The Subrogation Strategist

In Melrose Gates, LLC v. Chor Moua, et al., 875 N.W.2d 814 (Minn. 2016), the Supreme Court of Minnesota, applying the factors the court first articulated in RAM Mutual Insurance Company v. Rohde, 820 N.W.2d 1 (Minn. 2012), analyzed whether the parties to an apartment lease reasonably expected that the tenants would be liable in subrogation for fire damage caused by the tenants’ negligence. The Melrose Gates court held that, based on the language of the lease, the type of insurance the parties purchased, and the fact that the building was a multi-unit structure, the parties intended that the tenants would be responsible for damage to their leased unit but not for damage to other property. Thus, while the landlord’s insurer could recover the amount it paid to repair the damage to the tenants’ unit, it could not recover the amount it paid to repair other units or common areas of the building.

In Melrose Gates, Melrose Gates, LLC (Landlord) leased a residential apartment to Chor Moua and Maisse Xiong (Tenants). Tenants negligently caused a fire that damaged their leased unit as well as other parts of the building. After paying for repairs to the building, Landlord’s insurance carrier brought a subrogation action against Tenants to recover the money it paid to rebuild the building. The trial court granted summary judgment to Tenants, holding that a landlord cannot maintain a subrogation action against its tenants. The appellate court reversed and remanded, holding that the lease agreement reflected the parties’ expectation that Tenants would be liable for the property damage. Tenants appealed the decision of the appellate court.

To determine whether a landlord’s insurer can maintain a subrogation action against a negligent tenant, Minnesota courts apply a case-by-case analysis. The analysis depends, initially, on the language of the lease. Courts may also consider other evidence shedding light on the expectations of the parties, including the types and amounts of insurance the parties actually purchased and equitable considerations, such as whether the leased premises is part of a large, multi-unit structure.

Upon reviewing the lease, the Supreme Court of Minnesota found that the lease “plainly states that Tenants shall reimburse Landlord for ‘[a]ny loss, property damage, or cost of repair or service (including plumbing problems) caused by negligence or improper use by [Tenant], his/her agents, family or guests.’” However, the court further concluded that this lease provision, when read with the remainder of the lease, “is best understood as referring to loss, property damage, or cost of repair or service with respect to the Apartment.” Thus, the court held that Tenants’ liability for property damage did not extend to portions of the building that were not leased by Tenants. To bolster its decision, the court also explained that its interpretation of the lease was supported by the fact that Landlord had an insurance policy on the entire apartment complex and Tenants’ apartment was part of a large, multi-unit structure.

Melrose Gates highlights the need for subrogating insurers in Minnesota to carefully examine the terms of the parties’ lease to determine the intent of the parties. Even in situations where the apartment is part of a multi-unit building, a subrogating insurer may be able to secure a partial recovery – for losses to the tenant’s apartment itself – by arguing that, under the terms of the lease, the parties expected that the tenant would be responsible for its negligence.