Landlord & Tenants Subrogation

08/15/2017

Landlord & Tenants and the Subrogation Dilemma

John, aka “the bagel man,” has owned and operated his bagel shop for almost a decade. His shop is located on Main Street and comprises about 2,000 square feet of leased space in a strip mall. John is having his attorney, Nick, negotiate the renewal of his five-year lease with the building owner/landlord. Nick has arranged to meet with John and John’s insurance agent, Chelsea, because the landlord is proposing changes to the lease’s insurance requirements.

SUBROGATION While the lease requires John to purchase insurance for his contents (and the landlord has agreed to insure the building), the landlord is now demanding that John obtain from his property insurance company a waiver of subrogation endorsement in favor of the landlord. Nick explains to John the principle of subrogation – after paying John for a covered loss, his insurance company acquires a right to “step into John’s shoes” and recover from the wrongdoer that caused the loss.1  What is different is that the landlord is now requiring John to change his property insurance policy to give up or “waive” the insurance company’s right to subrogation against the landlord. In other words, if John’s property is damaged due to the negligence of the landlord, such as a roof leak, John’s insurance company will not be able to recover from the landlord.

JOHN'S INSURANCE Chelsea has placed John’s insurance with Restaurant Mutual Insurance Company. Restaurant has issued a standard ISO commercial package policy that provides coverage for John’s contents (business personal property), business income and extra expense, as well as commercial general liability insurance using the latest standard ISO2 policy forms. 

A WAIVER OF SUBROGATION ENDORSEMENT THAT DOES NOT EXIST Chelsea has known for quite some time that there is no ISO commercial property waiver of subrogation endorsement – it does not exist. 

THE USUAL PRACTICE She explains to Nick that the requested waiver does not exist and that the usual practice is to handle rights of recovery by the lease wording, not by an endorsement to the policy. The lease wording usually states that, if (and to the extent) a loss is covered by John’s insurance, John agrees to release the landlord from liability. Chelsea shows Nick the policy condition, which specifically permits John to waive his rights of recovery in writing prior to a loss – and that John’s insurance is not restricted if he waives his rights.3 Nick understands that the result to the landlord would be the same. The right of the insurance company to recover from the landlord will be extinguished. Subrogation is derivative – the right stems from John’s rights.  

As John has given up his rights to recovery, his insurance company does not have a right to recover from the landlord.4  

MORE SUBROGATION The landlord accepts Nick’s new lease wording and drops the requirement for a waiver of subrogation endorsement. However, the discussion is not yet complete. With all this talk of subrogation, John is now concerned about the landlord’s insurance company’s right to recover from him. What if John negligently damages the section of the building he occupies? 

DAMAGE TO PREMISES RENTED TO YOU During the discussion, Chelsea points out to John that his commercial general liability insurance policy does provide some coverage for property damage – by fire only and then only for a $50,000 limit – if John negligently damages the space that he leases.5  This is insufficient. In particular, John is concerned about property damage caused to his space if the water pipe he uses ruptures. The use of water is important in making bagels – boiling of the dough is the first step. John’s commercial general liability insurance policy provides no coverage for his liability for water damage to the space he leases. Chelsea agrees to explore other insurance options available to John. 

NICK'S ROLE As John’s attorney, Nick attempts to negotiate with the landlord to include similar wording that applies to John – to the extent the landlord has insurance for the loss, the landlord gives up the right to seek recovery from John. Even though this is the usual practice, the landlord flatly refuses. As John needs his Main Street location, Nick pursues some other possibilities. 

THE SUTTON RULE Nick finds the bagel shop is located in a state the follows the “Sutton Rule.6” Nick explains to John that this means that unless John’s lease stated differently (and it did not), under the “Sutton Rule,7” the tenant, in this instance John, is deemed by law to be a “co-insured” on the property insurance policy of the landlord. If the landlord’s insurance company did pay a loss to the space occupied by John that resulted from John’s negligence, the “Sutton Rule” would prevent the landlord’s insurance company from seeking subrogation from John. Subrogation does not permit recovery from an insured – and John is considered an insured on the landlord’s property insurance policy. The practical effect is that to the extent that the landlord’s property insurance policy provides coverage for a loss to the portion leased to John, the insurance company cannot seek recovery from John by subrogation. 

OTHER OPTIONS Chelsea also provides insurance options to John – including the purchase of Legal Liability coverage8 as part of John’s property insurance policy. This option would provide coverage for John’s legal liability for property in his care, custody or control for the same causes of loss that apply to his contents – Causes of Loss – Special Form, with a limit that is more commensurate with the actual exposure. 

CONCLUSION While insurance may protect a tenant against the landlord’s insurer’s attempt to subrogate, the actual liability of the tenant to the landlord is ultimately a question of law. Accordingly, asserting defenses to the tenant’s liability, such as the application of the Sutton Rule or amending the lease agreement, is the practice of law. As insurance agents and brokers are generally not qualified to practice law, tenants should always consult with and rely upon the advice of qualified legal counsel regarding questions of liability, including the consideration of the various approaches to limiting that liability to the landlord.  





1 Subrogation - The principle under which an insurer that has paid a loss under an insurance policy is entitled to all the rights and remedies belonging to the insured against a third party with respect to any loss covered by the policy. – Black’s Law Dictionary (Seventh Edition)      
2 Insurance Services Office, Inc. or ISO
3 CP 00 90 I. Transfer of Rights of Recovery Against Others to Us.
4 Subrogation is not the same contribution. An insurer’s right of contribution arises when the insurer has paid more than its share of loss when two (or more) insurers insure the same loss for the same insured. Contribution is not derived from the rights of an insured. 
5 CG 00 01 – “Exclusions c. through n. do not apply to damage by fire to premises while rented to you…A separate limit of insurance applies to this coverage described in Section III –Limits of Insurance.”
6 Sutton v. Jondahl, 532 P.2d 478 (Okla. App. 1975)
7 For a more detailed explanation of the Sutton Rule and how it applies in all 50 states, see Landlord/Tenant Subrogation in All 50 States published by Matthiesen, Wickert & Lehrer, S.C. www.mvl-law.com (updated July 26, 2016)
8 Legal Liability Coverage Form CP 00 40 





ABOUT THE AUTHOR
Craig F. Stanovich, CPCU, CIC, CRM, AU is co-founder and principal of Austin & Stanovich Risk Managers, LLC, a risk management and insurance advisory consulting firm specializing in all aspects of commercial insurance and risk management, providing risk management and insurance solutions, not insurance sales. Contact Criag at cstanovich@austinstanovich.com or visit www.austinstanovich.com
Contact Us

To learn more about how AmWINS can help you place coverage for your clients, reach out to your local AmWINS broker.  If you do not have a contact at AmWINS, please click here.

Legal Disclaimer. Views expressed here do not constitute legal advice. The information contained herein is for general guidance of matter only and not for the purpose of providing legal advice. Discussion of insurance policy language is descriptive only. Every policy has different policy language. Coverage afforded under any insurance policy issued is subject to individual policy terms and conditions. Please refer to your policy for the actual language.

(c) 2017 AmWINS Group, Inc.

Most Popular Insights

5 Strategies for Successful Small Business Renewals During COVID

07/16/20

In the current economic climate, many small businesses are struggling and some may even fail. Despite these challenges and the continued hardening market, there is opportunity for retailers to write and retain business. This article provides guidance on navigating the complex small business marketplace and helps retailers fine tune their understanding of what insurable risks will look like over the next 12 to 24 months.

What Product Recall Insurance and Risk Mitigation Plan Is Right for Your Clients?

07/16/20

​Product recalls are one of the most damaging events a business may encounter. In order to effectively respond to an incident, companies must be prepared with proper risk management strategies. As policy wording varies, it's also critical to ensure your clients have the right policy type in place to appropriately address their first- and third-party exposures.

State of the Market - Q2 2020

06/15/20

Our Q2 2020 State of the Market report provides a holistic view of highly impacted industry segments as well as overall market trends. This report is designed to help our retailers gain the knowledge they need to retain accounts, write new business, overcome challenges and capitalize on opportunities that do exist.

10 Catastrophe Claim Tips for Severe Weather Season

05/27/20

Severe weather can be unpredictable and strike at any time. Help your clients be prepared in the event their property is damaged by a hurricane, tornado, hailstorm or similar disaster with these 10 catastrophe claim tips.

On-Demand Webinar: COVID-19 Economic Impact and Future Outlook

05/15/20

As a result of the COVID-19 crisis, our industry is facing a broad array of challenges that impact insureds of every size and in every industry. In the first of a series of webinars, we hear from an economist on the financial impacts of COVID-19 and what we can expect in the future. This webinar is intended to complement your conversations with clients about how to plan for the next 12 to 24 months.

Lloyd's CEO and Property Underwriters Share COVID-19 Response and Market Update

05/11/20

This podcast features an update from John Neal, CEO of Lloyd’s, on the state of the Lloyd's market and their response to COVID-19 as well as a panel discussion with London Property underwriters on how they view the pandemic's impact both the Property sector and their syndicate's business.

Lloyd's CEO and Casualty Underwriters Share COVID-19 Response and Market Update

05/11/20

This podcast features an update from John Neal, CEO of Lloyd’s, on the state of the Lloyd's market and their response to COVID-19 as well as a panel discussion with London Casualty underwriters on how they view the pandemic's impact both the Casualty sector and their syndicate's business.

Lloyd's CEO and Professional Underwriters Share COVID-19 Response and Market Update

05/11/20

This podcast features an update from John Neal, CEO of Lloyd’s, on the state of the Lloyd's market and their response to COVID-19 as well as a panel discussion with London Professional Lines underwriters on how they view the pandemic's impact both the Professional Lines sector and their syndicate's business.

Flood 101: What to Know About Standard Flood Insurance

04/28/20

Ninety-eight percent of all United States counties were impacted by a flood event in 2018, yet many property owners remain unaware of their true risk of flood or what their existing policies cover. This article highlights key statistics about flood risk and outlines the differences between the National Flood Insurance Program and private market flood insurance.

Professional Lines Challenges and Market Response During the COVID-19 Crisis

04/28/20

The COVID-19 crisis has created a rapidly changing environment for the Professional Lines market. With the uncertainty of how claims will develop and the potential for increased exposure, retailers must be proactive. In this article, AmWINS specialists share their insights on why this is more important now than ever, including reactionary underwriting trends, D&O policy exclusions and impacts to EPLI, as well as the threat for increased cyber attacks and crime losses.

Small Business and Personal Lines During the COVID Crisis

04/22/20

Loss of revenue caused by stay-at-home orders due to the coronavirus pandemic has affected small businesses and the insurance industry serving them significantly. As retailers and carriers prioritize their focus to adapt to the “new normal” of daily transactions, underlying market dynamics remain unchanged. In this article, our experts share their insight on the current changes that we are seeing the small business and personal lines market, and how to navigate the market a this time of uncertainty.

Mind the Gap: COVID-19's Impact on the Logistics Industry

04/15/20

The disruptive impact of the COVID-19 outbreak on supply chains is already having a pronounced effect on the world of logistics and logistics insurance. Port closures, demand surges and production shifts are requiring nimble response to keep up with change. This article arms insurance brokers with the information needed to understand the changes taking place and plan for what is likely to occur in the months ahead.

Navigating the Casualty Market’s Response to COVID-19

04/15/20

The Casualty market’s response to COVID-19 is continuously evolving. With a wide array of factors already impacting this sector pre-crisis, segments of the Casualty marketplace are responding to the pandemic differently. In this article, our industry specialists share overall themes in the Casualty market and take a closer look at how various segments are being impacted.

Top COVID-19 Issues Impacting Builder’s Risk Insurance

04/15/20

The COVID-19 pandemic is causing historical disruption to the construction industry. These changes mean that risk mitigation strategies need to be implemented or revisited, policy language should be reviewed, and carriers should be apprised of all changes at the work-site. In this article, AmWINS specialists examine the major areas of concern for Builder’s Risk insureds, including government-mandated shutdowns, supply chain-driven slowdowns and policy wording that could limit coverage, and provide guidance for retailers to achieve the best results for their clients.

State of the U.S. Logistics Insurance Market

04/10/20

For decades, the logistics insurance market has been considered a sub-market of the cargo or ocean marine market. However, the continual rise of e-commerce and its effect on the global supply chain has carved out a complex and expansive industry niche. This article provides insight into the various lines of coverage, the specialized underwriting approach, and rate surges within the U.S. logistics insurance market.

Lloyd’s & the London Market’s Response to COVID-19

04/06/20

During the COVID-19 pandemic, Lloyd’s remains open for business and syndicates have successfully transitioned to working from home. However, there are notable changes in how the London market is approaching business. In this article, specialists from THB, AmWINS’ London broker, share their insight on consistent themes across the London Market as well as updates on various lines of business.

COVID-19 Claims Advice

04/02/20

There have been a lot of questions regarding COVID-19, in particular about coverage and claims handling. This claims advice is intended to offer guidance to help our retail clients through these difficult times.

Insurance Impacts of COVID-19 on the Healthcare and Senior Living Industry

03/30/20

As the healthcare industry remains on the front lines of battling the COVID-19 pandemic, staying abreast of the changing landscape and how the insurance market is adapting is critical to ensure new exposures are covered and renewals are successfully placed. In this article, our specialists share what they are seeing in the Healthcare and Senior Care markets, tips for risk control and mitigation, and how to get the best results for insureds.

Statute of Limitations Changes Cast a Shadow on Public Entities

03/19/20

​Public entities are facing a climate of change as the market continues to harden and insureds are faced with double-digit rate increases in property and liability. Contributing to this disruption are statute of limitation changes for sexual abuse victims, which have extended or removed the time limit for which a victim can file a claim. This article examines the impact of increased claim activity and discusses considerations that need to be made to better manage costs during this time of uncertainty.​

COVID-19 – Are Your Clients Covered?

03/19/20

The disruption to business and everyday life caused by the coronavirus (COVID-19) pandemic is resulting in an economic impact for insureds. Much of this disruption is likely not covered by insurance. We have consulted with several AmWINS insurance specialists across the Property, Casualty and Professional Lines sectors and offer a COVID-19 update.

Sign Up For Our Monthly Newsletter

Sign Up