The Subrogation Strategist

In Mutual Benefit Ins. Co. a/s/o Michael Sacks v. Koser, No. 1340 MDA 2023, 2023 Pa. Super. LEXIS 574, 2023 PA Super 252 (Mutual Benefit), the Superior Court of Pennsylvania discussed whether a landlord’s property insurer could file a subrogation action against tenants that had negligently damaged the landlord’s property. Despite there being more than one clause in the lease holding the tenants liable for the damages, the court held that because there was a provision requiring the landlord, not the tenants, to insure the leased building, the insurer could not subrogate against the tenants.

In Pennsylvania, a tenant’s liability for damage to a leased premises in a subrogation action brought by a landlord’s insurer is determined by the reasonable expectation of the parties to the lease agreement. Under this approach, to determine if subrogation is permitted, the court considers the circumstances of the case and examines the terms of the lease agreement.

In Mutual Benefit, the tenants leased and resided in a residential home pursuant to a lease agreement. The lease specifically addressed insurance, stating that landlord was responsible for obtaining insurance on the dwelling and the landlord’s personal property, and tenants were encouraged to procure separate insurance for their personal property. The lease also addressed liability for damage to the leased property, stating generally that the tenants were responsible for damage caused by the tenants’ negligence.

On August 3, 2020, a fire erupted in the back bedroom causing extensive fire and smoke damage to the home. A subsequent investigation revealed that the tenants left a candle burning in the back bedroom and caused the fire. The landlord’s insurer filed a subrogation action against the tenants, seeking recovery of the payments it made to the landlord for the damages sustained. The tenants filed a motion for judgment on the pleadings, arguing that the landlord’s insurer was precluded from bringing a subrogation action against them because – pursuant to the lease - they were implied co-insureds under the landlord’s insurance policy. The trial court granted the motion, noting that the tenants had a reasonable expectation of being co-insureds on the landlord’s insurance policy based on the terms of the lease agreement. The landlord’s insurer filed an appeal.

On appeal, the landlord’s insurer argued that the lease did not create a reasonable expectation that the tenants would be implied co-insureds under the landlord’s insurance policy because the language of the lease not only required each party to insure their respective financial interests, but also contained more than one provision holding the tenant liable for damages. To analyze these arguments the court turned to its decisions in Remy v. Michael D’s Carpet Outlets, 391 Pa. Super. 436, 571 A.2d 446 (1990) and Joella V. Cole, 2019 PA Super 313, 221 A.3d 674 (2019).  Both cases addressed the issue of whether a landlord’s property insurer could file a subrogation action against a tenant that negligently damaged the landlord’s property.

In Remy, the court held that a landlord’s insurer could bring a subrogation claim against the negligent tenant absent an express lease provision to the contrary. In reaching its decision, the Remy court noted, among other things, that the lease did not require the landlord to purchase fire insurance; but did require the tenant to purchase and maintain its own liability insurance, including coverage for property damage.

In Joella, the court considered which contractual provision controlled when the lease stated both that the landlord was responsible for maintaining insurance on the building, and that the tenant would not negligently damage the premises. The Joella court found that the insurance provision carried more weight, stating “absent some compelling provision to the contrary, the court may properly conclude notwithstanding a general surrender in good condition or liability for negligence clause in the lease, [the] reasonable expectation [of the parties] was that the landlord would only look to the policy, and not to the tenant, for compensation for fire loss covered by the policy.” Joella, 221 A. 3d at 680.

In this case, the lease required each party to insure their respective financial interests by purchasing appropriate insurance. The landlord’s insurer argued that the use of the terms “respective financial interests” and “appropriate insurance” required both the landlord and the tenants to purchase liability insurance for the property. The court rejected this argument, finding that the insurance provision merely required the parties to obtain first party property insurance not liability insurance.

Reading the lease agreement in its entirety, the court then considered whether the various provisions holding the tenants liable for damages were compelling enough to find that the tenants were not considered implied co-insureds under the landlord’s policy. The court reiterated the view endorsed by the Joella court, finding that the lease provisions were akin to general “surrender in good condition” or “liability for negligence” clauses. As such, the court held that none of the lease provisions were compelling enough to override the tenants’ expectations that they would be protected by the landlord’s policy since the landlord had agreed to be responsible for maintaining insurance on the property and his personal property. For these reasons, the court reaffirmed the trial court’s decision that the tenants were implied co-insureds under the landlord’s policy and precluded the landlord’s insurer for moving forward with its subrogation claim.

This decision serves as a reminder that Pennsylvania applies a case-by-case approach to determine whether a landlord’s insurer can pursue subrogation against a tenant. Subrogation professionals should carefully review the terms of a lease agreement to determine if the parties reasonably expected that the tenant would be an implied co-insured under the landlord’s policy.  Even if the lease explicitly holds the tenant responsible for damage caused by the tenant’s negligence, the tenant may still be considered an implied co-insured on the landlord’s policy.

Editor’s note:  On January 17, 2024, in Mutual Ben. Ins. Co. a/s/o Michael Sacks v. Koser, No. 1340 MDA 2022, 2024 Pa. Super. LEXIS 17, the Superior Court of Pennsylvania (Superior Court) granted the insurer’s application for reargument by the court en banc. In addition, the Superior Court withdrew the decision noted above.