Supreme Court of Vermont Rules Against Adoption of Per Se Recognition of Coinsured Status

November 2006

"Because there is no reason to suspect a landlord and tenant cannot express insurance expectations in their lease, there is no need ... to impose an insurance term when the parties are silent." Town of Stowe v. Stowe Theatre Guild, 2006 VT. 79, 904 A.2d 447 (2006).

In an August 4, 2006 decision issued by the Supreme Court of Vermont, White and Williams successfully argued against a per se rule applying coinsured status to a negligent tenant that caused property damage to rental property. In Town of Stowe v. Stowe Theatre Guild, 2006 VT. 79, 904 A.2d 447 (2006) White and Williams represented a subrogated insurer seeking to recover indemnity payments made to its insured for property damage caused by a tenant. The court held that equity alone will not allow a negligent tenant to avoid liability by claiming coinsured status where the expectations of parties did not reflect an allocation of risks or liabilities. Accordingly, a lease agreement must specifically address the landlord and tenant's responsibilities vis-à-vis insurance and/or risk for a tenant to be deemed a coinsured under a landlord's property policy according to Vermont law.

PRIOR LAW: THE SUTTON DOCTRINE AND VERMONT

In the seminal case of Sutton v. Jondahl, 532 P.2d 478 (1975), the Oklahoma Court of Appeals held that a tenant is a per se coinsured under its landlord's insurance policy unless the parties expressly agree otherwise. Because an insurer cannot subrogate against its own insured, a negligent tenant is therefore immune from subrogation claims for its own negligence resulting in property damage. After Sutton, various jurisdictions have adopted its doctrine or variations thereof. Prior to Town of Stowe, Vermont declined to adopt Sutton's per se rule but instead embraced a modified approach. See Union Mutual Fire Ins. Co. v. Joerg, 2003 VT 27, 824 A.2d 586 (2003). Accordingly, Vermont provided tenants coinsured status when the lease contained language relative to risk allocation. Thus, a property policy is judicially interpreted for the mutual benefit of both the landlord and tenant if a lease specifically requires a landlord to obtain fire insurance coverage on the rental property. Id. Town of Stowe, however, presented a novel issue under Vermont law: whether a per se rule conferring implied coinsured status to a negligent tenant should be granted in the absence of a written lease.

FACTS AND CIRCUMSTANCES OF TOWN OF STOWE

In Town of Stowe, White and Williams represented the property insurer of a municipality which permitted a theater group, Stowe Theatre Guild, use of its public auditorium to stage community performances. There was no written lease but the theater group orally agreed to pay token rent of $1.00 per year and make capital improvements to the auditorium. During a live performance, pyrotechnics used for theatrical effect inadvertently caused the auditorium's sprinkler system to discharge resulting in water-related damages. Consequently, an insurance claim was honored by the municipality's carrier. After the first-party claim was resolved, White and Williams' client, the municipal insurer, sought recovery of its payments from the theater group, the party at fault for the damages. However, the liability insurer for the theater group refused payment, claiming its insured was a coinsured under the municipality's insurance policy and thus immune from subrogation.

White and Williams then commenced a subrogation action on behalf of its client. At the close of discovery, the theater group moved for summary judgment claiming coinsured immunity under its landlord's property policy. White and Williams opposed the motion and successfully persuaded the trial court that the defendant was not a coinsured in the absence of an agreement designating insurance responsibilities. Subsequently, the parties stipulated to liability and damages and jointly moved for an interlocutory appeal to the Supreme Court of Vermont on the sole issue of alleged coinsured status. The Supreme Court granted the parties' appeal.

DECISION OF THE VERMONT SUPREME COURT

The Supreme Court of Vermont unanimously agreed with White and Williams and held that the theater group was not a coinsured under the municipality's property policy. In doing so, the Court stated:

[T]here is no evidence whatsoever to suggest that either party considered any particular allocation of responsibility or risks beyond, or different from, the duties or liabilities ordinarily attending their relationship at common law. Negligence liability arises from breach of duty of care, independent from the purchase of insurance. The lease was not ambiguous about insurance, but simply silent. There is no missing term in the contract for the Court to equitably divine, since insurance is not a necessary element to a binding landlord tenant relationship. Rather, the lease left defendant and its landlord entirely free to choose whether or not to purchase insurance against their respective risks or liabilities.

Town of Stowe, 2006 Vt. 79, 7.

The Court also addressed the defendant's plea to adopt Sutton's stringent per se standard. The Court declined this invitation stating, "[B]ecause there is no reason to suspect a landlord and tenant cannot express insurance expectations in their lease, there is no need to adopt the per se rule of Sutton to impose an insurance term when the parties are silent." Id. at 9. As such, the Supreme Court refused to add or supplement terms to a lease where the landlord and tenant do not specifically address the allocation of risk or insurance responsibilities.

CONCLUSION

The Town of Stowe case represents a victory for subrogation law because it limits imputing coinsured status to negligent tenants. In other words, property insurers issuing policies to commercial, residential or municipal landlords in the State of Vermont are not per se barred under the ominous Sutton doctrine from pursuing subrogation against a liable tenant.

David S. Huberman successfully represented the subrogated insurer in the Town of Stowe. Mr. Huberman is a senior associate in the Subrogation/Property Department. The Subrogation /Property Department is devoted to the practice of insurance subrogation in a twenty-five state territory running north from Maine to Florida and west to Illinois. For additional information please contact David Huberman at 215-864-6344 or hubermand@whiteandwilliams.com.