Insurer's subrogation rights in relation to leasehold premises revisited

In Elizabeth Frasca-Judd v Galina Golovina [2016] EWHC 497 (QB), the High Court has held, applying Mark Rowlands v Berni Inns Limited [1986] QB 211, that where a landlord insured property for the benefit of herself and her tenant, the insurer could not bring a subrogated claim against the tenant for damage caused by breach of contract and/or negligence.

Background

Mrs Frasca-Judd, the claimant landlord (the "Landlord"), let a cottage in Wiltshire to Ms Golovina, the defendant tenant (the "Tenant"), under a short-term tenancy agreement (the "Agreement"). The Agreement required the Tenant "to take all appropriate precautions […] to prevent damage […] which may be caused by frost including leaving background heat at all times during the winter months especially when Premises are vacant". The Tenant left the property unoccupied over the New Year for a period of about eighteen days. While the cottage was vacant, the pipes froze and burst causing damage to the property and contents. The cottage was also uninhabitable for a period of seven months and two weeks. The Landlord asserted that the Tenant had left the property vacant with the heating off and this caused the pipes to freeze and burst. The Landlord's insurer (the "Insurer") indemnified her for damage to the property and contents and for loss of rental income during the period when the cottage was uninhabitable. The Insurer then sought to bring a subrogated claim against the Tenant for negligence and/or breach of the terms of the Agreement. 

The issues

The Court considered one legal question and one factual question:

• The Tenant argued that as a matter of law the parties' intention was that the property would be insured for the benefit of both parties, and accordingly the Insurer could not bring a subrogated claim against her.
• There was a factual question as to whether the heating had in fact been turned off. The parties agreed that if the Tenant had left the heating on but the heating subsequently failed, the Tenant would not be liable. Likewise the Tenant agreed that if, contrary to her evidence, the heating had not been left on, the Landlord had established causation and the Tenant would be liable unless the Insurer was precluded from bringing a subrogated claim. 

The Rowlands principle

Mr Justice Holgate referred to the decision of the Court of Appeal in Mark Rowlands v Berni Inns Limited [1986] QB 211. An entire building was destroyed as a result of the negligence of a tenant of part of the building. The tenancy agreement obliged the landlord to insure the property against loss or damage caused by "insured risks" and to apply the proceeds of insurance claims in rebuilding and reinstating the property. The tenant covenanted to pay insurance rent, being the amount spent by the landlord "in effecting or maintaining the insurance of the demised premises", as well as to pay a fair proportion of the cost of insuring the whole building.

The Court of Appeal, following a review of a range of decisions of the North American courts, held that the crucial question was whether the terms of the lease precluded the landlord from recovering damages in negligence from the tenant. If so, the insurer could not bring a subrogated claim against the tenant. The Court of Appeal noted that the landlord covenanted to insure and apply the insurance monies to reinstate the property. The Court of Appeal then stated in a passage quoted by Holgate J and defined as the "Rowlands principle":

"The intention of the parties, sensibly construed, must therefore have been that in the event of damage by fire, whether due to accident or negligence, the landlord's loss was to be recouped from the insurance monies and in that event they were to have no further claim against the tenant for damages in negligence".

Principles to be derived from subsequent authorities

Holgate J then considered a Canadian case cited in Rowlands as well as subsequent English and Scottish cases. The judge summarised the principles to be derived from these cases:

1. The court should interpret the tenancy agreement to determine how the parties allocated risk.
2. If a landlord agrees to insure demised premises in return for mutual obligations owed by the tenant (including the payment of rent), this is an important indicator that the tenant need not insure the same risk and will not be liable to the landlord for loss or damage caused by risks which the landlord agreed to insure.
3. The strength of the landlord's agreement to insure as an indication that the parties intend the landlord to insure the property on behalf of both parties depends on the other terms of the tenancy agreement.
4. The strength of this indicator is greater if the tenant is contractually obliged to pay, or contribute to, the landlord's costs of insuring the premises. The Rowlands principle may apply even if the tenant is not obliged to pay or contribute to the landlord's costs of insuring the premises. The judge commented that a tenant paying a full open market rent will often be paying for or contributing towards the cost of the landlord's covenant to insure.
5. Other relevant indicators include terms which:

(a) relieve the tenant from obligations to repair damage caused by an insured risk;

(b) require the landlord to use insurance proceeds to reinstate the property or repair damage; and

(c) suspend the tenant's obligation to pay rent while damage caused by an insured risk prevents use of the property.

These are relevant factors, not prerequisites; the Rowlands principle may apply if some or all of these terms are not included in the tenancy agreement.

6. The Rowlands principle may apply to preclude a claim against a tenant for negligence notwithstanding that the tenancy agreement does not expressly exclude the tenant's liability for negligence. 

The legal issue: application of the principles to the Agreement

The judge considered the following provisions of the Agreement relevant to his analysis:

• The Agreement required the Landlord to insure the property for, amongst other things, property damage, damage to contents and loss of rent.
• Although the Tenant was not required to pay a separate insurance rent, the Tenant covenanted not to vitiate the insurance and to repay any increased premiums and reasonable expenses which the Landlord incurred if the Tenant did vitiate the insurance.
• Although there was no obligation to apply insurance proceeds in remedial work, this was not an essential requirement for the Rowlands principle to apply.
• The judge then considered the allocation of risk between the parties under the Agreement. The Tenant's obligation to pay rent was suspended if the property was rendered uninhabitable by an insured risk, even if the Tenant had been at fault (unless the Tenant vitiated the Landlord's insurance). The Tenant was also permitted to terminate the tenancy in these circumstances, even if she had been at fault (again, unless she had vitiated the Landlord's insurance). This transferred the risk of loss of rent to the Landlord. The sole remedy for the Landlord's claim for lost rent would be under the insurance policy. Holgate J stated that references to vitiation of the Landlord's insurance in this clause implied that if the insurance were not vitiated, the Landlord's "remedy is to recover his loss from the insurer and not from the tenant". The allocation of risk did not distinguish losses caused by the tenant's negligence or breach of contract.

The judge concluded that these clauses clearly showed the parties' intention was that:

"the landlord's insurance would be for the benefit of both parties and that risk in relation to the landlord's loss or damage caused by insured risks (even where the tenant is responsible) be dealt with by recourse to the insurance policy which the landlord was obliged to take out, and not as a claim for damages against the tenant".

The judge derived support for this conclusion from a special condition in the Agreement which expressly provided that the Tenant would be liable to compensate the Landlord for fire damage arising from the use of open fires within the premises. The judge considered the inclusion of this specific obligation to be consistent with his conclusion that damage from insured risks caused by the Tenant would otherwise be covered under the Rowlands principle. The Agreement did not provide that the Tenant would pay compensation or damages if she breached the heating covenant.

The judge added that parties to short-term tenancies would be likely to expect that the landlord's insurance would inure to the benefit of both parties, rather than indemnifying the landlord but allowing insurers to be subrogated to a landlord's right to sue tenants for negligence or breach of contract. If this were not the case, tenant and landlord would need to obtain separate insurance for the same risks. This would lead to unnecessary costs and negate the benefit of the clause.

The factual issue: alleged breach of the heating covenant

The Defendant gave live evidence stating that she had left the heating on. The judge considered her to be a reliable witness and stated that cross-examination did not undermine her evidence. In contrast, the insurer simply adduced an attendance note produced by an employee of the property manager. The insurer did not adduce witness evidence from that employee or from the caretaker of the property, who had found the damage. The judge considered this "surprising", particularly given the absence of an explanation from the Insurer and the substantial legal expenses involved. He concluded that the Insurer had not established on the balance of probabilities that the Tenant had breached the heating covenant. The Insurer would accordingly have lost its claim irrespective of the judge's conclusion on the legal issue.

Comment

Although it does not break new legal ground, this judgment is a helpful distillation of the principles which apply when a landlord's insurer seeks to bring a subrogated claim against a tenant who caused property damage and loss of rent through negligence or breach of contract. Each case will turn on a construction of the tenancy agreement and parties' contractual allocation of risks. In particular where a landlord has agreed with his tenant to insure the premises in return for mutual obligations by the tenant, this is an important indicator that the parties intended that the tenant would not be liable for loss or damage suffered by the landlord which he has agreed to cover. The court will also consider whether the tenant is obliged to pay for, or contribute towards, the cost of insurance incurred by the landlord and whether the landlord is obliged to apply insurance payments to reinstate or repair damaged property, although none of these indicators is definitive. If parties decide that the tenant is liable for loss arising from certain risks, this is likely to imply that losses arising from other risks are insured for the benefit of landlord and tenant.