Subrogation Claims Involving Tenants

Published on: April 26, 2001

…… the Massachusetts Supreme Judicial Court rendered a decision on an insurance claim which has import to condominiums. The case, Peterson v. Silva, involved a subrogation claim (a claim brought by an insurance company who has paid its insured against the person who caused the damage) against a tenant who had caused a fire which substantially damaged the insured’s building. The lease contained a standard clause providing that the tenant would indemnify and save the landlord harmless from all liability, loss or damage arising from any nuisance made or suffered on the leased premises by the tenant, his family, friends, relatives, invitees, visitors, agents or servants or from any carelessness, neglect or improper conduct of any such persons. The lease also contained a clause noting the tenant’s obligation to insure their own property and encouraging the tenant to buy their own insurance. The lease also noted, as required by law, that the landlord would provide $750.00 in relocation benefits if the tenant was displaced by fire or damage resulting from fire.

Upon these facts, the Court, noting prior decisions of its own and other Courts, held, as a matter of public policy, that absent an express provision making a tenant responsible for fire damage, it was deemed that the landlord’s insurance policy was for the benefit of both the landlord and tenant. In other words, it held that the tenant was a named insured and, as such, the insurance company could not recover against its own insured.

The significance of this in a condominium setting is that it is likely that a court will now hold that a tenant of a unit owner cannot be sued by the condominium’s master policy carrier if they negligently cause damage to the common elements as they, as their landlord, are insured’s under that policy. Bear in mind that condominium documents standardly provide in their insurance provisions that the insurer waives any right to claim against a unit owner. This is mandated by the secondary mortgage market and is a recognition that the unit owners own both their units and an undivided interest in the common areas. It also is necessary as a part of the requirement that the master policy insurer not only the common elements, but also the units. Thus, the unit owner is a named insured and, as such, the insurance company cannot sue them.

Returning to the leasing situation, it is likely that most residential lease forms used by unit owners will not have a clause making a tenant liable for fire damage. It may be that at some point in the future standard form leases will contain such a clause (by then our Court may well hold such a clause against public policy). However, until then it is doubtful that they will. To deal with this, in condominiums where the By-laws give the Board the authority to review leases, Boards should require a clause making the tenant specifically liable for damage caused by fire. Board’s and their Managers should then take pains to advise their insurer that they do this, and request some adjustment in the premium increase we’ll all likely see as a result of this ruling.

As an additional matter, the case noted that the Court had previously held that the standard yield up clause also provided a basis to hold that the tenant is an insured. That standard clause says that the tenant will yield up the premises at the conclusion of the term in the same condition reasonable wear and tear and fire by damage or other casualty excluded. In reviewing leases or setting standards for them, the words after wear and tear should be required to be delineated and this proactive measure also brought to the insurer’s attention.