Many subrogation specialists are aware of the potential issues posed by the Sutton Doctrine. Decided by the Oklahoma Court of Appeals in 1975, Sutton v. Jondahl, 532 P.2d 478 (Okla. App. 1975), holds that, absent an express agreement to the contrary, a tenant is presumed to be a co-insured under the landlord’s fire insurance policy. Because subrogation is forbidden against one’s own insured, the Sutton Doctrine can bar landlord/tenant subrogation actions. West Virginia, like many states, however, has adopted its own approach to landlord/tenant subrogation.
In Farmers & Mechanics Mutual Insurance Company v. Allen, 778 S.E.2d 718 (W. Va. 2015), the Supreme Court of Appeals of West Virginia considered whether a landlord’s insurer has a right of subrogation against a tenant who caused damage to the leased premises under the following circumstances:
Michael O’Connor (Michael) and Shelly O’Connor (Shelly) owned a single family home in Keyser, West Virginia. Shelly entered a lease-to-own agreement with Marcus Allen (Allen) in December 2009. The lease provided that Allen would pay Shelly $625.00 each month for fourteen years, of which $555.00 would go towards “mortgage, insurance, and taxes.” The lease also provided that Allen was “solely responsible” for damages made to the house, and that damaging the house was grounds for eviction. Farmers & Mechanics Mutual Insurance Company (F&M) insured the property pursuant to a homeowner’s insurance policy. The F&M policy listed Shelly as the named insured, and Michael as an additional insured. Its definition of “Insured” did not include Allen. On Shelly’s advice, Allen purchased a renter’s insurance policy from State Auto Insurance (State Auto) for the period March 10, 2010 to March 10, 2011. On May 6, 2010, Allen’s cooking resulted in a grease fire that caused extensive property damage. Allen tragically died in the fire.
Allen’s estate filed a wrongful death claim against Michael, arguing that the landlord had a duty to install smoke detectors in the home. Michael’s insurer, F&M, asserted a counterclaim against the estate to recover the payments it made under the homeowner’s policy. In response, State Auto hired counsel to file a counterclaim on behalf of Allen’s estate. The parties then filed cross-motions for summary judgment on the issue of whether Allen was insured under the homeowner’s policy which, if answered in the affirmative, would bar subrogation.
The Circuit Court of Mineral County, West Virginia reasoned that, because the lease allocated a portion of Allen’s rental payments to insurance, Allen was an “equitable insured” under the homeowner’s policy. Thus, the court granted the estate’s motion for summary judgment. F&M filed an appeal with the Supreme Court of Appeals.
On appeal, the Supreme Court of Appeals recognized that an insurance policy is a contract between the insurer and the named and definitional insureds contained in the policy, and that the rights arising from the policy are controlled by the principles of contract law. Provisions found to be clear and unambiguous, the court ruled, are not subject to judicial construction or interpretation. Finding that the F&M policy clearly and unambiguously stated that the insurance contract was between F&M and the O’Connors, the Supreme Court of Appeals held that the circuit court erred by enlarging the terms of the F&M policy to afford coverage to Allen, who was not a named or definitional insured, rather than giving full effect to the policy’s clear and unambiguous language.
The Supreme Court of Appeals rejected the circuit court’s “equitable insured” ruling, holding that a tenant, simply by having an insurable interest in the leased property, is not a co-insured on the landlord’s fire insurance policy. Such a ruling, the court stated, would be patently unfair to F&M because the insurer never agreed to insure Allen. The court also found that naming Allen as an “equitable insured” would give State Auto a windfall because the carrier would avoid responsibility for damage caused by Allen, whom it agreed to insure. The Supreme Court of Appeals reversed the circuit court’s decision, and allowed F&M to maintain its subrogation action against Allen’s estate.
Farmers & Mechanics Mut. Ins. Co. represents a departure from the Sutton Doctrine, and is a decision that is favorable to subrogating insurers. However, subrogation specialists handling cases in West Virginia should still be mindful of the Sutton Doctrine and confirm that the language of the applicable lease does not change the Farmers & Mechanics Mut. Ins. Co. analysis by expressly attempting to elevate a tenant to the status of an insured on the landlord’s fire insurance policy.