In a commercial landlord-tenant subrogation action by the landlord and commercial business association’s insurer, Partner David Webster and Senior Counsel Eugene Zinovyev recently obtained a published appellate opinion affirming the granting of a Summary Judgment Motion in favor of 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 underlying 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 appellate Court agreed with the trial court with all arguments and entered Judgment against Plaintiff’s suit seeking $3.5 million in paid proceeds.

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 Appellate Court issued a 16-page Order affirming 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. After the Appellate Court granted our request to publish the opinion, the Appellants petitioned the Supreme Court of California to de-publish. In response, the Supreme Court denied the request and declined to review the matter further.

Importantly, this Opinion establishes new law confirming and clarifying that that an insurer of an Owners Association is bound by the leases entered into by members of that Association and that the CC&Rs for an Association also bind an insurer with respect to limitation on subrogation actions.