The Supreme Court of Minnesota recently adopted a case-by-case approach to analyze whether a landlord or landlord’s insurer may sue its tenant. Ram Mutual Insurance Company v. Rusty Rohde d/b/a Studio 71 Salon, ____N.W.2d ____, 2012 WL 3822155 (2012). The decision effectively overrules the court’s decision in United Fire & Casualty Co. v. Bruggeman, 505 N.W.2d 87 (Minn. App. 1993), which followed a no-subrogation rule, barring insurers from pursuing subrogation claims for structural losses against negligent tenants in the absence of an express agreement otherwise. The current landlord-tenant bright line rule laid out by Bruggeman and its progeny was that a landlord’s insurance carrier could not subrogate against a tenant for the tenant’s negligence unless there was an express agreement placing liability on the tenant to procure insurance for that type of loss. That rule in Minnesota did not extend to nonstructural losses or uninsured losses, which could still be recovered from a negligent tenant.
In Ram Mutual, Studio 71 rented commercial space from JD Property Management, Ram Mutual’s insured. Studio 71 installed water lines that serviced pedicure chairs in violation of a term of the lease between it and JD Property Management, LLC. The water lines burst, causing damage to the property. JD Property Management made a claim to Ram Mutual, who paid the claim and then pursued Studio 71 for its negligence.
The lease between the parties contained no requirement that Studio 71 maintain insurance for water damage to the property. Studio 71 moved for summary judgment based on the bar against subrogation found in Bruggeman. Studio 71 argued that Bruggeman and its progeny required the court to dismiss Ram Mutual’s claim against it because as a tenant, it was a co-insured under the Ram policy. The district and appellate court agreed with Studio 71, stating that because the lease placed no express obligation on JD Property of Studio 71 to procure property insurance for the water damage at issue, Studio 71 was a co-insured and Ram could not maintain a subrogation action against Studio 71. Ram Mutual appealed the case to the Minnesota Supreme Court. There, the court reversed and remanded the case back to the lower court by adopting a case-by-case approach, with a focus on the intent of the parties.
In evaluating whether an insurer should be allowed to subrogate against a tenant, the court instructed lower courts to ascertain the parties’ intent and expectations as to which party bears responsibility for the loss. The court reasoned that a careful analysis of the lease agreement, as well as extrinsic evidence, should be considered in determining whether it was reasonably anticipated by the landlord and tenant that the tenant would be liable for its negligence.
The court gave examples of evidence that a lower court should consider when making an analysis:
· whether or not the lease required a tenant to purchase insurance for a particular type of loss
· whether there are lease provisions obligating the tenant to be responsible for damages it causes
· whether the contract provisions allocating responsibility are unfair or a contract of adhesion
· whether the leased units are part of a multi-unit structure, making it more difficult for a tenant to procure insurance on its unit
Insurers should look at claims that may have been closed because of Minnesota’s former rule to ascertain whether there may be claims within the statute of limitations that can be assessed under the new Ram Mutual rule. Although the Ram Mutual case was applied in a commercial context, the court did not limit its opinion to commercial landlords and tenants only, giving rise to opportunities for subrogation in residential landlord-tenant claims. The Ram Mutual decision is important as it recognized the parties’ intent while still honoring subrogation’s equitable principles and attempting to hold tortfeasors liable for their actions. Ram Mutual is good news in a legal environment that has increasingly become tougher to pursue subrogation.