Renters Insurance, Subrogation, And You
Overall, many people find the actual business operations of renters insurance to be somewhat dry and boring. One of our core values is to educate renters on their coverage, and we try to make it interesting.
You know it’s a bad idea to have your landlord as additional insured on your renters insurance, but do you know why? Did you know that your landlord can subrogate against your renters insurance policy (or against you if you’re not covered) in many cases? Do you know what subrogation against rensters insurance means in practical terms? Subrogation is a concept that’s been much maligned, misunderstood, and as a certain former President might say, “misunderestimated.” Let’s take a quick look at what it means to you and your choice whether to have renters insurance or not.
What Is Renters Insurance Subrogation?
Webster’s defines subrogation as “the assumption by a third party… of another’s legal right to collect a debt or damages.” If you make a claim under your renters insurance for property damage caused by vandalism, and the claim is paid, you’ve assigned your right to collect to that insurance company. You generally may not bring suit against the vandal to pay for the damages, because they’ve already been paid by your renters insurance.
Subrogation means that as assignee of that right your renters insurance company can, may, and often will bring such an action. In some situations, it’s possible for them to recover the money they paid out on the claim as well as your deductible, which is always a nice surprise when you get that deductible check in the mail.
Why Should You Care About Renters Insurance Subrogation?
Because it can cost you a ton of money.
Depending on the state of the loss and your lease, your landlord’s insurance company likely has a significant or unlimited right to pursue you for damages you cause for which the insurer pays. Remember how getting the deductible back for the insured is a part of subrogation? That means, in this instance, your landlord’s commercial property insurance deductible, which may be ten thousand dollars, twenty thousand dollars, or even more.
Matthiesen, Wickert, & Lehrer state in a whitepaper on the subject that the availability to your landlord’s insurer of subrogation against you is predicated on three main factors at the state level.
First, a minority of courts have held that the insurer has an absolute right to sue the tenant for those damages, so long as the lease does not contain a provision stating otherwise. The landlord would have to waive this right on behalf of the insurer in the terms of your lease.
Some states treat subrogation attempts on a case by case basis, in an effort to avoid creating a blanket ruling in favor of either side which would be applicable to future cases. In these states, the attempt at subrogation must be ruled on based on the specific and individual fact pattern.
In some states, you’ll find that there’s an automatic presumption that the tenant is co-insured on the landlord’s property insurance policy. Oklahoma first brought us this rather counterintuitive construct, known as the Sutton Rule (Sutton v. Jondahl). It’s crucial to note at this juncture that said presumption would apply to liability coverage and property of the landlord, such as the building. The Sutton Rule provides no coverage whatsoever under the landlord’s insurance policy for the tenant’s personal belongings under any circumstances.
Just in case you stopped reading after realizing that you may be a co-insured under your landlord’s policy for certain limited purposes, allow us to restate: It just doesn’t work that way. Co-insured simply prevents you and your assignees (the landlord’s insurance company) from suing each other.
The Sutton Rule has been described as “legal fiction” by Claims Journal. The holding reads in part, “Prospective tenants ordinarily rely upon the owner of the dwelling to provide fire protection for the [real estate]. Certainly 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 and that he would need to take out another fire policy to protect himself…”
Note that the tenant relies on the owner of the dwelling to provide fire insurance, as seen above. That is, largely, because the dwelling itself is not the tenant’s responsibility to insure. The tenant needs to maintain liability insurance to cover the costs in case a fire is the tenant’ fault, but the tenant does not need to maintain general fire insurance cover on the structure. The entire premise on which Sutton is based may be flawed, in fact, as the tenant would not take “another fire policy” on the dwelling. The tenant needs to protect against his own liability, as well as protect his own property. The suggestion in the holding in Sutton that the tenant should insure the structure is not logical, even in the absence of a policy covering the landlord’s interest in the structure.
Incidentally, in states using the Sutton Rule, this is another reason that it’s generally a bad idea to list your landlord as additional insured on your renters insurance policy. As a matter of fact, Maryland outlawing landlords as additional insureds is a very real possibility, as we’ve previously discussed. If your landlord is additional insured on your renters insurance, you don’t have a subrogation opportunity against him and he likely doesn’t have a subrogation opportunity against your policy, with or without the Sutton Rule.
At first blush, inability to subrogate against your renters insurance policy seems to be a positive thing from the tenant perspective. But it brings up two major problems.
First, if there is a loss to your property caused by the landlord’s negligence, and either your lease, the Sutton Rule, or your state prevents renters insurance subrogation, you and your renters insurance company have zero recourse to recover those funds, your deductible, or any expenses in excess of your policy limits.
As an example, let’s distil the relevant points from the Avalon fire.
- The landlord knew or should have known that using a plumbing torch inside a wooden wall is an inherently unsafe thing to do.
- The landlord sent employees or agents to perform the above work, presumably without giving them the full proper training they needed.
- The building burned to the ground as a direct and proximate result of maintenance workers using a plumbing torch inside a wooden wall.
- That result was neither expected nor intended.
Generally speaking, that would create a presumption of negligence on the part of the landlord and its employees or agents. This could potentially entitle residents who suffered property losses in excess of their policy limits to proceed against the landlord for those costs, as well as entitle residents with no renters insurance to do the same. However, a waiver of subrogation in the lease, by case law, or by the Sutton Rule would prevent subrogation in both of those situations.
Second, preventing subrogation against a renters insurance policy or against a landlord’s policy has the unintended effect of spreading costs in an inherently unfair manner. If the renters insurance company can’t recover their loss from the negligent landlord’s insurance, costs go up for renters insurance in that area because the negligent party can’t be made to pay. If the landlord’s insurance can’t subrogate against the renters insurance, costs go up for landlords.
Further, those costs are unfairly distributed because unreimbursed expenses, such as those in excess of a policy limit or deductibles, are borne by the parties in proportion to the size of the loss. The landlord almost always will have the lion’s share of the loss, and this is then passed on to the tenant in the form of additional fees or higher rents. Two parties who share the impact of a loss will generally try to recover that loss by any means possible.
If subrogation isn’t a viable option, then it becomes a cost of doing business which has to be accounted for by tenants. In states where subrogation against a renters insurance policy is not generally allowed, the trend is towards a no-fault model. When each party and/or their policy pays their own expenses from a shared loss for which someone is responsible, both business costs and the cost of insurance are driven up drastically and immediately. If you need further evidence of that mathematical certainty, look at what’s happened to auto insurance rates in Michigan. Their system is based on no fault, your insurance pays for your loss regardless of who caused the loss, and it’s not only been rife with abuse, but the system also exerts an inexorable upward pressure on insurance rates which can never be stopped altogether, so long as the system remains in its current no fault state. With additional insured status for the landlord, or without subrogation as a remedy, the same process becomes a significant risk.
As an example, property insurance rates in Illinois have increased significantly. One of the reasons for this is that Illinois, generally speaking, presumes co-insured status for the tenant and therefore prevents subrogation against the negligent party. With no recovery, rates increase to cover those costs, sometimes dramatically. Illinois does allow the waiver of that co-insured status for specific types of losses, if the lease in its totality makes clear the intent of the parties to agree to take on that responsibility.
Pekin v. Murphy held that a lease which clearly shows the parties’ intention for one party to accept responsibility for specific damage, the tenant is not a co-insured under the landlord’s policy and therefore subrogation against the tenant may proceed, allowing the landlord’s insurance company to make a recovery and keeping rates distributed fairly. This must be clear and obvious within the context of the lease and its addenda, the case law is clear that the lease and written agreements between the parties are the only appropriate place for this decision to be noted.
But You Said The Landlord Could Subrogate Against The Tenant, What About Renters Insurance Liability?
That’s an excellent question. While the landlord may subrogate against the tenant in the above example, an Illinois renters insurance policy would make a world of difference in how that actually impacts the tenant. Both the tenant and the renters insurance company would likely be named in that suit. The renters insurance company is obligated to provide a defense to the tenant and to defend or settle the suit at their option.
If you are responsible for a loss such as water damage or an apartment fire due to your negligence, you absolutely need renters insurance. Subrogation against renters insurance means that, ultimately, your renters insurance company will pay those costs subject to settlement and/or the policy limit.
Broadly speaking, renters insurance liability coverage protects you from subrogation actions for damage due to your negligence, even if the lease you signed explicitly gives you responsibility for the costs of those damages, such as in the Pekin case above. Of course, the usual conditions are relevant. If the damage was the expected or intended result of your actions, negligent or otherwise, there is unlikely to be coverage. But very few people intentionally turn off their heat until a pipe bursts just to see a pipe burst, so that’s probably not a concern for you.
What Happens If The Landlord Subrogates Against My Renters Insurance?
There’s a lawsuit naming you and your renters insurance company. Your renters insurance liability coverage pays for defense costs. You don’t need to get and pay for a lawyer on your own, you get one that’s paid for by the insurance company. If, in fact, you are found to be negligent or the claim is settled, your renters insurance pays those costs up to the policy limits.
As a result, your landlord’s insurance costs don’t go up, and therefore don’t need to be passed on to tenants as an operating expense factored into rent or building fees. Remember that renters insurance is very inexpensive. Even if your rates increase after a renters insurance subrogation, the math might look something like this:
(Current Premium) (Risk Multiplier) = New Premium
So you’re paying $150 a year currently, and your renewal premium is increased by 30 percent (a factor of 1.3)
$150 * 1.3 = $195.00 renewal premium
Even after a renters insurance subrogation loss, you still could be paying far less than you expect!
What Happens If The Landlord Subrogates And I Don’t Have Renters Insurance?
There’s a lawsuit naming you, and you only, as defendant suing you for the full amount of the damages to the building. You are obligated to find and pay for your own defense attorney, and you have little leverage to settle the claim because you don’t have the money to offer. The matter goes to court. Judgment is entered against you if you’re found negligent. That judgment follows you for the rest of your life, taking money out of your pocket every time you receive any money from any source. Even if you win and are not found to be liable for those costs, you’ve still spent ten or twenty thousand dollars on attorneys fees, at minimum. Either way, you’re broke. What’s worse is that more and more jobs are using credit as a criteria for new or continuing employment. A judgment is public record and goes on your credit report, sending your score into a downward spiral. You may not even be able to get or keep a job in your preferred field as a direct result of that judgment.
How can you prevent this? You can buy renters insurance that will defend you and pay those costs, as well as handle sorting out the entire matter. Most of that happens behind the curtain, so to speak, all you have to do is cooperate with the renters insurance subrogation, you don’t have to interface between the companies, the parties, the lawyers, and all the other moving parts in a situation like this. Renters insurance can prevent your life from being destroyed, and it averages about fifteen dollars a month nationally. The cost of having renters insurance is negligible compared to the cost of not having it.
For more information on how to protect yourself against liability risks and subrogation with renters insurance, contact the experts at Effective Coverage today and protect your family in just minutes.