Underwriters of Lloyds of London v. Cape Publications Inc.

• Decision Date: 17 June 2011
• Docket Number: No. 5D10–3384.,5D10–3384.
• Parties: UNDERWRITERS OF LLOYDS OF LONDON, etc., Appellant,v.CAPE PUBLICATIONS, INC., d/b/a Florida Today, Appellee.
• Court: Florida District Court of Appeals

63 So.3d 892

UNDERWRITERS OF LLOYDS OF LONDON, etc., Appellant,

v.CAPE PUBLICATIONS, INC., d/b/a Florida Today, Appellee.

No. 5D10–3384.

District Court of Appeal of Florida, Fifth District.

June 17, 2011.

Alexander Muszynski, III, and Cameron E. Shackelford of Meier, Bonner, Muszynski, O'Dell & Harvey, P.A., Longwood, for Appellant.L. Chuck Lira of Law Offices of Jack D. Evans, Tampa, for Appellee.COHEN, J.

The issue in this appeal is whether Underwriters of Lloyds of London (hereafter “Lloyds”) is precluded from bringing a subrogation action because Cape Publications, Inc.'s commercial lease evidenced an intent that it be considered a beneficiary or co-insured under the property and casualty insurance policy maintained by Harry and Wendy Brandon (hereafter “Brandons”). We review the issue de novo and affirm. See Volusia County v. Aberdeen at Ormond Beach, L.P., 760 So.2d 126 (Fla.2000).

Cape Publications leased commercial office space in a building owned by the Brandons. The Brandons insured the building with a property and casualty insurance policy, covering fire damage, purchased from Lloyds. As expressly provided in the lease, a portion of Cape Publications' monthly rent was allocated to paying its pro rata share of the premiums on the Brandons' property and casualty insurance. The lease also required Cape Publications to obtain a general liability insurance policy, naming the Brandons as co-insureds, “in an amount not less than $1,000,000 combined single limit for personal injury[,] bodily injury and property damage....” Cape Publications further agreed to indemnify and hold the Brandons harmless for any claim of damage or injury arising out of its negligence or use of the premises.

The Brandons subsequently submitted a claim to Lloyds after part of the premises leased by Cape Publications was damaged by fire.¹ Lloyds paid the Brandons' claim and, pursuant to the lease's indemnity and hold harmless provision, demanded Cape Publications indemnify it for the loss. When Cape Publications refused, Lloyds filed suit, asserting claims for breach of contract, contractual indemnity, and common law indemnity. Cape Publications moved for summary judgment arguing that its pro rata payment of the premiums, along with other lease provisions, made it a co-insured under the Brandons' property and casualty policy and, therefore, Lloyds could not maintain a subrogation action against its own insured. The trial court agreed and granted summary final judgment in favor of Cape Publications, citing Continental Insurance Co. v. Kennerson, 661 So.2d 325 (Fla. 1st DCA 1995).

Lloyds argues the summary final judgment was improvidently granted because the lease reflects the parties' intent to shift the risk of loss for fire damage to Cape Publications. Thus, Cape Publications cannot be considered a co-insured or intended beneficiary under the Brandons' property and casualty insurance policy. Lloyds points to two lease provisions in support: the provision requiring Cape Publications to purchase a general liability policy naming the Brandons co-insureds, and the indemnity and hold harmless provision.

The issue raised in this appeal has been addressed in numerous decisions across the country, in the context of both residential and commercial leases. In deciding the issue, courts have adopted one of three analytical approaches: the Sutton,² anti- Sutton, or case-by-case approach. Whether one approach is adopted over another is motivated by the public policy considerations underlying each. Before determining which approach this court will adopt, a brief overview is necessary.

Generally recognized as representing the majority position or “modern” trend ³ is Sutton v. Jondahl, 532 P.2d 478 (Okla.Ct.App.1975). In Sutton, 532 P.2d at 479, the residential landlord's insurer filed a subrogation action to recover the monies paid to the landlord for damage caused by an accidental fire started by the tenant's son. The court held that the landlord's insurer could not maintain a subrogation action against the negligent tenant because the “law considers the tenant as a co-insured of the landlord absent an express agreement between them to the contrary.” Id. at 482.

This conclusion was based on several legal and practical considerations and assumptions. First, the court recognized the “relational reality” that both the landlord and tenant had insurable interests: one with a fee interest and the other a possessory interest. Id. Second, the court assumed that the landlord passed the cost of the insurance premium onto the tenant as part of the rent payment. Id. Third, the court stated that a reality of residential renting was “[p]rospective tenants ordinarily rely” on the owner to procure fire insurance and, absent an agreement otherwise, “it would not likely occur to a reasonably prudent tenant that the premises were without fire insurance protection or if there was such protection it did not inure to his benefit....” Id.

Although a number of courts have adopted Sutton in toto,⁴ others have adopted its holding but advanced alternative rationales. In Tri–Par Investments, LLC v. Sousa, 268 Neb. 119, 680 N.W.2d 190, 199 (2004), the court reasoned that a “pure Sutton approach” provided legal certainty by preventing “landlords from engaging in gamesmanship when drafting leases by providing the necessary incentive for them, if they so desire, to place express subrogation provisions in their leases.” Absent such a provision, the court reasoned that insurers would pass the increased risk to the landlords in the form of higher premiums, and the landlords would increase the rent to reflect the higher premiums. The court stated: “This is almost certainly the current commercial reality.” Id.

In DiLullo v. Joseph, 259 Conn. 847, 792 A.2d 819, 822 (2002), the court concluded that Sutton represented better policy based on the “strong public policy” against economic waste. The court stated that to hold otherwise

would create a strong incentive for every tenant to carry liability insurance in an amount necessary to compensate for the value, or perhaps even the replacement cost, of the entire building, irrespective of the portion of the building occupied by the tenant. That is precisely the same value or replacement cost insured by the landlord under his fire insurance policy. Thus, although the two forms of insurance would be different, the economic interest insured would be the same. This duplication of insurance would, in our view, constitute economic waste and, in a multiunit building, the waste would be compounded by the number of tenants.

Id. at 822–23.

In addition to recognizing the rationales in Sousa and DiLullo, the court in Dattel Family Limited Partnership v. Wintz, 250 S.W.3d 883 (Tenn.Ct.App.2007), added that the Sutton approach comported with the reasonable expectations of the parties. Specifically, the court reasoned that a residential tenant who merely has a possessory interest would expect the landlord to obtain insurance on the entire building. Conversely, a reasonable landlord would not expect each individual tenant to purchase insurance covering the landlord's building. Accordingly, “all parties involved would reasonably expect a residential tenant to be considered a co-insured under the landlord's insurance policy unless the parties had expressly agreed otherwise.” Id. at 892.

Reaching the opposite conclusion are the anti- Sutton courts. These courts hold that the landlord's insurer may maintain a subrogation action against a negligent tenant who causes fire damage, unless the parties expressly or impliedly agree to the contrary. See Page v. Scott, 263 Ark. 684, 567 S.W.2d 101 (1978); Neubauer v. Hostetter, 485 N.W.2d 87 (Iowa 1992); Britton v. Wooten, 817 S.W.2d 443 (Ky.1991); Fire Ins. Exchange v. Geekie, 179 Ill.App.3d 679, 128 Ill.Dec. 616, 534 N.E.2d 1061 (1989); Zoppi v. Traurig, 251 N.J.Super. 283, 598 A.2d 19 (1990). These cases reject the assumptions and rationale underlying Sutton and adhere to the maxim that a party cannot escape liability for his negligence unless expressly disclaimed in the contract.

The case-by-case approach eschews presumptions that a tenant is or is not a co-insured of the landlord. Instead, the court examines the lease as a whole to determine the parties' reasonable expectations as to who should bear the risk of loss when a tenant negligently damages the leased premises. See Am. Family Mut. Ins. Co. v. Auto–Owners Ins. Co., 757 N.W.2d 584 (S.D.2008); Rausch v. Allstate Ins. Co., 388 Md. 690, 882 A.2d 801 (2005); Union Mut. Fire Ins. Co. v. Joerg, 175 Vt. 196, 824 A.2d 586 (2003). This approach not only adheres to basic contract analysis, but avoids “making assumptions and adopting fictions that are largely conjectural, if not patently illogical....” Rausch, 882 A.2d at 814. As its name suggests, the determination is made on a case-by-case basis and “subrogation may be denied ... if the lease expressly requires the landlord to maintain fire insurance or the lease exonerates a tenant from losses caused by a...