Cmty. Ass'n Underwriters of Am. Inc. v. Kalles

• Decision Date: 20 September 2011
• Docket Number: No. 40231–9–II.,40231–9–II.
• Citation: 259 P.3d 1154,164 Wash.App. 30
• Court: Washington Court of Appeals
• Parties: COMMUNITY ASSOCIATION UNDERWRITERS OF AMERICA, INC., a/s/o Harbour Commons, a Condominium, Appellant,v.Harold E. KALLES and Deborah L. Kalles, husband and wife, Derek Kalles and “Jane Doe” Kalles (if married); and Michael Quinn and “Jane Doe” Quinn (if married); and Lease Police, Inc., a Washington corporation, Respondents.

164 Wash.App. 30

259 P.3d 1154

COMMUNITY ASSOCIATION UNDERWRITERS OF AMERICA, INC., a/s/o Harbour Commons, a Condominium, Appellant,

v.Harold E. KALLES and Deborah L. Kalles, husband and wife, Derek Kalles and “Jane Doe” Kalles (if married); and Michael Quinn and “Jane Doe” Quinn (if married); and Lease Police, Inc., a Washington corporation, Respondents.

No. 40231–9–II.

Court of Appeals of Washington, Division 2.

Sept. 20, 2011.

Daniel J. de Luca, Nelson Levine de Luca & Horst, Blue Bell, PA, Shaun Ivon Huppert, Huppert Law Firm PLLC, Everett, WA, for Appellant.Alfred E. Donohue, Wilson, Smith, Cochran & Dickerson, Seattle, WA, for Respondents.JOHANSON, J.

¶ 1 Community Association Underwriters of America (CAU) appeals the trial court's grant of summary judgment in favor of Harold Kalles, Deborah Kalles, Derek Kalles, Michael Quinn, and Lease Police, Inc. (collectively the Kalles). CAU brought a subrogation claim against the Kalles, alleging that they negligently started a fire in a unit they rented from Paul and Kathy Elkins (the Elkins). The Kalles successfully moved for summary judgment on the theory that they were the Elkins's implied coinsured. They also obtained an attorney fee award. On appeal, CAU argues that (1) the trial court erred in granting summary judgment because the Kalles were not the Elkins's coinsured under CAU's policy and (2) the trial court improperly awarded the Kalles attorney fees. We affirm.

FACTS

¶ 2 Harbour Commons is a seven-unit commercial building in Gig Harbor. The Elkins own unit F and operated a business, Lease Police Inc. there until November 2007, when they sold the business to the Kalles. The Kalles leased unit F from the Elkins. In January 2009, a fire started in unit F, causing significant damage. The local fire department did not determine the specific cause of the fire but noted that it was likely associated with the space heater.

¶ 3 The Harbour Commons's “Declaration and Covenants, Conditions, Restrictions, and Reservations” (condominium declaration) established a board (the Board) to manage the condominium. Clerk's Papers (CP) at 109 (capitalization omitted). The condominium declaration required the Board to

obtain and maintain at all times as a common expense a policy or policies and bonds required to provide

a. Fire insurance ... in an amount as equal to the full insurable replacement value ... of the common and limited common areas and the condominium units, with the Board named as insured as trustee for the benefit of owners and mortgagees as their interest may appear.

CP at 66.¹

¶ 4 The Board obtained fire insurance through CAU. CAU's fire insurance policy named the insured, “Harbour Commons, A Condominium,” and provided coverage “for one two-story frame office condominium building containing twelve professional units.” CP at 177–78 (capitalization omitted).

¶ 5 CAU paid for the fire damage to the Harbour Commons and then sued the Kalles as subrogee of Harbour Commons. Alleging that the Kalles negligently caused the fire, CAU sought to recover from the Kalles the money that it paid under the Harbour Commons insurance policy.

¶ 6 The Kalles moved for summary judgment, arguing that they were entitled to judgment as a matter of law because they were a coinsured under the CAU insurance policy and because Washington law prohibits an insurer from suing its insured. The trial court granted summary judgment in favor of the Kalles and dismissed CAU's lawsuit. The Kalles then requested the trial court grant them attorney fees for defending CAU's lawsuit. The trial court granted their request and awarded $9,433.50 in attorney fees. CAU appeals.

ANALYSIS

I. Subrogation

¶ 7 The first question before us is whether the trial court properly granted the Kalles's motion for summary judgment. We review an order granting summary judgment de novo and engage in the same inquiry as the trial court. Weden v. San Juan County, 135 Wash.2d 678, 689, 958 P.2d 273 (1998). Summary judgment is proper “if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” CR 56(c). We view the facts and any reasonable inferences from those facts in the light most favorable to the nonmoving party. Federal Way Sch. Dist. No. 210 v. State, 167 Wash.2d 514, 523, 219 P.3d 941 (2009).

¶ 8 CAU maintains that the trial court erred in ruling as a matter of law that CAU could not assert a subrogation claim against the Kalles. Subrogation is an equitable doctrine, the purpose of which is to provide for a proper allocation of payment responsibility. Mahler v. Szucs, 135 Wash.2d 398, 411, 957 P.2d 632 (1998). “It seeks to impose ultimate responsibility for a wrong or loss on the party who, in equity and good conscience, ought to bear it.” Mahler, 135 Wash.2d at 411, 957 P.2d 632. “An insurer entitled to subrogation ‘stands in the shoes' of the insured and is entitled to the same rights and subject to the same defenses as the insured.” Mutual of Enumclaw Ins. Co. v. USF Ins. Co., 164 Wash.2d 411, 424, 191 P.3d 866 (2008) (quoting Fireman's Fund Ins. Co. v. Maryland Cas. Co., 65 Cal.App.4th 1279, 1292, 77 Cal.Rptr.2d 296 (1998)). “ ‘No right of subrogation can arise in favor of an insurer against its own insured since, by definition, subrogation exists only with respect to rights of the insurer against third persons to whom the insurer owes no duty.’ ” Mahler, 135 Wash.2d at 419, 957 P.2d 632 (quoting Stetina v. State Farm Mut. Auto. Ins. Co., 196 Neb. 441, 243 N.W.2d 341 (1976)).

¶ 9 Subrogation has two features. The first is the right to reimbursement, and the second is the mechanism for the enforcement of the right. Mahler, 135 Wash.2d at 412, 957 P.2d 632. The right to reimbursement, which is at issue here, may arise by operation of equity in law or contract. Mahler, 135 Wash.2d at 412, 957 P.2d 632.

¶ 10 Three approaches emerge from the other jurisdictions that have addressed whether an insurance carrier should be subrogated to the rights of the landlord against an allegedly negligent tenant. A minority of the courts follow the rule that, absent a clear contractual expression to the contrary, the insurance carrier may sue a tenant for the insurer's subrogated interest. See, e.g., Neubauer v. Hostetter, 485 N.W.2d 87 (Iowa 1992). Other jurisdictions have adopted a case-by-case approach, and they determine whether an insurer may assert a subrogation interest against the tenant based on the reasonable expectations of the parties under the facts of the case. See, e.g., Fire Ins. Exch. v. Hammond, 83 Cal.App.4th 313, 99 Cal.Rptr.2d 596, 600–01 (2000). Under the third approach, which is called the Sutton rule, ² courts hold that, absent a clearly expressed agreement to the contrary, the law presumes a tenant to be a coinsured on the landlord's insurance policy, and therefore the landlord's insurance carrier has no right of subrogation against the negligent tenant. See, e.g., Sutton v. Jondahl, 532 P.2d 478, 482 (Okla.Civ.App.1975). Cascade is the only published Washington case addressing whether an insurance company may claim a subrogation interest against a tenant for negligently causing damage. Cascade Trailer Court v. Beeson, 50 Wash.App. 678, 686, 749 P.2d 761, review denied, 110 Wash.2d 1030, 1988 WL 632392 (1988). In Cascade, Division Three of this court considered whether Cascade's insurer could claim a subrogation interest against three of Cascade's tenants for damages paid as the result of a fire. Cascade, 50 Wash.App. at 679, 749 P.2d 761. After examining Sutton and other cases—both supporting and opposing the Sutton approach—the Cascade court held that “[w]here the landlord has secured fire insurance covering the leased premises, the tenant can reasonably expect the insurance to cover him as well, unless the parties have specifically agreed otherwise.” Cascade, 50 Wash.App. at 686, 749 P.2d 761. The court reasoned that a tenant could reasonably expect that his landlord's fire insurance would cover him, unless agreed otherwise, because the tenant is in privity of contract with the landlord and has a property interest in the premises the insurance protects. Cascade, 50 Wash.App. at 686, 749 P.2d 761.

¶ 11 The Cascade court then considered whether the parties expressly agreed in the written lease to limit the benefit of fire insurance to the landlord. Cascade, 50 Wash.App. at 687, 749 P.2d 761. At least one of the three tenants had agreed to a lease that prohibited him from “intentionally or negligently destroy[ing] ... any part of the premises” and that required him to “vacate said premises in as good order and condition they are now in, excepting the reasonable wear and tear thereof.” Cascade, 50 Wash.App. at 679, 749 P.2d 761. The court held that a tenant could sign this lease and never reasonably contemplate that his landlord's insurer could collect damages from him if he negligently caused a fire that destroyed the premises. Cascade, 50 Wash.App. at 687, 749 P.2d 761. Therefore, the Cascade court stated, “We adopt the reasonable expectations rationale of the Sutton line of cases and hold Cascade is presumed to carry its insurance for the tenant's benefit because the lease did not contain an express provision to the contrary.” Cascade, 50 Wash.App. at 687–88, 749 P.2d 761.

¶ 12 We adopt Cascade's reasoning and hold that the law presumes a tenant to be the landlord's coinsured absent an express agreement between them to the contrary. Cascade, 50 Wash.App. at 686–87, 749 P.2d 761. The Sutton rule recognizes the reality that both the landlord and tenant have an insurable interest in the rented premises, where the landlord has an ownership interest, and the tenant has a possessory interest. Cascade, 50 Wash.App. at 686, 749 P.2d 761. As Cascade acknowledged, the tenant reasonably expects that...