An appellate court in Florida cited eight provisions in a commercial lease to conclude that the landlord's insurer could bring a subrogation action against a tenant whose alleged negligence had caused fire damage to the rented building — notwithstanding that, under the lease, the tenant paid the majority of the premiums for the landlord's fire insurance.

The Case

Puccini LLC, dba 5 Napkin Burger (the “Tenant”) leased space from Lincoln-Drexel Waserstein Ltd., and Lincoln Drexel Ltd. (together, the “Landlord”) for a restaurant pursuant to a written lease agreement dated March 1, 2010, for a term of 15 years and 10 months.

On Feb. 7, 2015, a fire ignited in the Tenant's kitchen followed by another fire on the roof of the building.

At the time of the fire, the Landlord had an insurance policy from Zurich American Insurance Company that covered a portion of the damage.

Zurich said that it paid the Landlord over $2.1 million and that, as a result, it became subrogated to all of the Landlord's claims against the Tenant up to that amount.

Zurich sued the Tenant, which moved to dismiss Zurich's subrogation action, asserting that the Tenant was an implied co-insured under the policy.

The trial court agreed with the Tenant that the Tenant was an implied co-insured and ruled that, as a matter of law, Zurich was barred from proceeding with a subrogation action against the Tenant.

Zurich appealed.

The Appellate Court's Decision

The appellate court reversed.

In its decision, the appellate court explained that, generally, after an insurer pays a claim of its insured, the insurer may bring a subrogation action against the tortfeasor to recover the amount it paid under the insurance policy. However, the appellate court continued, an insurer may not maintain a subrogation action against its own insured, even if the insured's negligence caused the loss.

The appellate court added that, in the landlord/tenant context, when a tenant is found to be an implied co-insured with its landlord, the landlord's insurer is barred from bringing an action against the tenant in subrogation.

The appellate court then pointed out that, in determining whether a landlord's insurer may pursue a subrogation action against a negligent tenant, courts typically have adopted one of three views:

(1) A tenant is a coinsured of the landlord, and subrogation is unavailable, absent an express agreement to the contrary;

(2) A presumption in favor of subrogation that permits an insurer to bring a subrogation action against the tenant absent an express or implied agreement to the contrary; and

(3) A “case-by-case approach” in which there is no presumption in favor of or against subrogation but the lease as a whole is examined “to ascertain the intent of the parties as to who should bear the risk of loss for damage to the leased premises caused by the tenant's negligence.”

The appellate court observed that it had adopted the case-by-case approach, and it then examined the “lease as a whole” in this case.

The appellate court noted that paragraph 41 provided that “[r]ent shall not be abated and Tenant shall be fully responsible for all repairs and damages if Premises are partially or totally destroyed by fire or any other casualty caused by Tenant or its agents.” The appellate court said that paragraph 41 not only did not exculpate the Tenant for its own negligence, it expressly held it liable.

Next, the appellate court noted that paragraph 33 eliminated the Landlord's duty to make repairs to the “structural aspects and elements of the Building” if such repairs were “occasioned by any intentional or negligent act of Tenant, its agents, or its employees.”

In addition, the appellate court continued, the lease contained “unilateral provisions” that expressly waived the Landlord's liability and waived the Tenant's right to make a claim against the Landlord.

In particular, the appellate court pointed to paragraph 9, which stated: “The Landlord shall not be liable for any loss or damage to any of Tenant's personal property or Premises unless directly caused by the gross negligence or willful misconduct of Landlord . . . nor shall Landlord be liable for . . . damages incurred or suffered by the Tenant . . . or others occasioned by . . . fire. . . .”

Thus, the appellate court reasoned, by its “plain language,” paragraph 9 shifted the risk of loss from the Landlord, absent gross negligence or willful misconduct on its part, to the Tenant.

Moreover, the appellate court added, paragraphs 24 and 31 required the Tenant to indemnify the Landlord:

24. INDEMNITY/LIABILITY: Tenant will indemnify and save Landlord and any mortgagee of the Building harmless of and from any and all . . . damages . . . arising from or out of any occurrence in or upon the Premises . . . .

. . .

31. TENANT'S RESPONSIBILITIES: . . . Tenant shall be responsible for, and shall indemnify and hold harmless Landlord for any and all costs and expenses relating to such damages, actual or consequential . . . resulting from Tenant's failure to properly maintain the Premises and appurtenances thereto.

(Emphasis added.)

These provisions, when examined to ascertain the intent of the parties as to who should bear the risk for damage caused by the Tenant's negligence, supported allowing Zurich to proceed with its subrogation claim because the Tenant “clearly agreed to bear that risk,” the appellate court said.

The appellate court then considered the lease provisions related to the obligation to purchase insurance, observing that rather than require the Landlord to maintain insurance for the benefit of the Tenant, the lease affirmatively placed the burden on the Tenant to procure and maintain insurance for its own benefit and to name the Landlord as an additional insured:

25. INSURED LOSS OR DAMAGE: In any event of loss or damage to the Building, the Premises and/or any contents, each party shall first exhaust its own insurance coverage before making any claim against the other party. As Tenant is obligated to maintain insurance to fully cover all of its losses, in the event Tenant sustains a loss not fully covered by its own insurance, Tenant acknowledges that it is self-insured for any uncovered loss; Tenant expressly waives the right to make any claim against the Landlord or seek recovery of any damages from the Landlord or its insurance company arising out of any loss or incident for which the Tenant should have maintained its own insurance. . . .

. . .

26. TENANT INSURANCE: Tenant shall procure and maintain in force during the term of this Lease . . . , at its expense, (a) Fire/Windstorm/Property Insurance with extended coverage endorsement on Tenant's fixtures, equipment, furnishings and other contents of the Premises, for the full replacement cost of said items; and (b) Comprehensive Commercial / Public Liability insurance . . . [*11]  sufficient to protect against liability for damage claims … arising out of accidents occurring in or around the Premises in a minimum of $1,000,000.00 for each person injured; $1,000,000.00 for any one accident and $1,000,000.00 for property damage; and (c) Plate Glass Insurance. … Such insurance policies shall provide coverage for Landlord's contingent liability on such claims or losses, and shall name Landlord as an additional insured party. … Tenant shall maintain sufficient insurance to fully protect Tenant from all losses and damages; Tenant indemnifies and saves Landlord harmless for any claim for which Tenant was insurable.

Finally, the appellate court examined paragraph 45, which required the Tenant to pay, as additional rent, 70 percent of the Landlord's operating expenses, including taxes, insurance premiums, and special assessments.

The Tenant argued, based primarily on paragraph 45, that it was an implied co-insured with the Landlord under the terms of the lease because it paid a pro rata share of the Landlord's insurance premiums, but the appellate court was not persuaded.

The appellate court said that, looking at the lease as a whole to determine whether the parties intended the Tenant to be held liable for damages resulting from its alleged negligence, it was “clear” that the parties did not intend to shift the risk of loss for damage caused by the Tenant's negligence to Zurich, the Landlord's insurer. The appellate court reiterated that the lease explicitly held the Tenant liable for damage caused by its negligence or the negligence of its agents; there were provisions holding the Landlord harmless for such damage; the lease required the Tenant to procure and maintain fire insurance for damage “arising out of accidents occurring in or around the Premises[,]” and the Tenant agreed to name the Landlord as an additional insured.

The appellate court pointed out that, although the lease required the Tenant to pay a percentage of the Landlord's operating costs, including any insurance premiums, nothing in that provision explicitly required the Landlord to purchase fire insurance or to name the Tenant as an insured under the policy.

Accordingly, the appellate court — over a dissent that highlighted the fact that the Tenant paid the majority of the premiums for the Landlord's fire insurance — concluded that the Tenant was not an implied co-insured under Zurich's policy and, therefore, that Zurich could proceed with its subrogation action against the Tenant.

The case is Zurich American Insurance v. Puccini, No. 3D17-0690 (Fla. Ct. App. Feb. 6, 2019). Attorneys involved include: Derrevere Stevens Black & Cozad, and Jon D. Derrevere, and Michael B. Stevens, and Shirley Jean McEachern and Mary Grecz (West Palm Beach), for appellant. Hamilton, Miller & Birthisel, and Michelle A. Delancy and Melanie Grant, for appellee.

Steven A. Meyerowitz, Esq., is the Director of FC&S Legal, the Editor-in-Chief of the Insurance Coverage Law Report, and the Founder and President of Meyerowitz Communications Inc. As FC&S Legal Director, Mr. Meyerowitz, a member of the team that conceptualized FC&S Legal, provides daily analysis and commentary on the most significant insurance coverage law decisions from courts across the country and news regarding legislative and regulatory developments. A graduate of Harvard Law School, Mr. Meyerowitz was an attorney at a prominent Wall Street law firm before founding Meyerowitz Communications Inc., a law firm marketing communications consulting company.