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Insurance Law

The Problem of Mutual Benefit Insurance

Barry Zalma   By Barry Zalma, Attorney and Consultant

When a person leases a portion of a structure with multiple tenants it is usual for the landlord to promise to buy property insurance to protect the entire structure and make, as part of the rent charged, the tenant pay a ratable portion of the insurance. When, due to the negligence of the tenant the property is damaged by fire, the insurer will pay the named insured and then attempt to recover its payment from the tenant who was responsible for the fire. By doing so the insurer and its named insured act contrary to the spirit, if not the terms of the contract of insurance. In Underwriters of Lloyds of London, Etc v. Cape Publications, Inc., D/B/A Florida Today, No. 5D10-3384, 2011 Fla. App. LEXIS 8976 (Fla.App. 06/17/2011) the Florida Court of Appeal determined that the commercial lease between the named insured and the tenant protected the tenant from a subrogation action.


Subrogation is an equitable remedy that allows an insurer to step into the shoes of its insured when it pays for damage to property caused by the conduct of another who negligently or otherwise caused damage to the property.

The issue raised was whether Lloyd's is precluded from bringing a subrogation action because Cape Publications, Inc.'s commercial lease evidenced an intent that it be considered a beneficiary or co-insured under the property and casualty insurance policy maintained by Harry and Wendy Brandon (hereafter "Brandons").

Cape Publications leased commercial office space in a building owned by the Brandons. The Brandons insured the building with a property and casualty insurance policy, covering fire damage, purchased from Lloyd's. As expressly provided in the lease, a portion of Cape Publications' monthly rent was allocated to paying its pro rata share of the premiums on the Brandons' property and casualty insurance. The lease also required Cape Publications to obtain a general liability insurance policy, naming the Brandons as co-insureds, "in an amount not less than $1,000,000 combined single limit for personal injury[,] bodily injury and property damage . . . ." Cape Publications further agreed to indemnify and hold the Brandons harmless for any claim of damage or injury arising out of its negligence or use of the premises.

Fire Trucks Responding to Building Fire

The Brandons subsequently submitted a claim to Lloyd's after part of the premises leased by Cape Publications was damaged by fire. Lloyd's paid the Brandons' claim and, pursuant to the lease's indemnity and hold harmless provision, demanded Cape Publications indemnify it for the loss. When Cape Publications refused, Lloyd's filed suit, asserting claims for breach of contract, contractual indemnity, and common law indemnity. Cape Publications moved for summary judgment arguing that its pro rata payment of the premiums, along with other lease provisions, made it a co-insured under the Brandons' property and casualty policy and, therefore, Lloyd's could not maintain a subrogation action against its own insured. The trial court agreed and granted summary final judgment in favor of Cape Publications.

Lloyd's argued that the summary final judgment should not have been granted because the lease reflects the parties' intent to shift the risk of loss for fire damage to Cape Publications. Thus, Cape Publications cannot be considered a co-insured or intended beneficiary under the Brandons' property and casualty insurance policy. Lloyd's pointed to two lease provisions in support:

1.    the provision requiring Cape Publications to purchase a general liability policy naming the Brandons co-insureds, and

2.    the indemnity and hold harmless provision.

Resolving the Issue

The issue raised by Lloyd's has been addressed in numerous decisions across the country, in the context of both residential and commercial leases. In deciding the issue, courts have adopted one of three analytical approaches:

1.    The Sutton v. Jondahl, 532 P.2d 478 (Okla. Ct. App. 1975) approach,

2.    The anti-Sutton approach, or

3.     The case-by-case approach.

Whether one approach is adopted over another is motivated by the public policy considerations underlying each as determined by a court. Generally recognized as representing the majority position or "modern" trend is Sutton v. Jondahl, supra.  In Sutton, the residential landlord's insurer filed a subrogation action to recover the monies paid to the landlord for damage caused by an accidental fire started by the tenant's son. The court held that the landlord's insurer could not maintain a subrogation action against the negligent tenant because the "law considers the tenant as a co-insured of the landlord absent an express agreement between them to the contrary."

This conclusion was based on several legal and practical considerations and assumptions.

First, the court recognized the "relational reality" that both the landlord and tenant had insurable interests: one with a fee interest and the other a possessory interest.

Second, the court assumed that the landlord passed the cost of the insurance premium onto the tenant as part of the rent payment.

Third, the court stated that a reality of residential renting was that prospective tenants ordinarily rely on the owner to procure fire insurance and, absent an agreement otherwise, 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.

Although a number of courts have adopted Sutton others have adopted its holding but advanced alternative rationales. In DiLullo v. Joseph, 792 A.2d 819, 822 (Conn. 2002), the court concluded that Sutton represented better policy based on the "strong public policy" against economic waste. The court stated that to hold otherwise would create a strong incentive for every tenant to carry liability insurance in an amount necessary to compensate for the value, or perhaps even the replacement cost, of the entire building, irrespective of the portion of the building occupied by the tenant. That is precisely the same value or replacement cost insured by the landlord under his fire insurance policy. Thus, although the two forms of insurance would be different, the economic interest insured would be the same. The duplication of insurance would constitute economic waste and, in a multiunit building, the waste would be compounded by the number of tenants who needed to purchase duplicative insurance coverage.

The Sutton approach comports with the reasonable expectations of the parties to a lease agreement. Specifically a residential tenant who merely has a possessory interest would expect the landlord to obtain insurance on the entire building. Conversely, a reasonable landlord would not expect each individual tenant to purchase insurance covering the landlord's building. Accordingly, all parties involved would reasonably expect a residential tenant to be considered a co-insured under the landlord's insurance policy unless the parties had expressly agreed otherwise.

There are courts who reach opposite conclusions. They hold that the landlord's insurer may maintain a subrogation action against a negligent tenant who causes fire damage, unless the parties expressly or impliedly agree to the contrary including Page v. Scott, 567 S.W.2d 101 (Ark. 1978); Neubauer v. Hostetter, 485 N.W.2d 87 (Iowa 1992); Britton v. Wooten, 817 S.W.2d 443 (Ky. 1991); Fire Ins. Exchange v. Geekie, 534 N.E.2d 1061 (Ill. App. Ct. 1989); Zoppi v. Traurig, 598 A.2d 19 (N.J. Super. Ct. Law Div. 1990). These cases reject the assumptions and rationale underlying Sutton and conclude that a party cannot escape liability for his negligence unless expressly disclaimed in the contract.

The case-by-case approach eschews presumptions that a tenant is or is not a co-insured of the landlord. Instead, the court must examine the lease as a whole to determine the parties' reasonable expectations as to who should bear the risk of loss when a tenant negligently damages the leased premises. This approach avoids making assumptions and adopting fictions that are largely conjectural, if not patently illogical.

Although each approach is supported by persuasive policy rationales, the Florida Court of Appeal concluded that the parties are in the best position to allocate the risk of loss for fire damage and adopted the case-by-case approach. Applying this approach to the commercial lease to the Cape Publications case, the Court of Appeal agreed with Lloyd's that the general provisions requiring Cape Publications to obtain general liability insurance and indemnify and hold the Brandons harmless for its negligence are relevant to determining which party bears the risk of loss, but that fact does not dispose of the issue.

The lease expressly provided that the Brandons would purchase a property and casualty insurance policy, which undisputedly covered fire damage on the commercial building. The parties further agreed that Cape Publications' rent included its pro rata share of the premium. These specific provisions not only control over the general provisions Lloyd's cites, but plainly indicate that the parties intended the risk of loss be born by the Brandons' insurer: Lloyd's. The Florida Court of Appeal, reading the entire lease agreement concluded that the parties intended Cape Publications to be an intended beneficiary or co-insured under the Brandons' property and casualty insurance policy. Accordingly, the Court of Appeal concluded that Lloyd's may not maintain its subrogation action against Cape Publications and the trial court properly entered summary final judgment in its favor.


Since there is a divergence of opinion across the country and the issue will usually result in litigation, commercial lessors and their insurers should work to avoid the problem of mutual benefit insurance and divergent court rulings by proactively:

1.    Placing a waiver of subrogation in the commercial lease.

2.    Be certain that all property insurance policies authorize the named insured to waive subrogation both before and after a loss.

3.    Include a clause in the lease that the property insurance is for the mutual benefit of the landlord and tenant.

4.    Place a clause in the lease that states that the risk of loss of the property rests with the landlord and that the insurance purchased by the landlord is purchased for the mutual benefit of the landlord and the tenant.

Reprinted with Permission from Zalma on Insurance, (c) 2011, Barry Zalma.

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, "Heads I Win, Tails You Lose - 2011," "Zalma on Rescission in California," "Zalma on Diminution in Value Damages," "Arson for Profit" and "Zalma on California Claims Regulations," "Murder and Insurance Fraud Don't Mix" and others that are available at Zalma Books.

Mr. Zalma can be contacted at Barry Zalma, and you can access his free "Zalma on Insurance Fraud" newsletter at Zalma's Insurance Fraud Letter.

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