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When is a Tenant an Implied Co-Insured?

By September 12, 2012October 24th, 2018Insurance Blog, Kevin Price

Kevin J. Price

How about this one for creating an awkward silence at a cocktail party:  “Everyone knows that an insurance company can’t usually subrogate against its own insured.”  Depending on the audience, the conversation often goes downhill from there.

The issue of “who is an insured” doesn’t usually arise at a cocktail party, but often does when a non-insured tenant causes damage to real property that he leases.  Can that tenant, who is not listed as an additional insured on the policy, be considered an insured for the purposes of avoiding subrogation by the landlord’s insurer?  That depends in large part on the state where the property is located, and sometimes on the language of the lease.  Increasingly often, the answer is “yes.”

The innocent co-insured rule derives from the Oklahoma case of Sutton v. Jondahl, a case arising from a fire caused by 10 year old John Jondahl and his chemistry set.  The logic behind the “Sutton Rule” goes like this:  The fact that there is a landlord and tenant implies that the tenant’s rent payments are paying the premiums on the property insurance policy.  The Sutton court opined that it would be unfair to allow an insurer to subrogate against the tenant who was paying for the policy that gives rise to the subrogation action.  That tenant, so said the court, should be considered an insured such that the insurer would not be permitted to subrogate against him.  Thus, implied co-insured.

“But what about a claim in California?”

The Sutton rule is not applied in the same way in every state.  In Oklahoma, where the Sutton case was decided, tenants are considered insureds under the policy for the purposes of the subrogation efforts of property insurers.   In California, the courts take a “case-by-case” approach, and look to the language of the lease in order to determine whether or not the parties may have intended the tenant to be responsible for his negligent damage of the property.  For example, many commercial leases provide that the tenant will pay for property insurance.  Others will specify that the landlord has the obligation to maintain property insurance, while the tenant will insure his or her contents.  In either instance, California courts will look to this language as an indication that the parties considered and agreed upon the insurance responsibilities, and will consider the tenant a co-insured under the policy.

On the other hand, if the lease is silent as to insurance and makes the tenant responsible for damage to the property, the California courts may find that the Sutton rule does not apply.  In that case, the Insurer will be free to subrogate the loss.

Claims adjusters should be aware of the law in the state in which they work.  When faced with a tenant at fault for a property loss, California claims adjusters should obtain a copy of the lease.  Just don’t bring it up over cocktails.