Pursuing subrogated recovery claims against co-insured third parties
Property Insurance Aware 4
It is well established that insurers ordinarily have the right to bring a subrogated recovery claim upon payment of an insured’s losses, but what happens when a claim is pursued against a third party, who is a co-insured on the policy?
This situation often arises where a commercial lease is in place and the landlord obtains an insurance policy to cover the whole premises. The landlord then seeks an insurance contribution from each tenant.
The general principle is that where one party agrees to effect insurance for another, he implicitly agrees to exempt the other party from liability for causing an insured loss. The result is that neither he, nor the subrogated insurer acting through him, can sue for such loss.
The leading case on this issue is Mark Rowlands Ltd v Berni Inns Ltd and Others CA .
Facts of the claim
The claimant, Mark Rowlands, owned the freehold and had let the basement to the defendant, Berni Inns. The claimant insured the building.
The defendant covenanted, to pay to the claimant, an insurance rent equal to the proportionate cost of insuring the part of the building occupied by the defendant. The defendant paid that rent.
The building was subsequently destroyed by fire - caused by the negligence of the defendant. The insurer paid the claimant the sum due under the policy and brought an action in the name of the claimant to recover its outlay from the defendant.
The defendant was not named as a co-insured in the relevant insurance policy. The issue came to whether the tenant had an interest in the landlord’s fire insurance policy and an insurable interest in the premises which were destroyed by fire.
Notwithstanding the fact that the defendant was not a co-insured under the policy, the Court of Appeal found that there was no right of subrogation against the defendant for the property damage claim. This was because the claimant was held to have affected the insurance (of the property) for the benefit of itself and the lessee.
Kerr LJ said: The intention of the parties, sensibly construed, must have been that in the event of damage by fire, whether due to accident or negligence, the landlord’s loss was to be recouped from the insurance monies and that in that event they were to have no further claim against the tenant for damages in negligence.
Many believe that Berni Inns were provided with immunity from a subrogated action because they contributed towards the insurance premium - making them joint or co-insureds and simply put, you cannot sue yourself.
However, it is explicitly stated in the appeal decision that the lessee was not a co-insured. It paid the premium, but was not named on the policy and the lease did not promise it joint named status. So, this was not the reason for the immunity.
The fundamental reason the case against Berni Inns was dismissed was that Mark Rowlands covenanted to insure the whole building against damage from fire and that such insurance is expected to respond whether the fire is accidentally or negligently caused. Berni Inns paid a separate insurance rent to acknowledge the benefit it derived from that covenant.
It was reasonable for Berni Inns to expect the premises to be rebuilt at no cost to it whether the damage was caused by its negligence or not.
That a bare covenant by a landlord, to insure the building, does not raise a presumption that the insurance is intended to be for the benefit and relief of both parties. This is illustrated in the case of Lambert V Keymood  2 EGLR 70.
Here the lease contained merely a bare covenant by the landlord to insure the demised premises and lacked the additional terms which persuaded the court in Berni Inns that the insurance was intended to provide an indemnity to satisfy both parties’ loss.
Laws J found that, although the landlord had promised to arrange and pay for fire insurance on the buildings, and the tenant had consequently refrained from covering the loss, that was not enough to show that the landlord had agreed to insure for the benefit of the tenant.
Laws J concluded, that it did not follow automatically from a covenant to insure that the tenant was exonerated in respect of loss covered by the insurance. Not every promise to insure has the effect of conferring an interest on the tenant, so that he becomes immune from subrogation proceedings.
This position has been affirmed more recently by the Court of Appeal in Gard Marine & Energy Ltd v China National Chartering Co Ltd (The Ocean Victory) .
The decision in this case confirmed that the existence or otherwise of subrogation rights rests upon the true construction of the agreement between the co-assureds, but that there is a presumption against subrogation.
Insurers should be alive to the issues referred to above so as to avoid overlooking those cases that might succeed.
It should not be assumed that any party occupying premises under a lease and paying an insurance rent is immune from a subrogation claim.
The terms of the lease need to be considered carefully in each scenario in order to understand the intention of the parties and whether or not a claim can be pursued.