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Almost every commercial lease of multi-unit structures contain waivers of subrogation or an agreement that the building owner’s fire insurance is purchased for the benefit of both the owner and the tenants. Since it is improper for an insurer to sue its own insured courts across the country have decisions that prevent subrogation or indemnity if subrogation is waived or if the insurance is purchased for the mutual benefit of the owner and tenant.
In SFI Ltd. Partnership 8 v. Carroll — N.W.2d —-, 288 Neb. 698, 2014 Neb. LEXIS 121 (Neb., 8/1/2014), [enhanced version available to lexis.com subscribers], the Nebraska Supreme Court was asked to deal with a claim that the antisubrogation rule adopted in Nebraska applied when the owner’s insurance was not involved in payment for fire damage allegedly caused by the tenant because of a large deductible.
In previous cases, the Nebraska Supreme Court has applied an antisubrogation rule to prohibit a landlord’s insurer from seeking reimbursement from the tenant of fire losses paid by insurance.
SFI Ltd. Partnership 8(SFI) owns an apartment complex containing approximately 200 apartments. Through its agent, SFI leased an apartment to Michelle Carroll. SFI’s agent and Carroll signed a residential lease agreement including various addenda. The lease employed a standard form used for all units in the complex. Tenants were not allowed to change any of the provisions of the lease or addenda.
The lease included provisions requiring Carroll to pay for repairs caused by her use of the unit and to maintain renter’s insurance including “a personal liability coverage to a minimum of $100,000.00.”
A fire occurred in the apartment rented to Carroll. Both the apartment and the surrounding building were damaged. SFI had $10 million of total insurance coverage on the apartment complex. The policy provided for a deductible of $250,000 per occurrence unless a specific deductible applied.
The parties stipulated that SFI sustained damages in excess of $100,000 resulting from the fire, which damages were not covered by its insurance policy. But neither the total amount of damages nor the amount of any insurance recovery by SFI was included in the evidence.
Carroll had renter’s insurance in place at that time, and she submitted a claim to her insurer. Carroll’s insurer paid her $1,500, representing only her damages under “Loss of Use Coverage.”
SFI sued Carroll and attached a copy of the lease to the complaint. SFI alleged that Carroll breached several provisions of the lease. SFI further alleged that Carroll was negligent in failing to properly dispose of cigarettes being smoked in the apartment and that this negligence proximately caused the damage to the apartment and surrounding building. Carroll filed an answer. She alleged that the fire was caused by someone else; that SFI’s claims were barred because she and SFI were considered coinsureds under SFI’s fire insurance policy, that several paragraphs of the lease were unconscionable and void as against public policy; and that SFI failed to mitigate any damages.
Carroll moved for summary judgment. SFI then moved for partial summary judgment on Carroll’s claim that several paragraphs of the lease were unconscionable and void as against public policy. The parties stipulated that SFI brought the claim in its own behalf. They also stipulated that it was not a subrogation claim.
DISTRICT COURT’S DECISION
Following a hearing, the district court granted Carroll’s motion for summary judgment, denied SFI’s motion for partial summary judgment, and dismissed the complaint. The court stated that the crux of the case revolved around paragraph 17 of the lease, which stated: “Resident’s personal property is not insured or covered by Landlord for loss of any kind, including without limitation, loss due to theft, fire, smoke, wind, rain, lightening [sic], seismic occurrence or water damage.”
SFI filed a timely appeal.
Carroll admits that “this is not a true subrogation claim, [but] is a claim by a landlord against a tenant for the uninsured portion that public policy still bars as a gross economic waste.”
Under the antisubrogation rule, no right of subrogation can arise in favor of an insurer against its own insured or coinsured for a risk covered by the policy, even if the insured is a negligent wrongdoer. The antisubrogation rule has been extended to “implied coinsureds.” To allow subrogation under such circumstances would permit an insurer, in effect, to avoid the very coverage which its insured purchased. In addition, the insurer should not be in a situation where there exists a potential conflict of interest which could affect the insurer’s incentive to provide its insured with the indemnity promised.
The antisubrogation rule in Nebraska comports with the reasonable expectations of tenants and accounts for modern commercial realities by preventing the economic waste that will undoubtedly occur if each tenant in a multiunit dwelling or multiunit rental complex is required to insure the entire building against his or her own negligence.
Carroll’s allegations regarding the conscionability of the lease provisions placed SFI on fair notice that the lease provisions imposing liability on Carroll for damages resulting from fire were being challenged.
The interpretation of a lease, the unconscionability of a contract provision, and the determination of whether a contract violates public policy are questions of law.
SFI argues that the antisubrogation rule is inapplicable to the instant case. SFI brought this action against Carroll to recover damages which were not covered by its insurance policy. This is not a subrogation action brought by SFI’s insurer to recover sums the insurer paid to SFI. Because this is not a subrogation action, the antisubrogation rule does not apply. Accordingly, the district court erred when it applied the rule. Carroll concedes that this is not a true subrogation claim. She argues, however, that the principles of the antisubrogation rule should be extended to the landlord’s uninsured loss.
The Nebraska Supreme Court cautioned that courts should be cautious in holding contracts void on the ground that the contract is contrary to public policy; to be void as against public policy, the contract should be quite clearly repugnant to the public conscience. The Supreme Court could find no such repugnancy. Further, the term “unconscionable” means manifestly unfair or inequitable. Nothing in paragraph 17 of the lease is manifestly unfair or inequitable.
The Uniform Residential Landlord and Tenant Act contemplates that a court may determine a lease provision to be unconscionable, but expressly upholds tenants’ liability for negligent fire damage. Where a court finds that a rental agreement or any provision thereof was unconscionable when made, the court may refuse to enforce the agreement, enforce the remainder of the agreement without the unconscionable provision, or limit the application of any unconscionable provision to avoid an unconscionable result. But the act treats fire damage caused by a tenant’s negligence differently. The statute provides that: “Notwithstanding the provisions of this section, the tenant is responsible for damage caused by his [or her] negligence.”
Because it concluded that the lease’s paragraph 17 is not void as against public policy or unconscionable, the district court erred in entering summary judgment for Carroll upon that basis. The summary judgment must be reversed, and the cause remanded for further proceedings consistent with this opinion.
The antisubrogation rule is still alive and well in Nebraska, as it is in most states. No insurer should be allowed to recover in subrogation for amounts it paid to one insured from another insured. What this case stands for is that you can’t apply the antisubrogation rule if there is no insurance payment and no right of an insurer to recover part of the tort damages sought by the owner of the multiunit building.
By Barry Zalma, Attorney and Consultant
Reprinted with Permission from Zalma on Insurance, (c) 2013, Barry Zalma.
Barry Zalma, Esq., CFE, is a California attorney who limits his practice to consultation regarding insurance coverage, insurance claims handling, insurance bad faith and fraud and acting as a mediator or arbitrator on insurance disputes. 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 only consultant. He recently published the e-books, "Zalma on Rescission in California - 2013"; "Random Thoughts on Insurance" containing posts from this blog; "Zalma on Insurance;" "Murder and Insurance Don't Mix;" “Heads I Win, Tails You Lose — 2011,” “Zalma on Diminution in Value Damages,” “Arson for Profit” and “Zalma on California Claims Regulations,” and others that are available at Zalma Books.
Mr. Zalma can be contacted at Barry Zalma or email@example.com, and you can access his free "Zalma on Insurance Fraud" newsletter at Zalma’s Insurance Fraud Letter.
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