Union Mutual Fire Insurance Co. v. Joerg

1. Plaintiff, Union Mutual Fire Insurance Company,
appeals from the decision of the superior court granting defendants' motion
to dismiss in its subrogation action against tenants of its insured and
their guest. On appeal, plaintiff argues that the court erred by: (1)
determining that defendants, Elmer and Jacqueline Joerg (tenants), were
implied coinsureds under their landlord's fire insurance policy, thereby
precluding a subrogation claim against them by plaintiff; (2) holding that
the tenants had no duty to supervise Francis Roy, Jacqueline Joerg's
father, who was living with them and who caused the fire underlying this
case; and (3) concluding that no direct cause of action existed against Mr.
Roy. We affirm.

2. This litigation arises from a fire that occurred on June 5,
1999 at a house owned by Mark Johnson (landlord) and rented to tenants
pursuant to a lease-purchase contract. At the time of the fire, the
tenants lived in the house with their two minor children and Francis Roy,
Mrs. Joerg's seventy-three-year-old father. The fire was allegedly caused
when Mr. Roy fell asleep or passed out while smoking. As a result of the
fire, the house was severely damaged, and Mr. Roy was killed.

3. In accordance with the Union Mutual fire insurance policy that
landlord maintained on the house, plaintiff paid approximately $97,000 to
landlord. Plaintiff then instituted a subrogation claim against the
defendants - the tenants individually and Mrs. Joerg as administratrix of
her father's estate - alleging that Mr. Roy negligently caused the fire and
that tenants were negligent in their supervision of Mr. Roy. Defendants
filed a motion to dismiss pursuant to V.R.C.P. 12(b)(6), arguing that (1)
plaintiff had no right of subrogation against tenants because they were
implied coinsureds under the landlord's policy, (2) tenants were not
negligent because they had no duty of care to supervise Mr. Roy, and (3)
plaintiff had no right of subrogation against Mr. Roy as an invitee. The
trial court granted the motion, and plaintiff subsequently brought this
appeal.

4. A motion to dismiss a cause of action for failure to state a
claim upon which relief may be granted should be denied "unless it appears
beyond doubt that there exist no facts or circumstances that would entitle
the plaintiff to relief." Amiot v. Ames, 166 Vt. 288, 291, 693 A.2d 675,
677 (1997) (internal quotation marks omitted). In reviewing the
disposition of a V.R.C.P. 12(b)(6) motion to dismiss, "this Court assumes
that all factual allegations pleaded in the complaint are true . . .
accept[s] as true all reasonable inferences that may be derived from
plaintiff's pleadings and assume[s] that all contravening assertions in
defendant's pleadings are false." Richards v. Town of Norwich, 169 Vt. 44,
48-49, 726 A.2d 81, 85 (1999). In this case, the allegations in the
complaint were supplemented by a copy of the lease. (FN2)

5. Plaintiff's first argument on appeal is that the trial court
erred in holding that tenants were implied coinsureds under landlord's
insurance policy with plaintiff and therefore plaintiff was precluded from
bringing a subrogation action against them. We reject this argument for
the following reasons.

6. Subrogation is an equitable doctrine that is based on a
theory of restitution and unjust enrichment. See Norfolk & Dedham Fire
Ins. Co. v. Aetna Cas. & Sur. Co., 132 Vt. 341, 344, 318 A.2d 659, 661
(1974). Subrogation "enables a secondarily liable party who has been
compelled to pay a debt to be made whole by collecting that debt from the
primarily liable party, who, in good conscience, should be required to
pay." Nationwide Mut. Fire Ins. Co. v. Hamelin, 173 Vt. 45, 52, 786 A.2d
1078, 1084 (2001). In the insurance context, subrogation allows an insurer
in some situations to recover what it pays to an insured under a policy by
"standing in the shoes" of the insured and suing the wrongdoer, even if the
policy lacks an express provision providing for such a claim. See R.
Keaton & A. Widiss, Insurance Law § 3.10(a)(1), at 219 (Practitioner's ed.
1988); Ulm v. Ford Motor Co., 170 Vt. 281, 296, 750 A.2d 981, 992 (2000).
However, "an insurer cannot recover by means of subrogation against its own
insured." Peterson v. Silva, 704 N.E.2d 1163, 1164 (Mass. 1999) (internal
quotation marks omitted); Keaton & Widiss, supra § 3.10(a)(1), at 221.
This prohibition extends to coinsureds under the policy, both express and
implied. See 6A J. A. Appleman & J. Appleman, Insurance Law & Practice §
4055, at 146 (1972) ("Subrogation cannot be obtained against another
insured under the same policy, even if such protection is indirect."
(Footnotes omitted.)).

7. Thus, if we find that the tenants are express or implied
coinsureds under the landlord's fire insurance policy, plaintiff will not
be able to exercise a right of subrogation against them. In reaching its
decision that the tenants were implied coinsureds, the superior court
adopted a per se rule, holding that a tenant, as a matter of law, is deemed
a coinsured under a landlord's fire insurance policy, absent an express
agreement to the contrary. This rule is best expressed in the leading case
of Sutton v. Jondahl, 532 P.2d 478, 482 (Okla. Ct. App. 1975), and has been
followed by several courts. See Alaska Ins. Co. v. RCA Alaska
Communications, Inc., 623 P.2d 1216, 1218 (Alaska 1981); Lexington Ins. Co.
v. Raboin, 712 A.2d 1011, 1016 (Del. Super. Ct. 1998); N. River Ins. Co. v.
Snyder, 804 A.2d 399, 403-04 (Me. 2002); Peterson, 704 N.E.2d at 1165; N.H.
Ins. Group v. Labombard, 399 N.W.2d 527, 531 (Mich. Ct. App. 1986); United
Fire & Cas. Co. v. Bruggeman, 505 N.W.2d 87, 89 (Minn. Ct. App. 1993);
Safeco Ins. Co. v. Capri, 705 P.2d 659, 661 (Nev. 1985); Cmty. Credit Union
v. Homelvig, 487 N.W.2d 602, 605 (N.D. 1992); GNS P'ship v. Fullmer, 873
P.2d 1157, 1163 (Utah Ct. App. 1994).

8. We note, however, that the Sutton per se rule is only one of a
number of alternative rules. Some courts have rejected the implied
coinsured rationale and allowed the insurer to bring a subrogation claim
against the tenant, absent an express agreement to the contrary. See
Neubauer v. Hostetter, 485 N.W.2d 87, 89-90 (Iowa 1992); Zoppi v. Traurig,
598 A.2d 19, 21 (N.J. Super. Cr. Law Div. 1990); Galante v. Hathaway
Bakeries, Inc., 176 N.Y.S.2d 87, 92 (App. Div. 1958); Winkler v.
Appalachian Amusement Co., 79 S.E.2d 185, 190 (N.C. 1953). The majority of
courts, however, have avoided per se rules and taken a more flexible
case-by-case approach, holding that a tenant's liability to the landlord's
insurer for negligently causing a fire depends on the intent and reasonable
expectations of the parties to the lease as ascertained from the lease as a
whole. See Page v. Scott, 567 S.W.2d 101, 103 (Ark. 1978); Fire Ins. Exch.
v. Hammond, 99 Cal. Rptr. 2d 596, 602 (Ct. App. 2000); Continental Ins. Co.
v. Kennerson, 661 So.2d 325, 327 (Fla. Dist. Ct. App. 1995); Bannock Bldg.
Co. v. Sahlberg, 887 P.2d 1052, 1055 (Idaho 1994); Dix Mut. Ins. Co. v.
LaFramboise, 597 N.E.2d 622, 625 (Ill. 1992); Britton v. Wooten, 817 S.W.2d
443, 445-47 (Ky. 1991); Rock Springs Realty, Inc. v. Waid, 392 S.W.2d 270,
277-78 (Mo. 1965); Agra-By-Products, Inc. v. Agway, Inc., 347 N.W.2d 142,
146-50 (N.D. 1984); United States Fire Ins. Co. v. Phil-Mar Corp., 139
N.E.2d 330, 332 (Ohio 1956); 56 Assocs. v. Frieband, 89 F. Supp. 2d 189,
194 (D.R.I. 2000); Tate v. Trialco Scrap, Inc., 745 F. Supp. 458, 467 (M.D.
Tenn. 1989); Monterey Corp. v. Hart, 224 S.E.2d 142, 147 (Va. 1976);
Rizzuto v. Morris, 592 P.2d 688, 691 (Wash. Ct. App. 1979). Of the courts
following this approach, most that have denied subrogation have done so
because of the existence of specific provisions in the lease, such as a
provision obligating the landlord to purchase fire insurance on the
premises or a clause excepting fire damage from the tenant's responsibility
to maintain or return the property in a good state and condition. See
Continental Ins. Co., 661 So.2d at 328 (lease provided that damage caused
by fire "shall be repaired by and at the expense of Lessor"); Safeco Ins.
Cos. v Weisgerber, 767 P.2d 271, 272 (Idaho 1989) (lease required tenant to
maintain premises in a good state and condition of repair "damage by . . .
fire excepted"); Rock Springs Realty, Inc., 392 S.W.2d at 271 (lease
required tenant to maintain premises in good condition, "loss by fire . . .
excepted"); United States Fire Ins. Co., 139 N.E.2d at 333 (lease provided
that tenant would pay possible increase in fire insurance premiums due to
tenant's activities); Agra-By-Products, Inc., 347 N.W.2d at 144 (lease
required lessor to keep insurance and lessee to reimburse lessor for
premiums); Tate, 745 F. Supp. at 460 (lease required lessor to purchase
insurance coverage on building); Monterey Corp., 224 S.E.2d at 144 (lease
contained "except fire" provision); see also Britton, 817 S.W.2d at 446
(subrogation allowed because there was no clause requiring purchase of fire
insurance by landlord); 56 Assocs., 89 F. Supp. 2d at 194 (subrogation
allowed where lease did not address question of fire insurance).

9. Although we noted in Aetna Casualty & Sur. Co. v. Barasch,
158 Vt. 638, 638-39, 603 A.2d 380, 380-81 (1992) (mem.), that the Sutton
rule is one possible approach, we find the case-by-case approach to be the
most consistent with Vermont law. In determining the rights of the parties
to a lease, this Court has consistently looked to the intent of the
contracting parties as ascertained from the terms of the lease. See
Fairchild Square Co. v. Green Mountain Bagel Bakery, Inc., 163 Vt. 433,
436, 658 A.2d 31, 33 (1995); Lamoille Grain Co. v. St. Johnsbury & Lamoille
County R.R., 135 Vt. 5, 8, 369 A.2d 1389, 1390 (1976); Spero v. Bove, 116
Vt. 76, 90-92, 70 A.2d 562, 570-71 (1950). Our decision in Fairchild
Square is particularly instructive here. It involved a subrogation claim
by the landlord's insurer (brought through its insured, the landlord)
against the tenant and the tenant's employee for damages from fire caused
by the employee. We held that the tenant was protected against such a
claim because of specific provisions in the lease pertaining to fire
insurance. Fairchild Square Co., 163 Vt. at 436-40, 658 A.2d at 33-35. We
did not rely on a per se rule; to the contrary, we stated explicitly that
"[w]hether landlord waived its right to recover against tenant for
negligently caused fire damage depends on the intent of the contracting
parties as determined by the terms of the contract." Id. at 436, 658 A.2d
at 33. The dissent echoed this emphasis on the intent of the parties,
stating that "[w]e should enforce the contract that was made, not one we
wish they made." Id. at 444, 658 A.2d at 38 (Dooley, J., dissenting).

10. Holding that the presence of a provision in the lease
requiring the landlord to carry fire insurance on the leased premises is
determinative on the issue of subrogation is in line with the public policy
considerations underlying this rule that we recognized approvingly in
Fairchild Square. First, if the landlord and tenant agree that one of the
parties will purchase insurance, "it is only natural that they assume that
the insurance is for their mutual benefit and that the parties will look
only to the insurance for loss coverage." Id. at 443, 658 A.2d at 37
(quoting Tate v. Trialco Scrap, Inc., 745 F. Supp. 458 (M.D. Tenn. 1989)).
Second, where the lease expressly requires the landlord to maintain
insurance on the premises, the landlord will take the cost of the insurance
into account when setting rent. Therefore, since "the lessee ultimately
pays for insurance through his rent checks . . . simple equity would
suggest that he be able to benefit from that payment unless he has clearly
bargained away that benefit." Id. Finally, this rule prevents the
economic inefficiency that would result from having multiple insurance
policies - with multiple premiums - on the same building. Id.

11. We therefore hold that, where the lease requires the landlord
to carry fire insurance on the leased premises, such insurance is for the
mutual benefit of landlord and tenant, and, as a result, the tenant is
deemed a coinsured under the landlord's insurance policy and is protected
against subrogation claims by the landlord's insurer.

12. Although we disagree with the trial court's reasoning, we
agree with its result. See Sorge v. State, 171 Vt. 171, 174 n.*, 762 A.2d
816, 818 n.* (2000) (Court may affirm correct result below but use
different rationale). We conclude that the trial court was correct in its
finding that the lease contemplates that the landlord will procure fire
insurance on the premises. Paragraph 11 of the lease specifically provides
that "[t]he landlord shall be responsible for maintaining the insurance,
taxes and mortgage of the property." (Emphasis added). Paragraph 3 made
the tenants responsible for a "tenants liability policy." The superior
court found that the former paragraph included fire insurance on the
premises, and the latter referred to insurance on liability "to guests,
invitees or others entering the property who suffer injury due to tenant's
negligence" as well as fire coverage for the tenants' personal property.
We agree with the superior court that the provisions are plain and
unambiguous, and, as such, must be given effect and enforced in accordance
with their language. KPC Corp. v. Book Press, Inc., 161 Vt. 145, 150, 636
A.2d 325, 328 (1993). In fact, the landlord complied with the requirement
of paragraph 11 and purchased fire insurance on the premises through
plaintiff.

13. We therefore hold that the superior court correctly granted
the motion to dismiss with respect to tenants. In view of our holding, we
need not reach plaintiff's second argument, that the court erred in holding
as a matter of law that tenants were not responsible for the actions of Mr.
Roy under a failure to supervise theory. Since plaintiff cannot bring a
subrogation action against tenants for the losses paid to landlord, we do
not reach the issue of whether its liability theory is valid. See
Continental Ins. Co. v. Bottomly, 817 P.2d 1162, 1165 (Mont. 1991) (because
subrogation was denied, court declines to reach issue of negligence).

14. Finally, plaintiff argues that the trial court erred in
concluding that no cause of action existed against Mr. Roy, and now his
estate, because he was not a tenant and the implied coinsured rationale
does not apply to him. (FN3) The superior court rejected this claim,
concluding that we held in Barasch, 158 Vt. at 639, 603 A.2d at 380, that
the insurer cannot bring a subrogation action against a negligent guest of
a tenant. Again, we agree with the superior court's result, but not its
rationale.

15. The facts and claims in Barasch are somewhat similar to those
in this case, but the holding is not determinative to the issue before us.
Barasch involved a subrogation claim brought by a condominium owner's
insurer against the owner's employee and the employee's adult daughter,
invitees of the owner. The insurer sought to recover sums paid to the
owner as a result of a fire allegedly resulting from the invitees'
negligence. Without addressing the cause of action against the daughter,
and without relying on the insurance issue resolved in this case, we held
that the insurer had no right of subrogation against the father because the
insurer presented no evidence that would suggest that the father's actions
directly caused the fire, id. at 638, 603 A.2d at 380, and made no showing
that the father could be held responsible for fire allegedly caused by his
adult daughter's negligence, id. at 638-39, 603 A.2d at 380. Nowhere did
we hold that subrogation was prohibited against either the father or the
daughter because of their status as invitees.

16. Although Barasch does not govern, we conclude that family
members living in the leased premises should be included as implied
coinsureds. The complaint in this case stated that Francis Roy was
"living" in the rented premises with his daughter and her family. He was
in the same position as tenants' children. We would greatly undermine our
holding that a subrogation action cannot be brought against the tenants
because the lease showed that the landlord was responsible for fire
insurance if we allowed the subrogation action to be brought against family
members living in the home. For purposes of the implied coinsured
rationale, it makes no difference that the fire was started by Mr. Roy as
opposed to one of the Joergs.

17. This result is supported by the reasoning of Fairchild Square
Co. where we held that the insurer could not bring a subrogation action
against either the corporate tenant or its employee. We reached that
result based primarily on policy grounds and the expected scope of
coverage. See 163 Vt. at 442-43, 658 A.2d at 36-37. For much the same
reasons, we conclude that plaintiff cannot bring a subrogation action
against tenants' resident family members.

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