Rausch v. Allstate Ins. Co.

• Decision Date: 08 September 2005
• Docket Number: Misc. No. 6
• Citation: 882 A.2d 801,388 Md. 690
• Parties: Felix RAUSCH, et ux. v. ALLSTATE INSURANCE COMPANY. Harford Mutual Insurance Company v. Janice D. Harkins.
• Court: Maryland Court of Appeals

882 A.2d 801

388 Md. 690

Felix RAUSCH, et ux. v. ALLSTATE INSURANCE COMPANY.

Harford Mutual Insurance Company v. Janice D. Harkins.

Misc. No. 6, September Term, 2004. No. 128, September Term, 2004.

Court of Appeals of Maryland.

September 8, 2005.

Reconsideration Denied October 12, 2005.

Mark Brown (Elliott Petty of Law Offices of H. Barritt Peterson, Jr. & Associates, Towson), on brief, for appellants.

Erick J. Kirker (Cozen O'Connor, Philadelphia, PA), on brief, for appellee.

Argued before BELL, C.J., RAKER, WILNER, CATHELL, HARRELL, BATTAGLIA and GREENE, JJ.

WILNER, J.

It is not uncommon for a fire insurance policy to contain a subrogation clause that permits the insurer to recover, from any person (other than the insured) who causes a covered loss under the policy, amounts paid by the insurer by reason of that loss. Under such a clause, the insurer stands in the shoes of the insured and can seek to recover those amounts to the same extent that the insured could have recovered them from the person causing the loss, had there been no insurance.

The question before us in the two cases that we have consolidated for appellate purposes is under what circumstances, if any, the insurer may pursue its contractual right of subrogation against a tenant of the insured who negligently damaged the insured premises and thereby caused the loss. Although, as we shall see, most of the courts that have addressed the issue have ended up holding in the tenant's favor, denying recovery, the theories used to support that result vary.

Part of the difficulty in agreeing on a single theory to support the result arises from the differing circumstances underlying the cases — the wide variety in lease provisions that define the landlord-tenant relationship, whether the leased property is commercial or residential, whether the lease is of a single-unit structure or part of a multi-unit structure. In large measure, the issue presents a clash between what a direct application of basic and well-established legal principles would produce and what the courts have come to regard as either impractical or inequitable to tenants, or at least certain classes of tenants.

THE CASES BEFORE US

Rausch

In January, 1999, John Dunlop purchased 5037 Netherstone Court, in Columbia, as a piece of rental property. The property was a single-family dwelling. In September, 1999, he appointed American Relo Realty, Inc. to manage the property. The agreement between Dunlop and American Relo required Dunlop to maintain fire insurance for damage that might arise from the occupancy or management of the house. In March, 2000, American Relo leased the property to the Rausches, for a period of six months, at a rental of $1,500/month. Included in the written lease were provisions that:

(1) Prohibited the tenants from doing anything on the property in contravention of any hazard insurance policy in force or which would increase the premium on such a policy;

(2) Required the tenants to indemnify the owner for any liability for injury, death, property damage, or other loss arising within those portions of the property within the exclusive control of the tenants or occasioned by any act or omission of the tenants (3) Required the tenants to surrender the property at the end of the lease in the same condition as when received, ordinary wear and tear excepted;

(4) Declared, with respect to the portions of the property within the exclusive control of the tenants, that the owner was not responsible for any loss or damage to goods or chattels placed in the property or for personal injury to the tenants and that it was the responsibility of the tenants to "obtain and pay the costs of any insurance to protect Tenant from loss or damage to Tenant's personal property placed on, in or about the Property, and to maintain adequate personal liability insurance." (Emphasis added);

(5) Declared that, if the property were rendered totally uninhabitable by fire or certain other causes, or if the property were partially damaged and the owner elected not to repair the damage, the tenancy would immediately terminate and all rent would cease as of the date of the occurrence; and

(6) Made the tenants responsible for "any and all damages to the Property caused by any act of negligence of Tenant" or other residents of the property as well as for the cost of all repairs, replacements, and related services if the need for the same resulted from the negligence or misuse by the tenants.

Although Item (4) above clearly required the Rausches to maintain "adequate personal liability insurance" and insurance to protect their property, and Item (1) anticipated that the owner would likely have a fire insurance policy of his own in force, nothing in the lease itself required the owner to maintain such insurance, and there is no indication that the tenants were aware of that requirement in the management agreement. The owner, in fact, purchased a fire insurance policy from Allstate Insurance Company that remained in force during the tenancy.

On April 12, 2000, Ms. Rausch caused a fire in the property by leaving a flammable item on the rear burner of the electric range that had been turned to "high" and then leaving the house. The fire caused nearly $152,000 in damage. Allstate paid $138,000 to Dunlop.¹ The Allstate policy contained a subrogation clause, which provided that (1) if Allstate paid any loss, the "insured person's rights to recover from anyone else become ours up to the amount we have paid," (2) the insured person "must protect these rights and help us enforce them," but (3) the insured could waive "your rights to recover against another person for loss involving the property covered by this policy" if the waiver was in writing and was given prior to the date of loss. There is no indication that Dunlop directly made such a waiver.

Exercising its rights as subrogee, Allstate sued the Rausches in U.S. District Court to recover the $138,000 it had paid to Dunlop. The complaint alleged both negligence and breach of contract. The Rausches moved for summary judgment, arguing that the law prohibited subrogation actions by a landlord's insurer against the landlord's tenants on the ground that the tenants were regarded as implied co-insureds. Both sides acknowledged that, although there were cases on the issue around the country, this Court had never addressed it. Because it was an unanswered question in Maryland, the court, invoking the Maryland Uniform Certification of Questions of Law Act (Maryland Code, § 12-601 through 12-613 of the Cts. & Jud. Proc. Article) (CJP) and Maryland Rule 8-305, certified the following two questions:

"(1) Does Maryland law recognize the doctrine of `implied co-insureds' so that a tenant is an implied co-insured of the landlord?

(2) If so, is Allstate barred from bringing the instant subrogation action against tenants of its insured?"

We shall address those questions as framed by the court, but, because theories other than "implied co-insured" have been used by courts to preclude subrogation actions against tenants, we shall, in our response, take account of those theories as well. The statute does permit this Court to reformulate the certified questions so long as our answer properly disposes of the questions as certified. See CJP § 12-604; also Mardirossian v. Paul Revere Life, 376 Md. 640, 647 n. 4, 831 A.2d 60, 64 n. 4 (2003) (citing Piselli v. 75th Street Medical, 371 Md. 188, 202 n. 4, 808 A.2d 508, 516 n. 4 (2002)).

Harkins

In May, 1999, Janice Harkins entered into a one-year lease for Apartment 28 in the Oak Court Apartments, a multi-unit apartment development. The lease, signed on behalf of the owner by its leasing agent, United Homes, Inc., ran from June 1, 1999 through May 31, 2000. Included in the written lease were provisions that:

(1) Made available a storage space for Ms. Harkins but, in that provision, stated:

"Resident expressly agrees that landlord shall not be liable for any loss, damage or injury to property. Tenant shall have insurance coverage for this storage area as well as Renter's Insurance for the apartment. Landlord is not responsible for such loss which may be incurred." (Emphasis added);

(2) Required the tenant to reimburse the landlord for "any loss, damage or actual cost of repairs or service caused in the apartment or apartment complex by improper use or negligence of tenant or tenant's guests or occupants"; and

(3) Required the tenant, when moving out, to "surrender the apartment in the same condition as when received, reasonable wear expected. Reasonable wear means occurring without negligence, carelessness, accident, or abuse."

Other than the reference in Item (1) to renter's insurance, which Ms. Harkins obtained, the lease was silent with respect to insurance. In fact, the owner obtained a fire insurance policy from Harford Mutual Insurance Company that was in effect during Ms. Harkins's tenancy. The policy contained a subrogation clause, stating that, "[i]f any person or organization to or for whom we make payment under this policy has rights to recover damages from another, those rights are transferred to us to the extent of our payment" and that the payee "must do everything necessary to secure our rights and must do nothing after loss to impair them." The clause permitted the insured to waive its rights against another party in writing (1) prior to a loss, or (2) after a loss if the party is a tenant. The owner never directly waived its rights against Ms. Harkins.

On March 29, 2000, Ms. Harkins lit one or more scented candles on a nightstand in her bedroom and then left the room to answer the telephone. While on the telephone, the smoke alarm went off, but Ms. Harkins thought it had malfunctioned. When she smelled smoke, Ms. Harkins investigated and discovered that her bedspread was on fire. After an unsuccessful attempt to extinguish the fire, she left the apartment. The fire and smoke caused...