Archive for July 2012

Insurer’s Subrogation Claim Against Commercial Tenant Denied in Fire Damage Case

July 16, 2012

In Nationwide Mutual Fire Ins. Co. v. T & N Master Builder & Renovators, No. 2-10-1143 (Ill. App. Ct. Oct. 25, 2011), Plaintiff Nationwide Insurance (“Insurer”) sued to recover $140,328 it paid to property owner Michael Markowitz (“Insured”) for fire damage to the property leased by Defendant T & N Master Builder and Renovators (“Tenant”).  The court ruled in favor of the Tenant finding that even in the commercial realm, rent payments qualified the tenant as a co-insured protected from subrogation actions, and certain provisions of the lease specifically exempted damages from “loss by fire.”

In the present case, the Insurer sought to limit the ruling of an Illinois Supreme Court case – Dix Mutual Ins. Co. v. LaFramboise, 149 Ill. 2d 314 (1992).  In Dix, a tenant, after obtaining landlord’s approval, attempted to strip paint from the exterior of the property using a heat-applied power stripper.  During this process, the house was damaged by fire and the landlord filed a claim causing the insurer to pay the landlord $40,579 for the loss.  The insurer in turn filed subrogation action against the tenant to recover the amount it paid to the landlord for fire loss allegedly caused by tenant’s negligent use of the power stripper.  The Appellate Court found that as a result of the tenant’s payment of rent, the tenant had also contributed to the payment of the insurance premium, thereby allowing the tenant to qualify as a co-insured under the insurance policy.

In the Nationwide case, the Insurer raised two issues on appeal in an attempt to limit the previous opinion of Dix:  (1) the present case involved a commercial lease with sophisticated parties who could have allocated risks and costs as they saw fit; and (2) certain provisions in the lease made the Tenant liable for the fire damage.

Although Dix did not involve a commercial lease, the Appellate Court properly cited Dix relied extensively on Cerny-Pickas & Co., which did involve a commercial lease.  In the commercial realm, the court supported the proposition that a tenant, through the payment of rent, effectively pays to insure rented property, and expressly rejected a contrary rule.  As such, tenant’s rent payments were the source of the fire insurance premiums and the landlord intended the cost of insurance to come from its tenant.  In practical effect, the tenant paid the cost of the fire insurance.  The Nationwide court held that Illinois Supreme Court decisions Dix and Cerny-Pickas remain valid and controlling law in Illinois.  Consequently, the court rejected the Insurer’s attempt to distinguish the commercial lease.

The Nationwide court also addressed the Insurer’s argument that the lease contained no language exculpating the Tenant from negligent acts and that it did not identify Tenant as a co-insured.  The court reasoned that the lease, read as a whole, did not make the Tenant liable for damages resulting from fire. While the lease imposed a duty upon the Tenant to make all repairs when the damage resulted from misuse or neglect, the “loss by fire” exception in the lease confirmed the parties’ intent that the landlord provide insurance for loss by fire. Thus, the language of the lease protecting the landlord from a tenant’s negligence plainly excluded fire damage and did not render the Tenant liable. The plain language of the lease, along with the fact that the Tenant contributed to the insurance premiums by virtue of paying rent, qualified the Tenant as co-insured under the policy issued by the Insurer.  Since it is well settled that an insurance carrier cannot subrogate against a co-insured, the Nationwide Court affirmed the judgment for the Tenant denying the Insurer’s subrogation claims.

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