An Indiana Court of Appeals decision issued on October 28, 2014 changes the landscape of landlord/tenant subrogation in the Hoosier State. For years, Indiana allowed an insurer to bring a subrogation claim against a tenant. LBM Realty, LLC v. Mannia, 981 N.E.2d 569 (Ind. App. 2012). A 1996 Court of Appeals decision appeared to announce that Indiana had avoided an inflexible application of the “Sutton Rule” and taken a more flexible case-by-case approach, holding that a tenant’s liability to the landlord’s insurer for negligently causing a claim depends on the intent and reasonable expectations of the parties to the lease as ascertained from the lease as a whole. United Farm Bureau Mut. Ins. Co. v. Owen, 660 N.E.2d 616 (Ind. App. 1996).
However, in 2012, that same Court of Appeals backtracked and clarified that while Indiana law does not preclude a subrogation action by a landlord’s insurer against a tenant, the Court in Owen did not adopt a case-by-case approach. Rather, Owen merely affirmed a trial court’s entry of summary judgment in favor of a tenant and against an insurer who sought subrogation for a claim it paid to its insured (who was the tenant’s landlord) because the specific language of a lease provision at issue released the tenant from property damage liability to the landlord, thereby precluding the insurer – who steps into the shoes of its insured – from raising a subrogation claim. Mannia, supra. The Mannia decision was reviewing a trial court order which declared that Indiana had adopted the “no subrogation” approach and noted, that in Owen, the Court of Appeals did not discuss or adopt any of the three subrogation approaches, and the question of whether Indiana would adopt a rule regarding subrogation claims by a landlord’s insurer against a negligent tenant was never raised. The Mannia decision also noted that question had not been raised in other cases where an insurer brought a subrogation claim against an insured’s tenant for property damage. Cincinnati Ins. Co. v. Davis, 860 N.E.2d 915 (Ind. App. 2007); St. Paul Fire & Marine Ins. Co. v. Pearson Construction Co., 547 N.E.2d 853 (Ind. App. 1989), trans. denied.
On October 28, 2014, Indiana for the first time officially announced that whether a subrogation suit could be brought by a landlord’s insurer against a negligent tenant was to be determined by a case-by-case approach based on the reasonable expectations of the parties as reflected in the lease agreement. LBM Realty, LLC v. Mannia, 2014 WL 5461791 (Ind. App. 2014). The Indiana Court of Appeals held that whether a landlord’s insurer may bring a subrogation action against a negligent tenant for damage to tenant’s leased premises is determined under the case-by-case approach; a finding that a tenant’s liability to the insurer for damage-causing negligence depends on the reasonable expectations of the parties to the lease as ascertained from the lease as a whole and any other admissible evidence. In determining the expectations of the parties as articulated in the lease, courts should look for evidence indicating which party agreed to bear the risk of loss for a particular type of damage in question.
In July 2010, a fire caused $743,402.86 in damages at the Summer Place Apartments in Granger, Indiana, owned by LBM. Mannia was a tenant in the Apartments, having signed a one-year lease in March 2010. Included within the lease were several relevant lease provisions, condensed and paraphrased as follows:
After the fire at the Apartments, the insurer filed a subrogation action in LBM’s name against Mannia, alleging in its complaint that Mannia breached her contract with LBM in “one or more of the following ways”:
In regard to its negligence claim, LBM repeated (1) and (2) above and also alleged that Mannia had “otherwise acted carelessly and negligently.” Mannia filed a motion to dismiss LBM’s complaint, discussing the three different approaches used by courts around the country to address subrogation claims of landlord’s insurers against negligent tenants, including:
Mannia convinced the trial court to apply approach number one, dismissing the case because Mannia was an “additional insured” under LBM’s insurance policy. LBM appealed and, in 2012, the Court of Appeals reversed and remanded because the trial court did not test the complaint against the backdrop of the law that existed. Further discovery occurred, and it was agreed and stipulated that:
In 2013, Mannia filed a Motion for Summary Judgment, which the trial court granted, and LBM appealed again. This time, the Court of Appeals rejected the legal fiction of the Sutton Rule and specifically adopted the “middle-ground” case-by-case approach, which eschews presumptions that a tenant is or is not a co-insured of the landlord, and requires an examination of the lease as a whole to determine the parties’ reasonable expectations as to who should bear the risk of loss when a tenant negligently damages the leased premises. Although it provides less predictability than either the pro- or no-subrogation approaches, the Court of Appeals found that this approach best effectuates the intent of the parties by simply enforcing the terms of their lease. It reversed the trial court again, allowing subrogation against Mannia, specifically because the lease in question permitted subrogation.
For a thorough review of the law regarding the ability of a landlord’s insurer to subrogate against a careless tenant, see the chart found on our website.