Court Finds Tenant Co-Insured With The Landlord
November 16, 2011
The 2nd District Appellate Court recently held that a property insurer's subrogation claim against tenants of property destroyed by fire was barred by the doctrine that an insurer may not seek subrogation against a co-insured, inasmuch as the tenants were regarded as the co-insureds of the insured landlord/subrogor. Nationwide Mutual Fire Insurance Co. v. T and N Master Building and Renovators, 2011 Ill. App. 101,143, 2011 WL 5073757 (2d Dist. Oct. 25, 2011).
The insurer, Nationwide, was represented by Sneckenberg, Thompson & Brody LLP. Daniel P. Costello & Associates represented the defendant tenants.
Background
The property in question was owned by Michael Markowitz to whom Nationwide issued property insurance coverage. The defendants were tenants under a commercial leasing agreement. A fire occurred in February 2007 as a result of which Nationwide paid Markowitz approximately $140,000. Nationwide thereafter sought to recover that amount, as subrogee of Markowitz, from the defendants.
The lease generally obligated the defendants to make all repairs necessary to put the premises in the same condition as when the defendants first became tenants. Such obligation, however, was expressly subject to an exception for "reasonable wear and loss by fire."
The lease also contained a paragraph applicable to "holding over," which had potential application since the lease had expired at the time of the fire and the defendants still were in possession. The last sentence of the holdover provision stated that the lessee was to pay to the lessor "all damages sustained by lessor resulting from retention of possession by lessee."
In response to Nationwide's subrogation action, the defendants filed a motion for judgment on the pleadings, which the trial court granted on the ground that they were co-insureds under the policy issued to Markowitz, relying on Dix Mutual Insurance Co. v. LaFramboise, 1449 Ill. 2d 314 (1992). Nationwide brought this appeal.
Sophistication
In an opinion by Justice Donald C. Hudson, the 2nd District affirmed. He initially addressed Nationwide's argument that, while Dix recognized that a tenant could be a co-insured under an insurance policy issued to a landlord, Dix itself involved a residential lease and nonsophisticated parties, while the lease here was of commercial property and the parties were more sophisticated.
Hudson agreed with Nationwide that the law often distinguishes between sophisticated and nonsophisticated parties. He suggested, however, that the Supreme Court in Dix did not draw such a distinction. He also noted that the court in Cerny-Pickas & Co. v. C.R. Jahn Co., 7 Ill. 2d 393 (1955), relied on by the court in Dix , involved a commercial lease and still supported the proposition that the tenant is a co-insured by virtue of the fact that the rent it pays goes in part for insurance premiums. Hudson said that both Dix and Cerny-Pickas therefore should control the outcome here.
Lease Terms
Nationwide further argued that the Dix court did not rely exclusively on the fact that the tenant in that case had paid rent, but also looked to the terms of the lease. Nationwide contended that the lease in this case suggested that the tenant should be responsible for a loss due to fire. It pointed out that there was nothing in the lease exculpating defendants from negligent acts and did not expressly identify the defendants as co-insureds.
Hudson countered that fire loss was expressly excepted from the tenant's obligation to make repairs. He also noted another provision in the lease that required the lessee to comply with the rules and orders of the fire department, which would assist in keeping insurance rates down and which would not be necessary if the landlord were not responsible for damages caused by fire.
Hudson, therefore, concluded that the plain language of the lease, taken as a whole, along with the fact that the defendants contributed to insurance premiums through payment of rent, established the defendants as co-insureds under the policy issued to Markowitz.
Holdover Provision
He then turned to the holdover provision in the lease and the language that required the tenant to pay all damages sustained by the lessee's retention of the premises. Nationwide argued that this language rendered the defendants liable for the fire loss.
As an initial response, Hudson observed that Nationwide had not raised this argument in the trial court. And even though the court's review on appeal was de novo, due to the fact that Nationwide was appealing the grant of a motion for judgment on the pleadings, a de novo review did not provide an excuse for Nationwide to avoid forfeiture of the issue if it did not raise the point in the trial court.
Nevertheless, Hudson construed the language relied on by Nationwide, when compared with other terms in the lease, as not imposing an obligation on the defendants to pay for fire loss. In particular, Hudson said that, in his view, the obligation of the tenants to pay all damages during their retention was subject to the exception for fire losses as expressed elsewhere in the lease.
He relied on the contract principle that, where an inconsistency exists in a contract, a more specific provision controls over a more general one. Hence, the more specific provision relating to fire losses would control over the provision that pertains to damages generally. So even if Nationwide had not forfeited the argument, it would not be persuasive.
The court therefore affirmed the judgment for the defendants.
Key point
The rule of Dix continues to apply in Illinois and requires that a tenant be treated as a co-insured of the landlord for purposes of property coverage, at least so long as the terms of the lease do not allocate risk otherwise.
