U.S. Court of Appeals affirms that implied coinsurance doctrine applies to resident of retirement home

I posted last year about a decision of the United States District Court for the District of Massachusetts in Fed. Ins. Co. v. Commerce Ins. Co., 2008 WL 4873959 (D. Mass.), in which the court held that the doctrine of implied coinsurance barred an insurer of the owner of a retirement community from bringing a subrogation action against a resident who negligently started a fire.

The implied coinsurance doctrine states that a residential tenant is an insured on a landlord's insurance even if the policy does not state that the tenant is an insured. Under that doctrine, a landlord's insurer is barred by the anti-subrogation rule from seeking reimbursement from a tenant for damages caused by the tenant. (The anti-subrogation rule bars an insurer from seeking from its own insured reimbursement of funds the insurer paid on a loss.)

The United States Court of Appeals for the First Circuit has affirmed the District Court's decision in Fed. Ins. Co. v. Commerce Ins. Co., __ F.3d ___, 2010 WL 716412 (1st Cir.)

The court first held that the lease was a residential lease so that, absent an exception, the implied coinsurance doctrine would apply.

The court then held that an exception to the implied coinsured doctrine where a lease has an express provision establishing a tenant's liability for loss from a negligently started fire did not apply. The court held that if the landlord intended to include such a provision in the lease, "it needed to be crystal clear in requiring that the tenants maintain fire insurance."

Although the lease at issue mentioned a tenant's liability for damages caused by the resident, it had no express language establishing liability for fire damages. The lease mentioned insurance, but could interpreted as making tenants liable only for losses to their personal property. Neither of the clauses explicitly mentioned fire liability.

United States District Court interprets strictly exception to doctrine of implied coinsurance

Mike Tracy of Rudolph Friedmann LLP brought to my attention a recent case in which the United States District Court for the District of Massachusetts applied the implied coinsurance doctrine.

The implied coinsurance doctrine states that a residential tenant is an insured on a landlord's insurance even if the policy does not state that the tenant is an insured. Under that doctrine, a landlord's insurer is barred by the anti-subrogation rule from seeking reimbursement from a tenant for damages caused by the tenant. (The anti-subrogation rule bars an insurer from seeking from its own insured reimbursement of funds the insurer paid on a loss.)

In Fed. Ins. Co. v. Commerce Ins. Co. Roberts, a resident of Kimball Farms retirement home, negligently started a fire in her unit. The lease stated that any loss or damage to property owned by Kimball Farms will be paid for by Roberts, and that Roberts releases Kimball farms from all liability or responsibility for injury or damage to her personal property not caused by Kimball Farms or its employees. It also stated that Roberts "shall have the responsibility of providing any insurance desired to protect against such loss."

Federal Insurance Company insured the retirement home and paid the damages resulting from the fire. It sought to recover that amount from Roberts. The court held that it was barred from doing so by the implied coinsurance doctrine.

The court noted an SJC decision stating that the implied coinsurance doctrine does not apply where a provision of a lease expressly establishes "a tenant's liability for a negligently started fire." It interpreted that phrase literally, holding that since the lease did not discuss fire specifically, the exception to the implied coinsurance doctrine did not apply.

The court also held, sensibly, that the fact that Roberts purchased insurance was irrelevant to the application of the implied coinsurance doctrine.