The principle of subrogation applies where an insured suffers loss and damage as a result of the negligent action of a third party. When the insurer has indemnified the insured for their loss and damage, the insurer can commence a subrogation action against the negligent third party.
Common law gives an insurer the right to bring subrogated proceedings in the name of the insured only after the insured has been fully indemnified in accordance with the terms of the policy. However, many insurance policies contain a contractual right to subrogation, both before and after payment under the policy.
In commercial leases, the obligation is usually on the landlord to insure the property. The premium is generally paid by the tenant, either as part of rent or as an additional insurance charge.
The tenant will normally be under an obligation not to do, or omit from doing, anything that would cause the landlord’s insurance policy to be vitiated or render irrecoverable the whole or any part of the insurance monies.
The issue of whether a landlord’s insurer can commence subrogation proceedings against a tenant was dealt with in the seminal case of Mark Rowlands v Berni Inns Limited  1QB 211.
A building in Leeds, housing a Berni Inn in its basement, was damaged by fire caused by the negligence of the tenant. The landlord’s fire insurers sought to recover damages from the tenant by subrogation.
The Court held that, in these circumstances, the proper interpretation of the lease was that the fire insurance taken out by the landlord should also exist for the tenant’s benefit. It followed that the subrogated insurance recovery claim by the landlord’s insurers against the tenant failed.
The relevant provisions of the lease included the following:
- The landlord was obliged to insure the whole building against fire.
- The tenant contributed to the cost of this insurance.
- The tenant was relieved of its repairing obligations in the event of damage to the building by fire; and
- The landlord was obliged to use the insurance monies to rebuild the demised premises.
The Court made it clear that not all these features must be present to defeat the subrogated claim. They are however relevant considerations in deciding the question of whether the insurance should exist for the benefit of the tenant.
The principle of subrogation in regard to residential leases was most recently tested by Holgate J in a judgment that he handed down on 5 February 2016 in Fresca-Judd v Golovina QBD. Ms Golovina was the tenant of a holiday cottage and Ms Fresca-Judd the landlord. She returned to her London flat during the Christmas period to find that, while she was away, there was extensive flood damage from a burst pipe.
The landlord’s insurers compensated Ms Fresca-Judd and then pursued a subrogated recovery claim against Ms Golovina, alleging that she had failed to leave the heating on while she was away, causing the pipes to freeze and burst, which was both a breach of the tenancy agreement and negligent. Holgate J considered the Mark Rowlands defence and listed the points to consider as:
- How the parties had decided to allocate risk in the tenancy agreement.
- A covenant by one party to insure in return for obligations by the other is an important indicator that a tenant need not insure the risk and would not be liable for damage within the scope of the agreed cover.
- The Court would also have to consider the other terms of the tenancy including:
- whether the tenant is contractually obliged to contribute to the insurance cost and/or;
- is relieved of the repairing or other obligations if the insured risk occurs and;
- whether the landlord has to expend the insurance monies on repairing the damage.
- The Court made it clear that it is not necessary for all these indicators to be present.
The Court held that in this instance, a reading of the clauses of the tenancy agreement led to the conclusion that the landlord should rely on the insurance policy as a remedy and not sue the tenant.
- If a tenant has negligently caused damage to a landlord’s property, the landlord may have a potential right in subrogation against the tenant.
- The strength of the potential claim will depend upon careful consideration of all the relevant clauses of the lease, or tenancy agreement.
- The Court will look at the circumstances as a whole to determine whether the contractual relationship between the parties reflects an intention that the landlord should rely upon the insurance company, or the tenant, for a remedy.
The author of this article has significant experience in advising clients involved in complex and high value insurance litigation. For advice and information in relation to the issues set out in this article, please contact us at firstname.lastname@example.org.