subrogation clause in the policy), the association would have undercut its coverage leaving it vulnerable to the insurance company disclaiming coverage or seeking a remedy against the association.
So what can a tenant do if he is savvy enough to recognize the foregoing? In all likelihood, nothing. In the author’s experience, most landlords are not willing to discuss waiving claims (even to the extent of insurance). Even if the landlord is willing to consider same, it isn’t always easy for the landlord to obtain such a waiver from the insurance company. Further, the insurance company may ask for an increased premium if it is willing to grant such a waiver. If the premium increase is reasonable, it is well worth the cost because the landlord can build the cost into the rent (as he effectively has for the base coverage), and it is the only economically viable way to provide such coverage. Also, it is ultimately consistent with the (perhaps un-thought-through) expectations of all the parties.
Most landlords (again in the author’s experience) insist on a waiver of claims by the tenant against them, on the tenant carrying insurance to cover damage to the tenant’s property, and (if they are reasonably well-advised) on the tenant’s obtaining a waiver of subrogation regarding claims against the landlord. But, virtually no landlord incorporates a waiver of claims (and obligation to obtain a waiver of subrogation in the insurance policy) against other tenants. So, even if the landlord is willing and able to waive claims and subrogation, it is unlikely that the tenant’s exposure to other tenants and their insurance companies will be addressed.
In the face of these problems, courts in some other states have treated the tenant as a constructive co-insured of the landlord. Those courts reasoned that subrogation is an equitable concept, and equity should recognize the reality that both landlord and tenant have an insurable interest in the rented premises -- the former owns the fee and the latter has a possessory interest. In addition, the courts reasoned that the rent paid was established (in part) in light of the insurance premium paid, thus, the tenant is actually paying the premium as part of the monthly rental. The seminal case in this line is Sutton v. Jondahl, 532 P.2d 478 (Okl.App. 1975), in which the court said:
To suggest the fire insurance does not extend to the insurable interest of an occupying tenant is to ignore the realities of urban apartment and single-family dwelling renting. Prospective tenants ordinarily rely upon the owner of the dwelling to provide fire protection for the realty (as distinguished from personal property) absent an express agreement otherwise. Certainly it would not likely occur to a reasonably prudent tenant that the premises were without fire insurance protection or if there was such protection it did not inure to his benefit and that he would need to take out another fire policy to protect himself from any loss during his occupancy.
New Jersey courts have not followed Sutton with respect to the landlord’s insurance (see, Zoppi v. Traurig et al, 251 N.J.Super. 283 (1990) and thus would be highly unlikely to expand Sutton to other tenants’ insurance.
As can be seen, the existence of a subrogation right in the residential context presents an unusual problem for the residential tenant in that it is unlikely that he will be aware of the exposure to which he is subject, and, even if he is aware of it, he will (in all likelihood) not be able to do anything about it. As the New Jersey courts have declined to fashion a judicial solution, the problem cries out for legislative action. At the very least, the Legislature ought to eliminate the right of subrogation on behalf of a landlord’s insurer. In addition, the Legislature ought to consider requiring landlords of multi-tenanted property to carry insurance (under the same logic that mandates auto insurance), and eliminating the right of subrogation of one tenant’s insurance company against another tenant.