Landlords’ insurers and the right to pursue subrogated claims
The case of Frasca-Judd v Golovina  concerned subrogated claims by a landlord’s insurers against her tenant for damage the tenant caused to the property. However, the court held that the landlord had taken out an insurance policy in her sole name, pursuant to the lease, for the benefit of both landlord and tenant, and so the insurance company was not entitled to bring a subrogated claim at a later date, because of specific terms in the lease.
Short term lease
Ms Frasca-Judd rented a cottage to Ms Golovina on a short-term lease containing the following terms:
- The landlord agreed to insure the cottage against certain risks, including water damage but excluding fire damage caused by negligence;
- The tenant agreed to leave the heating on when she was not at the cottage.
Over the festive period, Ms Golovina left the cottage unoccupied for two weeks. During her absence, the water pipes at the property froze and burst, causing £128,000 worth of damage.
Ms Golovina claimed she had left the heating on, in accordance with the clause in the lease. However, evidence suggested this was not the case. The landlord’s insurers, NFU, brought a subrogated claim against Ms Golovina in the name of her landlord to recover the cost of repairs.
The court was asked to consider whether the landlord’s insurers were entitled to bring subrogated claims against the tenant. It acknowledged that, in certain circumstances, where landlords took out insurance for the benefit of themselves and their tenants, the tenant could be protected from a subrogated claim for negligence, as in Mark Rowlands Ltd v Berni Inns Ltd . In that case, it was decided that an insurer could not bring subrogated claims against a tenant if the lease contained an obligation to contribute to the cost of the insurance premiums, also known as ‘insurance rent’. However, whether or not this principle applied depended on the wording of the tenancy agreement in question.
Therefore, the court examined the terms of the lease between Ms Frasca-Judd and Ms Golovina for evidence that they intended the principle in Rowlands to apply to them. It found that the insertion of the clause relating to fire damage was consistent with the view that other risks would be compensated by the insurer. Furthermore, the clause obliging the tenant to keep the heating on did not spell out that she would be liable to compensate the landlord if she did not. The lease did not provide for the tenant to pay insurance rent to the landlord.
The court concluded that the landlord was not entitled to claim the cost of repairs from the tenant and therefore her insurers could not make a subrogated claim. Parties to short-term leases expect the landlord to take out the insurance policy and the landlord to be indemnified by the insurer. The court found that this conclusion satisfied the requirements of reasonableness and public policy.
This is a decision at first instance and is not binding, so it may be subject to appeal.
This is the first reported case where the courts have reached this conclusion despite there being no insurance rent clause. The lease was short term, the value of property and contents was above average and a clause had been inserted in the lease specifically in relation to fire damage and the insurable interest thereof. The case was decided on its own facts.
It is not unheard of for leases to make specific provision for certain perils and the tenant’s liability for these perils. This case would suggest that, in future, the drafting of leases needs to be more specific and landlords’ insurers should pay closer attention to the wording of the lease at inception.
The risk to landlords’ insurers is that they may not be able to recover their outlay if tenants can successfully argue that the insurance policy benefits both landlord and tenant.
If this decision at first instance is upheld, it may extend potential defences to tenants in subrogated claims from landlords’ insurers. This decision goes further than the principle set in Rowlands, by suggesting that the insurance policy can be assumed to benefit both landlord and tenant, even if no insurance rent is payable. Although the decision is not binding, insurers and advisers should now be looking at the specific terms of leases, as this decision underscores the importance of considering the specific terms of the lease in each case when contemplating a recovery.
If you have any questions about subrogated claims or any of the other issues raised in this article, please contact Natalie Blannin in the Property Insurance Litigation team on 0117 394 5048 or by emailing: [email protected].
Posted on Jul 19th, 2016 by Lyons Davidson