Lessors Should be Entitled to Waive Insurer’s Right of Subrogation
Post 4867

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In a subrogation action, Plaintiff Philadelphia Indemnity Insurance Company (Philadelphia), as subrogee of Renaissance Realty Group, Inc. (Renaissance), appealed from the circuit court’s partial grant of defendant Norinaica Gonzalez’s motion to dismiss.

In Philadelphia Indemnity Insurance Company, a/s/o Renaissance Realty Group, Inc. v. Norinaica Gonzalez, 2024 IL App (1st) 230833, No. 1-23-0833, Court of Appeals of Illinois, First District, Sixth Division (August 23, 2024)

BACKGROUND

On September 25, 2019, Renaissance and Gonzalez entered into a written lease agreement (hereinafter “Lease”) for an apartment (“Unit 601”) in a multi-unit building located on the 1500 block of West Belmont Avenue in Chicago.

The Lease contains multiple provisions relevant to the resolution of Philadelphia’s claims. On the first page of the Lease, Unit 601 is described as the “Leased Address (Premises)” and Tenant was required to maintain the Premises in a clean, presentable and safe condition at all times.

On January 20, 2021, Philadelphia sued Gonzalez as subrogee to Renaissance. Therein, Philadelphia alleged that on August 7, 2020, a small fire started in Gonzalez’s kitchen in Unit 601, which caused “a substantial amount of smoke” and activated the building’s sprinkler system. The sprinkler system caused significant water damage to both Unit 601 and other units, totaling over $200,000.

THE INSURANCE CLAIMS

Renaissance submitted an insurance claim to Philadelphia, which paid “in excess of $50,000 to cover” repairs and lost rental income. Philadelphia alleged Gonzalez was liable to reimburse Philadelphia, as subrogee to Renaissance, for this coverage. Specifically, count I of the complaint alleged Gonzalez negligently caused the fire that resulted in the property damage. Count II alleged that Gonzalez breached the Lease because it required her to pay for any damages caused by her negligence, but she violated this term by refusing to reimburse Philadelphia.

Gonzalez moved to dismiss the complaint arguing she was an implied coinsured of Renaissance’s policy pursuant to the Illinois Supreme Court’s holding in Dix Mutual Insurance Co. v. LaFramboise, 149 Ill.2d 314 (1992), and thus could not be sued by Philadelphia in subrogation.

On June 30, 2021, Philadelphia responded, arguing in relevant part that the Lease terms demonstrated the parties’ intent not to make Gonzalez an implied coinsured.

The trial court found Philadelphia could not “seek compensation for damage beyond” Unit 601. Philadelphia moved for summary judgment regarding the damages arising from Unit 601 only, which it alleged totaled $18,831.04. The circuit court granted Philadelphia’s motion for summary judgment as to liability only on Counts I and II for damages to Unit 601, with the total of those damages to be determined at trial.

ANALYSIS

This case presents a matter of contractual interpretation, as a lease is a contract and, as such, it is governed by the rules which govern contracts generally. Where a contract’s terms are clear and unambiguous, the appellate court must enforce those terms without reference to extrinsic sources.

The key factor in determining whether the parties intended to exculpate the tenant from liability for negligently caused fire damage to the leased premises is the allocation of insurance burdens as evidenced by the lease. When the provisions of the lease either explicitly or implicitly indicate that the lessor will obtain insurance against the risk of fire loss to its building, the tenant will normally not be liable for negligently causing fire damage to that building unless the parties’ contrary intent is clear. Such a rule gives effect to the parties’ probable and customary intent that the landlord is to look to the insurance he has agreed to procure for indemnification for fire loss.

The Court of Appeals found that Philadelphia and Gonzalez did not intend for Gonzalez to be generally liable for negligently caused fire damage outside of Unit 601. If the parties had intended for Gonzalez to be liable for negligent conduct in other areas besides Unit 601, they would have done so with lease terms making her liable for negligently causing damage to the “property,” “common area,” or “elsewhere in the building.” The Lease does not do so.

Philadelphia’s final claim is that equitable principles dictate that it should have a right to recover on a subrogation claim against Gonzalez. This argument fails because Philadelphia cannot overcome a core tenet of the equitable remedy of subrogation-a subrogee can have no greater right than the subrogor and can enforce only such rights as a subrogor could enforce per the Lease Renaissance has no right to recover against Gonzalez for damages outside of Unit 601, and, therefore, neither does Philadelphia as subrogee to Renaissance’s rights.

Because the Lease shows the parties’ intended Gonzalez not to be liable for damages outside of Unit 601the circuit court’s limitation on Philadelphia’s recoverable damages was affirmed.

ZALMA OPINION

Suing, in subrogation, a tenant of an insured generally causes problems between insured’s and the insurer. For that reason most commercial property policies include a provision that the insured may waive the insurer’s right to subrogation against a tenant. Since the landlord did not waive the court made a Solomon-like decision and only held her responsible for damage to her unit in the building. The Court of Appeals did justice and the insured and its tenant resolved the dispute. Many courts, including Illinois, include an exclusion not written, that Philadelphia’s insurance was issued for the mutual benefit of the insured and the tenant.

(c) 2024 Barry Zalma & ClaimSchool, Inc.

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