Defining Occurrence – When Policy Definitions Do Not Apply To All Coverages
September 24, 2020
Historically, a tenant who pays towards its landlord’s insurance premiums, pursuant to the terms of the lease, is generally considered a “co-insured” under the landlord’s policy. See Lumber Mutual Insurance Co. v. Zoltek Corp., 647 N.E.2d 395 (Mass. 1995). However, a Florida court recently reviewed a lease with such a provision and came to an opposite conclusion. Zurich American Insurance Company v. Puccini, LLC, 2019 WL 454222 (Fla. 3d DCA February 4, 2019).
In Zurich, the landlord and tenant entered into a fifteen-year lease, where in addition to rent, the tenant was required to pay seventy percent of the landlord’s operating expenses, which included the landlord’s insurance premiums. Zurich American Insurance Company, 2019 WL 454222, at * 4. After executing the lease, the property was destroyed by a fire, and a portion of the loss was covered by the landlord’s policy. The landlord’s carrier subsequently filed a subrogation action against the tenant.
Under the anti-subrogation rule, it is evident that an insurer cannot subrogate against its insured(s). Insurance Co. of North America v. Nezelek, 480 So.2d 1333 (Fla. 4th DCA 1985). However, in the landlord/tenant context, the question of who is an insured under the applicable policy may not always be clear. Courts throughout the country have adopted multiple approaches to analyze this issue.
One approach is derived from Sutton v. Jondahl, 532 P.2d 478 (Okla. Civ. App. 1975), and commonly referred to as the “Sutton Rule.” In short, under the Sutton Rule, a tenant is presumed to be a co-insured under the landlord’s policy, and therefore subrogation is unavailable. The Sutton Court reasoned, “[t]his principle is derived from a recognition of a relational reality, namely, that both landlord and tenant have an insurable interest in the rented premises—the former owns the fee and the latter has a possessory interest.” Id. at 482. Conversely, some courts follow the anti-Sutton approach, which provides a presumption in favor of subrogation. Both of these presumptions can only be overcome by an express agreement to the contrary.
Florida, however, like many jurisdictions, has steered away from any strict presumptions and instead has utilized a “case-by-case” approach. Under this approach, the Court examines the language of the lease between the parties to determine the parties’ intention as to who bears the risk of loss. See State Farm Florida Ins. Co. v. Loo, 27 So.3d 747 (Fla. 3d DCA 2010) (A case-by-case analysis does not consider a presumption in favor or against subrogation, instead, it takes a subject approach to determine which party agreed to bear the risk of loss.). Generally speaking, this approach is closely aligned with traditional contract interpretation and analysis.
Under a “case-by-case” analysis, one particular lease provision that courts have emphasized where applicable is the requirement that the tenant procures insurance, or otherwise pay towards the landlord’s insurance premiums. Courts have previously viewed this provision as strong, if not conclusive, evidence of the parties’ intent to shift the risk of any loss to the landlord’s insurer, and include the tenant as a co-insured under the policy, which effectively bars subrogation. See U.S. Fire Ins. Co. v. Norlin Indus., Inc., 428 So.2d 325 (Fla. 1st DCA 1983) (lease provision required tenant to procure and maintain fire insurance coverage for the benefit of the tenant and landlord, therefore, subrogation was barred); Continental Ins. Co. v. Kennerson, 661 So.2d 325 (Fla 1st DCA 1995) (Tenant was required to pay towards landlord’s insurance premium in addition to rent, therefore tenant was co-insured); Underwriters of Lloyds of London v. Cape Publications, Inc., 63 So.3d 892 (Fla. 5th DCA 2011) (tenant’s rent included the pro-rated portion of the landlord’s premium, therefore, landlord and its insurer could not look to tenant for recovery.)
However, the Third District Court in Zurich determined that the particular requirement for the tenant to procure insurance was not dispositive. Instead, the Court took the analysis a step further and placed more weight on other provisions in the lease. For example, the lease provided that the “…Tenant shall be fully responsible for all repairs and damages if Premises are partially or totally destroyed by fire or any other casualty caused by Tenant or its agents.” Zurich American Insurance Company, 2019 WL 454222, at *3.
Notably, the Court also found that indemnity language in the lease indicated a clear intent by the parties to shift the risk of loss to the tenant, as opposed to the landlord’s insurer. Conversely, Florida courts who have examined leases in the past have failed to rely on indemnity language to overcome other provisions apparently evidencing the parties’ intent to shift the risk of loss to the landlord’s insurer. See U.S. Fire Ins. Co., 428 So.2d at 326 (Indemnity language did not defeat the intent of the parties to shift risk of loss to the landlord’s insurer); Underwriters of Lloyds of London, 63 So.3d at 896 (The requirement for the tenant to pay towards the landlord’s insurance premium controlled over general indemnity provision in lease, and, therefore, evidenced the parties’ intention for the landlord’s insurer to bear risk of loss.).
The Zurich decision seems to indicate a shift in an important area of subrogation law. Now, under Florida’s case-by-case approach, where subrogation may have previously been presumed to be excluded by the requirement for the tenant to pay towards the landlord’s insurance premiums, the Third District’s ruling indicates that insurers may be able to bring a subrogation claim, based on indemnity and/or other lease provisions. It is more important now than ever for insurers to consult with their counsel, and closely examine the lease language to determine the intent of the landlord and tenant.