Mutual Benefit Insurance Defeats Subrogation Effort
Barry Zalma
Jul 26, 2023
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Typically, an insurer that pays a claim to an insured as a result of the negligent acts of a third party an insurer has the right, in the name of its insured, to sue the responsible party in the name of its insured. The right to sue in the name of the insured results from the equitable remedy of subrogation and is effective as long as the insured has not waived the right of its insurer to subrogate.
In Delaware there is an exception to the equitable remedy because landlords and tenants are presumed to be co-insureds under the landlord’s fire insurance policy unless a tenant’s lease clearly expresses an intent to the contrary. If the rule applies, the fact that the landlord’s insurance is presumed to be for the mutual benefit of the landlord and the tenant, and the insurer cannot pursue the tenant for the landlord’s damages by way of subrogation.
The Superior Court ruled in the tenants’ favor at summary judgment that the rule applied because the lease did not clearly express an intent to hold the tenants liable for the landlord’s damages.
In Donegal Mutual Insurance Company A/S/O Seaford Apartment Ventures LLC T/A The Villages Of Stoney Brook Apartments v.Thangavel and Muthusamy, No. 379, 2022, Supreme Court of Delaware (July 18, 2023) the apartment’s insurer sued the tenants for the $77,704.06 to repair the water damage they caused.
The Superior Court ruled in the tenants’ favor at summary judgment that the rule applied because the lease did not clearly express an intent to hold the tenants liable for the landlord’s damages.
ANALYSIS
In Delaware landlords and tenants are presumed to be co-insureds under the landlord’s fire insurance policy unless a tenant’s lease clearly expresses an intent to the contrary. If the rule applies, the landlord’s insurer cannot pursue the tenant for the landlord’s damages by way of subrogation.
The tenants who leased an apartment from Seaford Apartment Ventures, LLC, Donegal’s insured, were considered to be coinsueds since the lease did not express an intent to the contrary. The complaint alleged that the tenants hit a sprinkler head while they flew a drone inside the apartment. Water sprayed from the damaged sprinkler head and caused damage to the apartment building.
The Superior Court granted the tenants’ summary judgment motion. It concluded that the lease in this case was substantially similar to the leases in three other Delaware all of which found that the leases did not clearly express an intent to the contrary.
CONCLUSION
The Supreme Court concluded that the Superior Court correctly found that the apartment lease did not clearly express an intent that the tenants were responsible for the water damage in this case. Since the Seaford Apartment lease did not specifically address liability for fire or water damage caused by the tenant’s negligence the policy issued by Donegal was issued for the mutual benefit of the insured and the tenant and Donegal had no right to subrogate..
Also, the Superior Court correctly observed that the policy considerations recognizing the one-sided nature of residential leasing and protecting the parties’ typical expectations regarding the assignment of risk of loss – are served by applying the rule in this case because residential landlords control the lease terms. If they want, they can clearly express a requirement that the tenants obtain fire insurance or notify them that they would not benefit from the landlord’s fire insurance policy.
ZALMA OPINION
Most commercial fire insurance policies, like the Donegal policy in this case, allow the insured to waive the insurer’s right of subrogation. Apparently, the landlord did not specifically waive its insurer’s right to subrogation but, Delaware precedent, accomplished the same effect by, as a mater of law, made the landlord’s policy a policy for the benefit of both the insured and the tenant, effectively acting as a waiver of subrogation.
(c) 2023 Barry Zalma & ClaimSchool, Inc.
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ZIFL – Volume 30 Number 1
THE SOURCE FOR THE INSURANCE FRAUD PROFESSIONAL
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Parties & Claims:
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ZIFL Volume 29, Issue 24
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Zalma’s Insurance Fraud Letter (ZIFL) continues its 29th year of publication dedicated to those involved in reducing the effect of insurance fraud. ZIFL is published 24 times a year by ClaimSchool and is written by Barry Zalma. It is provided FREE to anyone who visits the site at http://zalma.com/zalmas-insurance-fraud-letter-2/
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