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Defense Summary Judgment in Favor of Commercial Tenant Against $3.5M Subrogation Suit

October 24, 2017

In a commercial landlord-tenant subrogation action by the landlord and commercial business association’s insurer, partner David Webster and senior associate Eugene Zinovyev recently obtained summary judgment for our client, The Wooden Duck, a long-standing furniture manufacturer and seller in Berkeley. The subrogation action followed a building fire that destroyed our client’s leased warehouse space and other property and personal property of three other entities. Plaintiff insurer issued a property damage policy to the Association that owned and maintained the common area building components and the landlord that leased space to our client. The successful Motion for Summary Judgment was brought under California’s case-by-case anti-subrogation law which provides that lessees cannot be sued for subrogation as deemed implied co-insureds under the policy based on specific language in the lease agreement.

The trial court agreed with all arguments and entered Judgment against Plaintiff’s suit seeking $3.5 million in paid proceeds. The Court is currently considering awarding our client attorneys’ fees and costs as prevailing party, since the subject lease contained a prevailing party attorneys’ fees clause.

Why this Case Is Important

Subrogation suits following fire and other casualties to structures and personal property are commonly brought by the insurer of the damaged or destroyed building, seeking reimbursement for monies paid to repair or reconstruct. Such insurers then file suit under the equitable doctrine of subrogation against a building tenant as the responsible party; however, such tenants may be able to challenge plaintiff’s standing to bring such a suit based on the specific language of the lease between it and the landlord. Based on favorable lease language, the tenant can successfully argue that it was intended to be an implied co-insured under the policy seeking subrogation. If so, such a suit is prohibited as a matter of law, as it violates the long-standing rule that an insurer cannot sue its own insured for a risk of loss it agreed to cover when it issued the policy in exchange for premiums. While different rules of law apply in other jurisdictions, California follows a case-by-case rule for determining whether the suit is prohibited; thus, it is important to closely examine the applicable lease language to determine if this defense is available.

In this case, The Wooden Duck entered into a written lease which only required it to purchase and maintain liability insurance, but contained no specific express requirement that it also obtain property damage insurance. The lease further contained a common “yield up” provision, obligating the lessee to surrender the premises in a condition limited to “reasonable wear and tear, casualty, etc., excepted,” a separate provision defining “casualty” to include “fire,” and other language implying that the landlord shall repair the premises with its insurance proceeds. Moreover, the CC&Rs controlling the building Association contained language requiring the Association and its owner/members to obtain blanket property damage insurance and prohibiting occupants from doing so.

After extensive briefing and oral argument, the Court issued a 23-page Order granting The Wooden Duck’s Motion for Summary Judgment, holding that the lease and CC&R language supported the parties’ expectations under the agreements that our client would benefit from the Association/Landlord’s policy as an implied co-insured. The Order contains an exhaustive review of the applicable law on the subject beginning in the 1950s and more recent California law issued by different appellate districts, including the holding in Parsons Mfg. Corp. v. Superior Court (1984) 156 Cal. App. 3d 1151. The Court agreed and applied the law that “absent an express agreement to the contrary, a tenant qualifies as an ‘implied co-insured’ under the landlord’s first party fire insurance policy, thereby barring the landlord’s insurance provider from asserting an action in subrogation.”

The Court rejected Plaintiffs arguments attempting to distinguish the applicable legal authorities and raising other irrelevant legal principles. It also rejected Plaintiff’s offered evidence that the rents paid by our client were not directly used to pay the insurance premiums.

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