Subrogation - insurance premiums included in outgoings
- Published 10.08.2021
In subrogated real property recovery actions, the terms and conditions of any lease need to be given careful consideration with a view to ascertaining whether or not they impede the right of subrogation.
Example – Outgoings include insurance premiums
A question for consideration in a subrogated recovery action against a tenant for damage to real property caused by the tenant is, if the tenant has an obligation to pay insurance premiums as part of the outgoings payable under the lease, does this give the tenant standing as a beneficiary under the landlord’s policy?
Rights of subrogation only exist insofar as the insured has a right to recover against a third party.
If by reason of the terms of the lease there are any relevant terms that indicate that the Insured (landlord) and the tenant have agreed to conduct their relationship on the basis that they will both enjoy the benefits of the insurance policy in respect of a particular event or loss, and will not seek to recover from each other in that respect, then the Insurer of the landlord may not be able to pursue a subrogated claim against the tenant.
Case on point
Two single judge decisions at Supreme Court level in Australia have rejected the presumption accepted in Canada and the United Kingdom that the tenant has the benefit of insurance of leased property if the tenant has been required to pay for the insurance premiums: Linden v. Staybond (1986) NSW Conv R 55 – 308; Bit Badger v. Cunich (QSC 1996).
This article examines the findings and factual determinations in the Queensland decision in Bit Badger handed down by White J on 4 June 1996.
The Bit Badger case was concerned with fire damage to leased premises.
(a) had no obligation upon the landlord to insure the leased premises;
(b) had no requirement for the tenant to be a named insured or to have its interests noted on the landlord’s policy;
(c) had no provision stipulating how the landlord is to deal with insurance proceeds so as to render extinct or at least reduce the tenant’s liability to the landlord under any repair covenant; and
(d) obligated the tenant to pay insurance premiums as part of the outgoings.
The tenant’s only argument was that by reason of him being required to pay the premiums for the insurance policy, it was an implied term of the lease that the right of subrogation was excluded. That was rejected, on the basis that the lease in question could operate effectively without such an implied term.
Her Honour discussed the terms and conditions of the lease and identified the following six propositions which the parties had accepted as uncontroversial:
(a) the exception of fire in a repairing covenant does not exculpate a tenant from liability for damage done by a fire caused by the tenant’s negligence;
(b) the fact that the landlord has obtained fire insurance does not relieve the tenant of the obligation to make good the loss so caused;
(c) fire insurance provides indemnity to the insured for both accidental and negligently caused fires;
(d) the rights of subrogation of the landlord’s insurers are co-extensive with the rights of recovery of the landlord under the lease;
(e) if the landlord by virtue of the agreement between it and the tenant has waived or excluded its rights of recovery against the tenant, the insurer may not recover from the negligent tenant; and
(f) a covenant between the landlord and the tenant that fire insurance obtained by the landlord will be for the benefit of both will bar any right of recovery by the landlord from the tenant for loss due to the tenant’s negligence and in turn any right of subrogation by the insurer.
Her Honour considered three questions, namely:
- Whether it was an implied term of the lease that in the event of fire damage to the building, consequential losses, and loss of rent, the plaintiff's loss was to be recouped from the insurance moneys payable pursuant to the fire insurance cover referred to in the lease, and that in that event the plaintiff would have no further claim against the defendant in respect of loss or damage caused by the fire? This was rejected, on the basis that the lease in question could operate effectively without such an implied term.
- Whether the plaintiff, by virtue of having received payment pursuant to insurance cover it had effected, had been fully indemnified in the manner envisaged by the provisions of the lease and was therefore not entitled to recover damages from the defendant in addition thereto? This was rejected on the basis that there was no suggestion that the tenant was to be relieved of his obligations to repair pursuant to the terms of the lease where the landlord had obtained fire insurance and the fire was caused by the negligence of the tenant.
- Whether the lease, on its proper construction, excluded the right of the plaintiff to recover from the defendant in respect of damage from a fire caused by the negligence of the defendant? This was rejected by her Honour on the basis that on a plain reading of the lease she could find no suggestion that the tenant was to be relieved of his obligations to repair on notice where the landlord had obtained fire insurance and the fire damage was caused by the negligence of the tenant. Her Honour held that the tenant paying an ‘insurance rent’ did not have the effect he had contended for.
Her Honour gave judgment for the landlord plaintiff.
The terms and conditions of the lease need to be given careful consideration with a view to ascertaining whether or not they impede the right of subrogation.
It will also be necessary to consider the terms of the insurance policy because in Australia a third party is entitled to enforce the benefit of a contract of insurance.
For example, a lessee of real property has an insurable interest in leased property up to the value of the lessee’s obligation to make good any repairs to the property. The question that arises is whether the lessee is insured for that liability, or only in respect of its own property within the premises, such as when the insurance policy is a composite insurance policy for the respective rights and interest of each co-insured.
If a policy insures a tenant against property damage and liability (or liability alone), then the insurer will be unable to exercise rights of subrogation against the tenant because the tenant has a right under the policy to be indemnified by the insurer for its liability to make good the leased premises.
Issues for consideration will include what type of policy it is, i.e. property only or property and liability, definitions of insured and whether there is a waiver of subrogation clause.