Court Bars Fire Insurer’s Subrogation Claim Against Condominium Tenant as Implied Co-Insured Under Lease and CC&Rs

In Western Heritage Ins. Co. v. Frances Todd, Inc. (No. A152428, filed 3/4/19, ord. pub. 4/2/19), a California appeals court held that a condominium association’s fire insurer was barred from suing a tenant in subrogation for fire damage under the rule that an insurer cannot subrogate against its own insured. The lease and the association covenants, conditions and restrictions (CC&Rs) established an intent that the fire insurance inure to the tenant’s benefit, making the tenant an “implied co-insured.”

Western Heritage provided fire insurance to the condominium association. The CC&Rs required the association to “obtain and maintain a master or blanket policy of all risk property insurance coverage for all Improvements within the Project, insuring against loss or damage by fire or other casualty…. The policy shall name as insured the Association, the Owners and all Mortgagees of record.” Further, any association insurance was required to contain a waiver of subrogation for officers, owners and occupants. Unit owners and tenants were permitted to obtain liability insurance, but prohibited from procuring fire insurance.

The unit owner’s lease required the lessee to maintain liability insurance also naming the unit owner as an additional insured, but was silent on fire insurance. The lease also obligated the lessee to indemnify the unit owner for injuries or damage from the acts or omissions of the lessee.

A fire attributed to the lessee’s negligence and storage of flammable liquids damaged the leased and surrounding units. Western Heritage paid the loss and brought a subrogation action, but the court granted summary judgment to the lessee. The appeals court affirmed. Citing Fire Insurance Exchange v. Hammond (2000) 83 Cal.App.4th 313, the court said that: “In California, courts have held a lessee is not responsible for negligently caused fire damages where the lessor and lessee intended the lessor’s fire policy to be for their mutual benefit. [] The import of this rule is that an insurer may not seek subrogation against an insured’s lessee in such cases for a fire he or she negligently causes, even when the elements necessary for subrogation have otherwise been met.”

The court went on stating that: “[I]t would be an undue hardship to require a tenant to insure against his own negligence when he is paying, through his rent, for the fire insurance which covers the premises in favor of the lessor. [] [I]nsurance companies expect to pay their insureds for negligently caused fires, and they adjust their rates accordingly. In this context, an insurer should not be allowed to treat a tenant, who is in privity with the insured landlord, as a negligent third party when it could not collect against its own insured had the insured negligently caused the fire. In effect, the tenant stands in the shoes of the insured landlord for the limited purpose of defeating a subrogation claim.”

The court analyzed the lease and CC&Rs as follows:

“First, the Lease in this case required defendants to obtain only liability insurance, not fire insurance. The implication was that fire insurance would be carried by the lessor, de Carion. William R. de Carion was an additional named insured on the insurance policy purchased by the Association, as the CC&Rs governing the property required. Second, owners such as de Carion were prohibited by the CC&Rs from purchasing an individual fire policy, as were ‘occupants’ and ‘tenants’ of the premises to whom the CC&Rs applied. [] Defendants could not, therefore, purchase their own first-party fire insurance for the structure (a structure in which they held no ownership interest). Third, the yield-up clause in this case provided that defendants, as lessees, agreed to ‘surrender the Premises at the termination of the tenancy herein created, in substantially the same condition as they were on the Commencement Date, reasonable wear and tear, casualty, and any alterations, improvements, and/or additions which are the property of the Lessor under Paragraph 7 excepted.’ [] ‘Casualty’ includes damage from fire.”

The Western Heritage court then rejected an argument that the lease’s hold harmless clause authorized subrogation against the lessee, interpreting it instead as an agreement to indemnify the unit owner against liability to third parties.

Likewise, the court rejected a claim of “superior equities,” saying that: “[T]he equities are different when the third party is not the party to any agreement with the insured, but is simply a neighbor. Here, the allegedly negligent party is also a party to a lease that on its face contemplates that fire insurance will be procured by the lessor. This changes the equities considerably.”

Finally, the Western Heritage court was unpersuaded by the lack of a separate charge for the fire insurance premium in the lease, saying that: “While a provision in a lease that insurance will be paid for by the lessee may suggest that the insurance is for the benefit of the lessee [], the converse is not necessarily true. A lessee pays for insurance through his or her rent and there is no requirement that a specific amount of the rent be allocated for insurance for an intent to benefit the lessee to be shown.

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April 3, 2019