What happens if a tenant negligently causes a fire that damages the landlord’s building? Assuming the landlord is carrying fire insurance, the insurance company will pay the claim and make the landlord whole. Can the insurance company then make a claim against the tenant who caused the fire? Such claims of the insurance companies against tenants are known as "subrogation," when the insurer, having paid the landlord’s loss, stands in the shoes of the landlord and seeks to recover damages from the tenant for its negligence. If the lease has a so-called "waiver of subrogation" clause, the insurance company cannot recover against the tenant. Many commercial leases have such waiver clauses denying the insurance company the right to subrogate, and these clauses are generally enforceable. Subrogation waivers are readily obtainable and do not – at present – increase insurance premiums. (They only apply to casualty insurance, not liability insurance.)
But what happens to the hapless tenant whose lease does not have a subrogation waiver ? A recent case from the highest court in Massachusetts shows the risk to a tenant not having a subrogation waiver in its lease. In this case, Seaco v. Barbosa, a bakery tenant caused a fire. The insurer paid the landlord and then tried to recover damages from the tenant for its negligence. The lease had no subrogation waiver. The tenant tried to have the case dismissed on the strength of an earlier Massachusetts case holding that a residential tenant was considered a coinsured and could not be subjected to a subrogation claim. This earlier case (Peterson v. Silva) stated that in residential leases, the tenant had a reasonable expectation that the landlord would be covered by fire insurance and that the insurance company would not be making a claim against the residential tenant, who is considered a coinsured. However, the Seaco court refused to extend Peterson to commercial leases, but rather decided that a commercial tenant is not automatically a coinsured, and, in the absence of a waiver of subrogation, could be potentially exposed to claims from the insurance company. The Massachusetts court noted that while court rulings in some states consider a commercial tenant automatically to be a coinsured, the better-reasoned cases do not and instead allow a commercial landlord and tenant the freedom to negotiate in the lease the issue of the tenant’s liability for casualty damage.
In the Seaco case, in the absence of the waiver of subrogation, the court looked to the lease to determine the intent of the parties. If, for example, the lease provided that the rent and common area maintenance charges included the cost of insurance, that would evidence an intent that the tenant is a coinsured. If the lease provided that at the end of the term the tenant would "yield up" the premises subject to damage by fire or casualty, then the intent is that the tenant is not to be held liable for its negligence in causing a casualty. On the other hand, if the "yield up" clause did not contain an exception for casualty damage, the lease might be construed to make the tenant responsible for a casualty caused by its negligence. In such a case, the insurance company could then sue the tenant for damages. Also, if the tenant’s obligation to repair the premises does not exclude casualty damage, the lease might be construed to make the tenant liable for such damage.
The Seaco court noted that while the lease in question provided for an abatement of rent during the period of casualty restoration, the "yield up" clause did not except casualty damage. The court found the lease sufficiently ambiguous to allow the suit to proceed against the tenant in order to determine the parties’ intent as to the tenant’s liability.
Therefore, absent a waiver of subrogation, except in states that consider a commercial tenant a coinsured, the tenant may be at risk once the court decides to read the lease to determine the "intent" of the parties.
From a tenant’s point of view, it is important that a lease have the following:
- a waiver of subrogation
- a statement that the rent includes the tenant’s share of insurance costs
- a clause providing that upon termination of the lease, the tenant will "yield up" the premises subject to damage by fire or other casualty
- an exclusion in the tenant’s repair obligations for fire or casualty damage
- a clear statement as to which party is (a) carrying the casualty insurance, and (b) responsible for restoration after a casualty
In summary, if a tenant does not have a waiver of subrogation clause, its liability for a casualty may depend upon the state where it is located and what its lease provides. This recent Massachusetts case points up the importance to tenants of having waiver clauses in their lease.
The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.
