The Subrogation Strategist

In a matter of first impression, the Supreme Court of Wyoming (Supreme Court), in West American Insurance Company v. Black Dog Consulting Inc., No. S-23-0052, 2023 WY 109, 2023 Wyo. LEXIS 111, examined whether a landlord’s insurer could pursue a subrogation claim against a tenant who caused a fire loss. The Supreme Court, applying a case-by-case approach, found that the insurer could not subrogate against the tenant.

West American Insurance Company (West) insured Profile Properties (Profile), which owned commercial property in Cheyenne, Wyoming. Black Dog Consulting Inc., d/b/a C.H. Yarber (Yarber) leased commercial space from Profile where it operated a metal fabrication business. The lease agreement between Profile and Yarber required Yarber to pay the full expense of Profile’s blanket insurance policy, which included general commercial liability insurance and fire and extended coverage insurance on the building.

On December 5, 2016, a fire occurred at the property. Several hours after initially extinguishing the fire, the property again became engulfed in flames and the metal fabrication shop was destroyed. West paid for the damages caused by the fire and sought to subrogate against Yarber. West alleged claims of negligence and breach of contract. The trial court granted Yarber’s motion for summary judgment and adopted the well-known “Sutton rule,” first espoused in Sutton v. Jondahl, 532 P.2d 478 (Okla. Civ. App. 1975). The rule states that as a matter of law, the tenant is an implied co-insured under the landlord’s fire insurance policy unless the landlord and tenant expressly agreed otherwise. By applying the Sutton rule, the trial court concluded that although the lease between Profile and Yarber did not expressly require Yarber to carry fire insurance, because Yarber was required to pay for Profile’s blanket insurance policy and that policy covered fire losses, Yarber was an implied co-insured under the policy. Thus, the trial court found that West was precluded from pursuing its subrogation claim against Profile.

West appealed and the Supreme Court examined three approaches regarding whether a landlord’s insurer can pursue a subrogation claim against a tenant for negligently causing a fire.  The first approach is known as the anti-subrogation, or Sutton rule.  The anti-subrogation approach explains that, as a matter of law, the tenant is an implied co-insured under the landlord’s policy absent an express agreement to the contrary. Next, the court reviewed pro-subrogation, or the anti-Sutton rule. Contrary to the rule in Sutton, this approach permits the landlord’s insurer to pursue subrogation against a negligent tenant unless the parties expressly contract to the contrary.  Courts applying this approach reason that tenants should be held responsible for their own negligence.  Further, courts adopting this approach are concerned that the Sutton rule encroaches on the contractual relationship between the landlord and tenant. Finally, the court examined the more flexible case-by-case analysis. This approach adopts the foundation of the Sutton rule but also looks to the lease and any other admissible evidence to determine the parties’ reasonable expectations as to who should bear the risk of loss. Many times, courts determine the reasonable expectations of the parties by reviewing the lease.

The Supreme Court adopted the case-by-case analysis, which followed similar reasoning to a previously decided Supreme Court matter:  Berger v. Teton Shadows, Inc., 820 P.2d 176 (Wyo. 1991). Using the case-by-case approach, the court analyzed the four corners of the lease between Profile and Yarber. The court specifically highlighted Paragraph 12, which unambiguously stated that Profile had to obtain a blanket insurance policy that protected against fire losses. Further, Yarber had to pay the sole expense of that policy and Profile had to provide Yarber with a copy of the policy along with an invoiced amount. The court concluded that the plain language of the lease called for Profile to look only to its insurance policy to cover any losses from the fire and not to Yarber.  Thus, although the court did not adopt the Sutton Rule as the trial court did, it affirmed the decision.

Now that Wyoming’s Supreme Court has chosen the case-by-case approach to determine whether a landlord’s insurer can pursue subrogation against tenants, Wyoming insurers and subrogation professionals should first look to the lease between the parties when evaluating their claim. If the lease is unambiguous and states the landlord has agreed to procure insurance covering a particular loss, the landlord should only look to their policy—and not the tenant—for compensation. However, if the lease obligates the tenant to obtain insurance for a particular type of loss, that may be enough to claim that the tenant is liable for the loss.