Indiana Court of Appeals: Agreement to Insure is an Agreement to Provide Both Parties with the Benefits of Insurance

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by: Colin E. Flora

     The abbreviated holiday week meant only a handful of decisions were handed down by Indiana’s appellate courts. Nevertheless, there was still one decision that merits discussion: Youell v. Cincinnati Ins. Co.

     The case arose from a fire at a leased commercial property in Indianapolis. The lease required the Landlord to “maintain fire and extended coverage insurance on the Building and the Leased Premises in such amounts as Landlord shall deem appropriate. Tenant shall be responsible, at its expense, for fire and extended coverage insurance on all of its personal property, including removable trade fixtures, located in the Leased Premises.” Following the fire, the Landlord’s insurer paid the Landlord for the damage and then institute a subrogation claim against the Tenant. The Tenant contested the subrogation claim by asserting that the lease prohibited a subrogation claim by agreeing to allocate the risk of loss to insurance.

     The Tenant argued that the case was controlled by the Court of Appeals of Indiana’s 1979 decision in Morsches Lumber, Inc. v. Probst. There, the underlying contract was for the construction of a pole barn. Like inYouell, the contract required the landowner “to obtain property insurance for fire and windstorm damage and builder was required to obtain general liability insurance.” After a windstorm destroyed the barn in the midst of construction, the landowner sued the builder, claiming the builder was negligent. The landowner’s insurer joined the claim against the builder, having paid 75% of the landowner’s claimed losses. “The builder responded that regardless of any negligence on its part, neither the landowner nor his insurer as subrogee could bring an action for a loss that the parties agreed would be allocated to insurance.” The Court of Appeals agreed and limited the landowner’s “recovery to the proceeds of the insurance policy”:

[A]n agreement to insure is an agreement to provide both parties with the benefits of insurance. Individuals understand that insurance will protect them against the consequences of their own negligence and more than likely assume that if one who is a party to a contract agrees as part of his or its duties to provide insurance, that the insurance will protect both of them regardless of the cause of the loss (excepting, of course, wanton and willful acts). If that were not their intent, each would provide his or its own insurance protection and there would be no need for the contract to place the duty on one of them.

Notably, it did not matter that the insurance policy that the landowner chose to acquire was insufficient to cover the totality of his losses because he had assumed the risk of loss under the contract.

     The Court of Appeals saw no distinction between the facts before it in Youell and the ruling in Morsches Lumber. “Landlord and Tenant’s agreement to insure was thus an agreement to provide both parties with the benefits of the insurance and expressly allocated the risk of loss in case of fire to insurance.” As explained in Morsches Lumber, such an agreement shifts the risk of loss to an insurance company in return for a premium payment,” and removes the risk from either party individually. And, because the Landlord had no claim of its own against the Tenant, the Landlord’s insurer in subrogation, could have no higher rights than that of the insured Landlord.

     The insurance company did not attempt to distinguish Morsches Lumber. Instead, it relied entirely on a different, more recent decision from the Court of Appeals, LBM Realty, LLC v. Mannia. There, a landlord was able to sue its residential tenant after the tenant’s negligence led to “a fire [that] caused nearly $750,000 in damage to the apartment building[.]” There, adopting a case-by-case approach to determine when a landlord’s insurer may assert a subrogation claim against a tenant, dictating “that a tenant’s liability to the landlord’s 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.” But the case-by-case approach did not apply in Youell because LBM Realty involved a circumstance in which “[t]he lease was ‘silent’ as to the landlord’s obligation to maintain property insurance and only recommended that the tenant obtain renter’s insurance.” As the court explained:

LBM Realty is distinguishable from this case. In LBM Realty, the lease did not require the landlord to maintain property insurance and only recommended that the tenant obtain renter’s insurance; as a result, the parties’ expectations with respect to liability for damage to the leased premises was unknown. Here, however, the Commercial Lease Agreement unambiguously provides that Landlord would insure the building. Accordingly, the test set forth in LBM Realty does not apply to this case; rather, Morsches Lumber controls.

     An interesting note, though not addressed in the opinion, is that the author of Youell, Chief Judge Vaidik, was also the author of LBM Realty. Accordingly, no one was better situated to distinguish LBM Realty than the very author of Youell.

     One final note, the insurer also argued “that the lease is ambiguous because (1) the lease did not specify the amount of property insurance to be obtained (but rather left it to the discretion of Landlord) and (2) the lease did not explicitly rule out subrogation.” The Court easily rejected that argument, agreeing with the Tenant that “the contract in Morsches Lumber neither specified the amount of property insurance to be obtained nor explicitly ruled out subrogation.” 

     Join us again next time for further discussion of developments in the law.

Sources

Youell v. Cincinnati Ins. Co., ---N.E.3d---, No. 18A-CT-1466, 2018 Ind. App. LEXIS 497 (Ind. Ct. App. Dec. 28, 2018) (Vaidik, C.J.).

Morsches Lumber, Inc. v. Probst, 180 Ind. App. 202, 202, 388 N.E.2d 284, 285 (1979) (Garrard, J.), reh’g deniedtrans. denied.

LBM Realty, LLC v. Mannia, 19 N.E.3d 379 (Ind. Ct. App. 2014) (Vaidik, C.J.).

*Disclaimer: The author is licensed to practice in the state of Indiana. The information contained above is provided for informational purposes only and should not be construed as legal advice on any subject matter. Laws vary by state and region. Furthermore, the law is constantly changing. Thus, the information above may no longer be accurate at this time. No reader of this content, clients or otherwise, should act or refrain from acting on the basis of any content included herein without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue.