OAM Preserves Favorable Ruling for Client as Connecticut Supreme Court clarifies when a Landlord’s Insurer has a Right of Subrogation against a Tenant
Amica Mutual Insurance Company v. Andrew Muldowney, et al., 328 Conn. 428, — A.3d —- (2018).
In an important decision this week addressing the circumstances under which a landlord’s insurer has a right of subrogation against the tenants of its insured, the Connecticut Supreme Court on Tuesday affirmed the decisions of the Connecticut Appellate Court and Superior Court. The state’s high court held that Amica Mutual Insurance Company has a right of subrogation against Andrew Muldowney and Kaylynn Tupa, the tenants of its insured, for damages caused to a leased dwelling. OAM Attorneys Susan L. Miller and Dennis M. Carnelli represented Amica throughout the proceedings.
The Court clarified its prior decision in DiLullo v. Joseph, 259 Conn. 847, 792 A.2d 819 (2002), wherein it “announced a ‘default rule’ . . . pursuant to which a landlord’s insurer has no right of subrogation [against the tenant of its insured] unless the landlord and tenant have made a specific agreement otherwise.” Amica Mutual Insurance Co. v. Muldowney, 328 Conn. 428, 430 (2018). Under DiLullo’s “default rule,” there exists a rebuttable presumption against subrogation by a landlord’s insurer. In Amica v. Muldowney, the dispute centered upon “what sort of ‘specific agreement’ is required to overcome DiLullo’s presumption against subrogation.” Id., 431. The landlord, Amica’s insured, had a written lease with Muldowney and Tupa stating, among other things, that Muldowney and Tupa would be responsible for damage to the leased dwelling, that they would hold the landlord harmless from any loss or claim arising out of their use or occupancy of the dwelling, and—for their and the landlord’s mutual benefit—they would provide and pay for $1,000,000 in liability insurance to protect against injury and property damage in or about the dwelling. The lease, however, did not state in so many words that the landlord’s insurer had a right of subrogation against Muldowney and Tupa.
The issue was ripe for clarification. On one hand, some lower courts and litigants construed DiLullo to bar subrogation unless a written lease expressly stated that “a landlord’s insurer has a right of subrogation against the tenant.” Id. On the other hand, other lower courts and litigants construed DiLullo to permit subrogation where the written lease placed the tenant on notice “that he is responsible for any damage to the leased property and . . . [allocated] to the tenant the responsibility to provide liability and property damage insurance.” Id. The Connecticut Supreme Court agreed with Amica that the latter interpretation of DiLullo is correct.
In its decision, the Court first acknowledged that the equitable doctrine of subrogation, although highly favored in Connecticut, is applied “in a more limited manner in the context of actions brought by a landlord’s insurer against a tenant.” Id., 436. It then addressed how DiLullo only bars subrogation in the “typical default situation,” a narrowly defined circumstance that the Court described as “when a lease is silent about whether a landlord or the tenant should bear the risk of damage from the tenant’s negligence and when the lease is silent about who should insure against that risk.” Id., 437. On the basis of its analysis in DiLullo, the Court clarified that “leases that expressly allocate responsibility for damage and insurance coverage . . . fall outside of the ‘typical default situation’ that we considered in DiLullo and, thus, would satisfy the ‘specific agreement’ requirement.” Id.
The Court reasoned that “a specific agreement between a landlord and tenant allocating the risk of damage and insurance coverage responsibilities resolves the two concerns that led this court in DiLullo to adopt the presumption against subrogation:” (1) Connecticut’s strong public policy against economic waste and (2) “the likely lack of expectations regarding a tenant’s obligation to subrogate his landlord’s insurer for any damage the the tenant might cause to the leased property or to other properties in a multiunit building.” Id.
As to economic waste, the Court held in a nod to the freedom of contract that “[w]hen, as in the present case, the parties expressly agree to require the tenant to purchase separate insurance coverage for his own negligence, the concerns discussed in DiLullo about encouraging waste . . . are not implicated because the parties become responsible for any potential economic waste they have created by choosing duplicate insurance coverage.” Id., 438.
As to the expectations of the parties, the Court rejected the proposition that a tenant who agreed to be responsible for damage to the leased property and to insure against that risk would not expect a landlord’s insurer to hold him responsible for damages he caused: “[w]hen the tenant specifically agrees in the lease to be responsible for his own negligence and to purchase insurance for this purpose . . . it can hardly come as a surprise that the landlord’s insurer might hold the tenant responsible for any claims the insurer pays out to the landlord for the tenant’s negligence.” Id., 439.
The Court went further. Relying on both DiLullo and Middlesex Mutual Assurance Co. v. Vaszil, 279 Conn. 28, 900 A.2d 513 (2007), a post-DiLullo case involving the right of subrogation in the landlord-tenant context, the Court clarified that “DiLullo’s specific agreement requirement may be satisfied by an agreement that the tenant will bear responsibility for his negligence and will obtain insurance for that purpose . . . The primary purpose of notifying a tenant of the potential for subrogation is to put the tenant on notice that (1) the tenant will not benefit from the landlord’s insurance, if any, for harm caused by the tenant’s own negligence, (2) the tenant will be held responsible for this harm, and (3) the tenant thus should obtain insurance.” Id., 441. Mindful of this primary purpose, the Court squarely rejected the proposition that in order to avoid DiLullo’s “default rule,” a lease must state, in so many words, that the landlord’s insurer has a right of subrogation against a tenant:
An agreement shifting liability for damages and responsibility for insurance coverage to the tenant in fact more clearly and specifically informs the tenant of his responsibilities than a plain statement authorizing subrogation by the landlord’s insurer. A statement simply authorizing subrogation merely specifies who is likely to bring the action against the tenant, but that information would be of minor significance when the tenant has otherwise expressly agreed to be responsible to the landlord for damages and to obtain insurance for the landlord’s benefit. The tenant has no convincing basis to claim unfair surprise merely because the landlord’s insurer, who covered the claim, rather than the landlord, has sought to hold the tenant responsible for the tenant’s negligence.
Having clarified the legal principles governing the right of subrogation in the landlord-tenant context, the Court determined that “the trial court and the Appellate Court properly allowed subrogation” against Muldowney and Tupa because “the parties . . . specifically allocated their ‘risks and coverages’ [by agreement] . . . in both form and substance.” Id. The provisions of the lease between Amica’s insured and his tenants, Muldowney and Tupa, were “sufficient to put [Muldowney and Tupa] on notice that, as tenants, they would be responsible for any damages and were required to purchase their own insurance policy, for the benefit of both themselves and the landlord, which covers any damages the defendants might cause. Under these circumstances . . . [they] had no expectation that the landlord or his insurer would ultimately bear responsibility for . . . [their] own negligence.” Id., 443. The Court concluded that the lease was a “specific agreement sufficient to overcome the application of DiLullo’s presumption against subrogation.” Id.
The Court also held that permitting Amica a right of subrogation was “entirely fair and consistent with the doctrine of equitable subrogation.” Id. The Court opined that neither Muldowney nor Tupa should have been surprised that the landlord or his insurer “would seek recovery from them given their negligence . . . In fact, all that arguably might have exceeded . . . [their] expectations is that the landlord had separate insurance covering his liability notwithstanding . . . [their] own promise to obtain it.” Id., 444. In ultimately affirming the judgments of the lower courts, the Court held that Amica had a right of subrogation against Muldowney and Tupa.
The decision of the Connecticut Supreme Court in Amica v. Muldowney clarifies the legal landscape for subrogated insurers. In Connecticut it is now settled that a landlord’s insurer is not barred from subrogating against a tenant merely because the lease does not state or provide that the landlord’s insurer has a right to do so. Rather, so long as (1) there is a “specific agreement” between the landlord and tenant (2) that shifts to the tenant liability for damages to the leased property and (3) shifts to the tenant the responsibility for insurance coverage protecting against the same, DiLullo does not bar subrogation by the landlord’s insurer. The “specific agreement” need not be identical to the written lease in Amica v. Muldowney and, indeed, need not necessarily be reduced to a writing. As an equitable doctrine, the right subrogation is subject of a fact-intensive analysis of the relevant circumstances. Generally speaking, however, if there exists an agreement between a landlord and tenant specifically addressing the factors identified in Muldowney, e.g., liability for damages and responsibility for insurance coverage, then the landlord’s insurer may have a right of subrogation against the tenant of its insured.