Rausch v. Allstate

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IN THE COURT OF APPEALS OF MARYLAND Misc. N o. 6 September Term, 2004 ______________________________________ FELIX RAUSCH, ET UX. v. ALLSTATE INSURANCE COMPANY ______________________________________ No. 128 September Term, 2004 ______________________________________ HARFORD MUTUAL INSURANCE COMPANY v. JANICE D. HARKINS ______________________________________ Bell, C.J. Raker Wilner Cathell Harrell Battaglia Greene, JJ. ______________________________________ Opinion by Wilner, J. ______________________________________ Filed: September 8, 2005 It is not unco mmon for a fire insu rance polic y to contain a subrogation clause that permits the insurer to recover, from any person (other than the insured) who causes a covered loss under the policy, amou nts p aid b y the in sure r by reason of that loss. Under such a clause, the insurer stands in the shoes of the insur ed and ca n seek to rec over those amounts to the same extent that the insured could have recovered them from the person causing the loss, had there be en no in suranc e. The question before us in the two cases that we have consolidated for appellate purposes is under what circumstances, if any, the insurer may pursue its contractual right of subrogation against a tenant of the insured who negligently damaged the insured premises and thereby caused the loss. Although, as we shall see, most of the courts that have addressed the issue have ended up holding in the tenant s favor, denying recovery, the theories used to suppo rt that resu lt vary. Part of th e dif ficu lty in agreeing on a single theory to support the result arises from the differing circumstances underlying the cases the wide variety in lease provisions that define the land lord-ten ant relatio nship, whether the leased property is commercial or residential, whether the lease is of a single-unit structure or part of a mu lti-unit structure. In large measure, the issue presents a clash between what a dire ct application of basic and we llestablished legal principles would produce and what the courts have com e to regard as either imprac tical or in equitab le to tena nts, or at le ast certa in classe s of ten ants. THE CASES BEFORE US Rausch In Janu ary, 1999, John Dunlop purchased 5037 Netherstone Court, in Columbia, as a piece of rental property. The proper ty was a s ingle-f amily dw elling. In September, 1999, he appointed America n Re lo Realty, Inc. to manage the property. The agreement between Dunlop and American Relo required Dunlop to maintain fire insurance for damage that might arise from the occupa ncy or mana gement o f the hous e. In Marc h, 2000, A merican R elo leased the property to the Rausches, for a period of six months, at a rental of $1,500/month. Included in the written lea se were p rovisions tha t: (1) Prohibited the tenants from doing anything on the property in contravention of any haza rd insura nce p olicy i n force o r wh ich w ould increase the p remium on su ch a p olicy; (2) Required the tenants to indemnify the owner for any liability for injury, death, property damage, or other loss arising within those portions of the property within the exclusive control of the tenants or occasioned by any act or omission of the tenants; (3) Required the tenants to surrender the property at the end of the lease in the same condition as when received, ordinary wear and tear excepted; (4) Declared, with respect to the portions of the property w ithin the exclusive control of the tenants, that the owner was not responsible for any loss or d amage to goods or c hattels placed in the prope rty or for person al injury to the tena nts and that it w as the respo nsibility of the tenants to obtain and pay the costs of any insurance to protect Tenant from loss or damage to Tenan t s personal p roperty plac ed on, in o r abo ut the Pro perty, and to m aintain -2- adequate personal liability insurance. (Emph asis added ); (5) Declared that, if the property were rendered totally uninhab itable by fire or certain other causes, or if the property were partially damaged and the owner elected not to repair the damage , the tenancy w ould imm ediately termina te and all rent w ould cease as of the da te of the occurrence; and (6) Made the tenants responsible for any and all damages to the Property caused by any act of neg ligence of Tenant or other resid ents of the p roperty as well as for the cost of all repairs, replacements, and related services if the need for the same resulted from the negligence or misuse by the tenants. Although Item (4) above clearly required the Rausches to maintain adequate personal liability insurance and insurance to protect their property, and Item (1) anticipated that the owner would likely have a fire insurance policy of his own in force, no thing in the lea se itself required the owner to maintain such insurance, and there is no indicatio n that the tena nts were aware of that r equirem ent in the mana geme nt agree ment. The owner, in fact, purchased a fire insurance policy from Allstate Insurance Company that remained in force during the tenanc y. On April 12, 2 000, M s. Rausch caused a f ire in the prop erty by leaving a fla mmable item on the rear burner of the electric range that had been turned to high and then leaving -3- the house. The fire caused nearly $152,000 in damage. Allstate paid $138,000 to Dunlop.1 The Allstate policy contained a subrogation clause, which provided that (1) if Allstate paid any loss, the insured perso n s rights to recover from anyone else become ours up to the amount we have paid, (2) the insured person must protect these rights and help us enforce them, but (3) the insured could waive your rights to recover against another person for loss involving the property covered by this policy if the waiver was in writing and was given prior to the date of loss. There is no indication that Dunlop d irectly made such a waive r. Exercising its rights as subrogee, Allstate sued the Rausches in U .S. District Court to recover the $138,000 it had paid to Dunlop. The complaint alleged both negligence and breach of contract. The Rausches moved for summary judgment, arguing that the law prohibited subrogation actions by a lan dlord s insu rer against the landlord s ten ants on the ground that the tenants were regarded as implied co-insu reds. Both side s acknow ledged tha t, although there were cases on the issue around the country, this Court had never addressed it. Because it was an u nanswe red questio n in Ma ryland, the cou rt, invoking the Maryland Uniform Certification of Questions of Law Act (Maryland Code, § 12-601 through 12-613 of the Cts . & Jud. Proc. Article) (CJP) and Maryland Rule 8-305, certified the following two questions: (1) Does Maryland law recognize the doctrine of implied coinsureds so that a tenant is an implied co-insured of the 1 Althoug h the policy pro vided $17 0,000 of in surance, no issue is raised h ere as to the $138,000 that was paid. -4- landlord? (2) If so, is Allstate barred from bringing the instant subrogation action against tenants of its insured? We shall address those questions as framed b y the court, but, because theories other than implied co-insured have been used by courts to preclude subrogation actions against tenants, we sh all, in our respon se, take account of those theories as well. The statute does permit this Court to reformu late the certified questions so long as ou r answer p roperly disposes of the q uestion s as certif ied. See CJP § 12 -604; also Mardirossian v. Paul Revere Life, 376 Md. 640, 647 n.4, 831 A.2d 60, 64 n.4 (2003) (citing Piselli v. 75th Street Medical, 371 Md. 18 8, 202 n.4, 808 A .2d 508, 516 n.4 (20 02)). Harkins In May, 1999, Janice Harkins entered into a one-year lease for Apartment 28 in the Oak Court Apartments, a multi-unit apartment development. The lease, signed on behalf of the owner by its leasing agent, United Homes, Inc., ran from June 1, 1999 through May 31, 2000. Inclu ded in the w ritten lease w ere provisio ns that: (1) Made available a storage space for Ms. Harkins but, in that provision, stated: Resident expressly agrees that landlord shall not be liable for any loss, damage or injury to property. Tenant shall have insurance coverage for this storage area as well as Renter s Insurance for the apartment. Landlord is not responsible for such loss which m ay be incurred. (Emph asis added); (2) Required the tenant to reimburse the landlord for any loss, damage or actual cost -5- of repairs or service caused in the apartment or apartment complex by improper use or negligence of tenant or tenant s guests or occupants ; and (3) Required the tenant, when moving ou t, to surrender the apartment in the same condition as when received, rea sonable wear expected. Reasonable wear means occurring withou t neglige nce, ca relessne ss, accid ent, or ab use. Other than the referen ce in Item (1) to ren ter s insu rance, which Ms. Harkins obtained, the lease w as silent w ith respe ct to insu rance. In fact, the owner obtained a fire insurance policy from Harford Mutual Insurance Company that was in effect during Ms. Harkins s tenancy. The policy contained a subrogation clause, stating that, [i]f any person or organization to or for whom we make payment under this policy has rights to recover damages from another, those rights are transferred to us to the extent of our payment and that the payee must do everything necessary to secure our rights and must do nothing after loss to impair them. The clause permitted the insured to waive its rights against another party in writing (1) prior to a loss, or (2) after a loss if the party is a tenant. The owner never directly waived its rights against Ms. Harkins. On March 29, 2000, Ms. Harkins lit one or more scented candles on a nightstand in her bedroom and then left the room to answer the telephone. While on the telephone, the smoke alarm went off, but Ms. Harkins thought it had malfunctioned. When she smelled smoke, Ms. Harkins investigated and discovered that her bedspread was on fire. After an unsuccessful attempt to extinguish the fire, she left the apartment. The fire and smoke -6- caused extensive damage to the second floor of the apartment building. Harford paid over $83,000 to repair the damage and then, e xercising its righ ts as subrogee, sued Ms. Harkins in the Circuit Court for Harford County to recover the amount it had paid. Harkins moved for sum mary judgment on the grounds that (1) as a matter of law, she was not negligent in causing the fire, and (2) the subrogation clause relied on by Harford was unenfor ceable because (i) she was an implied co-insured under the policy, (ii) the clause was against public polic y, and (iii) it would be inequita ble to enforce the clause against her. The Circuit Court was unable to conclude that there was an absence of negligence, as a matter of law, but, relying on the holding and pronouncements in Sutton v. Jondahl, 532 P.2d 478 (Okla. Ct. App. 1975) and other cases adopting those pronouncements, found that Harkins was an implied co-insured under the Harford policy and that, as a result, the subrogation clause could not be enforced against her. On that ground, it entered summary judgment for Ms. Harkins. Harford appealed, and we granted certiorari on our own initiative prior to proceedings in the Court of Special Appeals and consolidated the case with Rausch for argument and decision. DISCUSSION Introduction These cases involve the coalescence of at least five independent principles of law, each fairly well-established. The first is simply an application of general negligence -7- principles to the landlord-tenant relationship. It has long been recognized , although there are a dearth of cases in M aryland, that, in the absence of any valid contractual provision to the contrary, a tenant is liable in tort to the landlord if and to the extent that the tenan t negligently damages the land lord s p roperty. See Pearson v. Wiltrout, 17 Md. App. 497, 302 A.2d 678 (1973); Liability of Tenant for Damage to the Leased Property Due to His Acts or Neglect, 10 A.L.R.2d 1012, 1014 (1950); 2 1 F RIEDMAN ON L EASES § 9.9 (4 th ed. 1997). The Legislature has recognized and given effect to that principle . See, for example, Maryland Code, § 8-203 of the Real Property Article, permitting residential landlords to demand security deposits from tenants to protect, among other things, against damage to the leased premises and, upon termination of the lease, to retain amounts for damage to the leased premis es in ex cess of ordina ry wear a nd tear. A second p rinciple, which is a corollary to the first, is that, although State law prohibits clauses in a lease that purport to exonerate a landlord from liability for injury or loss caused by the landlord s negligence (see Maryland C ode, § 8-10 5 of the R eal Property Article), there is no flat prohibition against a clause exonerating a tenant from liability for loss caused by the tenant s negligence or a provision waiving a landlord s right to sue a tenant for damage negligently cau sed by the tena nt. If a lease co ntains such a provision, 2 It may be stated as a basic pr oposition in the law of landlord an d tenant tha t it is the duty of the tenant to exercise ordinary care, in the use of the leased premises or property, not to cause any material and permanent injury thereto over and above the ordinary wear and tear, and th at he is liable to the landlord in dama ges for any such injury unnecessarily resulting from his wrongful acts or his failure to exercise such care. Id. -8- expressly or impliedly, and is otherwise valid, that pro vision may effectively negate any commo n law tort liab ility on the part of th e tenant. The third principle is an application of basic contract law to the landlord-tenant relationship. Just as a lease may negate a tenant s com mon law tort liabil ity, it m ay, independ ently of tort liability, contractually impose liability on the tenant for d amage to the leased premises resulting from the tenant s negligent act or o mission, eithe r by a specific lease provision to that effect or by a covenant on the part of the te nant to re turn the p rope rty, save for o rdinary wear and tear, in the same con dition as the te nant receiv ed it. 3 The fourth and fifth principles arise from the law of subrogation and its application to subrogatio n clauses found in insurance policies. It has long been recognized, as a legal principle, that an insurer may not recover from its insured, or a co-insured, as subr ogee. See Wager v. Providence Ins. Co., 150 U .S. 99, 1 10, 14 S . Ct. 55, 5 8, 37 L . Ed. 1013, 1018 (1893). In Aviation Ins. Co. v. Barclay, 237 Md. 318, 327, 206 A.2d 119, 123-24 (1965), we noted, albeit in dicta, that [t]he authorities are in complete accord, and it is conceded in the instant case, that the insurer cannot recover, as subrogee, against its ins ured, and that is clearly the case . See also R. Keeto n and A . Widiss , INSURANCE L AW, 341 (1988). Indeed, 3 In that re gard, see Maryland Code, § 8-113 of the Real Property Article, which provides th at a coven ant by the tenan t to restore, surre nder, or yield the le ased prem ises in good repair does not bind the tenant to erect or pay for any building destroyed by fire or otherwise without negligence or fault on the tenant s part. The implication from that statute is that such a clause, standing alone and in the absence of any inconsistent provisio n, will obligate the tenant to restore prem ises damaged as a re sult of the tenant s negligenc e or fault. -9- any other construction would be absurd because, as subrogee, the insurer stands in the shoes of the insur ed, it would essentially involv e the insured suing him self to recover damages he sustained by his own conduct. Those courts which find a tenant to be an implied co-insur ed of the land lord use that p rinciple t o deny rec overy. Apart from that legal limitation, equitable principles app ly to subrogation. In Bachmann v. Glazer, 316 Md. 405, 412, 559 A.2d 365, 368 (1989), citing a number of earlier cases, we observed that subrogation is founded on the equitab le power s of the cou rt and is intended to provide relief against loss and damage to a meritorious creditor who has paid the debt of anothe r. It is, we said, a legal fiction whereby an obligation extinguished by a payment made by a third person is treated as still subsisting for the benefit of this third person who su cceeds to th e rights of the creditor in relation to the debt. Id. The rationa le for the doctrine is to prevent the party primarily liable on the debt from being unjus tly enriche d whe n some one pa ys his deb t. 4 Id. 4 Couch provides a more comprehensive basis for subrogation, looking at it from the perspective of the insure d, the insurer, and the tortfeasor. From the insured s perspective, subrogation has the objective of preventing the insured from recovering twice for one harm, as would be the case if he or she could recover from both the insurer and from a third person who caused the harm. 16 COUCH ON INSURANCE 3d, § 222 :8 (2000). In essence, this is a contractual repudiation of the collateral source rule which otherw ise wo uld app ly in Mar yland. See Haischer v. CSX, 381 Md. 119, 848 A.2d 620 (2004). From the tortfeasor s perspective, Couch iterates the point made in Bachmann, that the tortfeasor should not receive the windfall of being absolved from liability because the insured procured, and paid for, insurance. 16 COUCH, supra. Finally, as to the insurer, Couch makes two points. First, it is equitable, he says, that the insurer should be reimbursed for its payment to the insured, to avoid either of the two prospects noted (contin ued...) -10- We noted in Bachmann that there were three categories of subrogation legal, which arises by operation of law when a third party, who pays another s debt to protect his/her own interests, is deemed entitled to reimbursement; conventional, which is provided for by contract; and statutory, which, of course, arises from an act of the Legislature. The basis of conventional subrogation the kind w e have he re is an ag reement, express or implied, between a debtor an d a third party or b etween a creditor and a third party that, upon payment of the debt, the th ird party will be entitled to all the rights and securities of that debtor or that creditor . Id. at 413- 14, 559 A.2d at 369 . We confirmed in Bachmann, howev er, that, though founded on contract, recovery on a theory of conventional subrogation is nonetheless subject to principles of equity and that [a] conventional subrogee is not necessarily entitled to subrogatio n as a matte r of legal righ t; the relative eq uities of the parties are still to be balanced. Id. at 416, 559 A.2d at 370. The theory espoused by the insurance companies in these cases is that the tenants, through their own negligent a cts or omissio ns, caused substantial da mage to their landlord s property and that, as a result, were liable to the landlords, in both tort and contract, for the damage they caused. Had there been no insurance, the landlords would have been entitled 4 (...continued) above that the insured recover twice for the single loss or that the tortfeasor be relieved of any respo nsibility for his/her to rtious cond uct. Secon d, he notes th at subroga tion is in a sense a salvage operation that insurers are usually entitled, by way of salvage, to the benefit of anything that may be received from the property insured or damages paid by third pe rsons f or the sa me loss . Id. -11- to sue the tenants to recover for the loss. Purs uant to their own contractual obligation under the fire insurance policies, the insurers paid at least part of the debt owed by the tenants and, under the conventional subrogation clauses in those policies, they succeeded to the rights of the landlords their insureds and were therefore entitled to be reimbursed by the tenants, who w ere the p rincipal debtor s. Holding aside the lingering question of Harkins s negligence, which was never resolved, the defense in these cases invokes predominantly the assertion that the tenants are, in effect, co-insureds with their landlords under the landlords policies and, as such, may not be sued under the subrogatio n clauses. H arkins add s the equitab le defense that it wou ld be inequitable to permit the insu rers to proceed against the tenants under their subrogation clauses. Thus, although the ten ants ultimate responsibility arises from principles of tort and contract liabi lity, the decisive issue before us is one of su brogation la w. Are th e tenants to be regarded, either as a matter of law or a matter of fact, as co-insureds under the landlords insurance policies and, if not, is there some other bas is, includ ing a ny paramount equ ity, favorable to them that precludes the enforcement of an otherwise valid subrogation clause? The Legal Landscape Although the prospect of subrogation claims against tenants of the insured has long existed, the actual emergence of such actions has been traced by at least one com mentator, Milton Friedman , to a 1950 case that inferentially involved but did not turn on a subrogation -12- claim General Mills v. Goldman, 184 F.2d 359 (8 th Cir. 195 0), cert. denied, 340 U.S. 947, 71 S. Ct. 532, 95 L. Ed. 683 (1951 ). See Friedma n, F RIEDMAN ON L EASES § 9.9 (4 th ed. 1997). In that case, Goldman purchased inv estment pro perty for $11 0,000 and promptly leased it to General Mills for a ten-year period at an annual rental of $15,000.5 Two years into the lease, the processing plant situated on the land was destroyed by a fire that Goldman contended was caused by the tenant s negligence. Goldman had obtained a fire insurance policy that provide d $100,0 00 of cov erage for lo ss to the building and $15,000 for loss of rental, and the company, in furtherance of that obligation, paid Goldman nearly $111,000. Notw ithstanding that payment, which exceeded the cost of the property, Goldman sued to recover $342,000 from General Mills, for additional costs and lo ss of rental. 6 The insurer interven ed, as su brogee , to recov er the am ount it h ad paid Goldm an. The case, governed by Minnesota law, turned on a general provision in the lease that exonerated the tenant from liability for loss by fire. Goldman, supra, 184 F.2d at 366. Goldman s position, and apparently that of the insurer, was that the exoneratio n did not ap ply to a fire caused by the tenant s negligence. General Mills argued that the exoneration did so apply because it w as contem plated by the p arties that any reimbursement for fire loss, howe ver cau sed, w ould co me fro m the la ndlord s fire ins urance . 5 The land was actually owned by several persons, but Goldman received an assignment from the other owners an d, for purposes of the case, was treated as the ow ner. 6 The majority opinion in the case omits many of these underlying facts, which have to be glea ned fro m the d issentin g opini on of J udge S anborn . Goldman, supra, 184 F.2d at 367-74. -13- Reversing a judgment for Goldman and the insurer, a majority of the appellate panel concluded that there was no public polic y in Minnesota that would preclude the parties from resorting solely to fire insurance in the event of a fire, whether or not occasioned by the tenant s negligence, and it construed the lease as being to that effec t. In the court s view, the exoneration for loss by fire anticipated that the loss would be covered by insurance regardless of any negligence a nd, if the land lord wishe d to limit that ex oneration, it co uld have done so in the lease. In light of all of the other detailed provisions regarding tenant liability and the court s supposition that, because the property was purchased as an investment the premiums for insurance coverage would come from the rent paid by General Mills, the panel majority simply refused to read into the general exoneration the unwritten excep tion sou ght by G oldma n. The importance of the ca se, acco rding to Friedm an, F RIEDMAN ON L EASES § 9.9, supra, lies in the fact that the court, in ultimately ruling for the tenant, was forced to rely on the exoneration clause in the lease, thereby acknowledging that in its absence the tenant would have been liable to the landlord s insurer under the doctrine of subrogation. Id. at 572-73. Whether that nuance in fact encouraged insurers to seek to enforce subrogation clauses agains t tenants is uncle ar. Goldman has been freque ntly cited, but mostly for the proposition that the parties, through express or implied exoneration clauses in the lease, can -14- effectively shift the burden of liability from the tenant to the lan dlord s insu ranc e com pany.7 Indeed, it is tha t concept the second principle no ted above that has tak en root. The generally accepted progenitor of the no-subrogation rule is Sutton, supra, 532 P.2d 478.8 In Sutton, the 10-year-old son of the tenant ca used a fire in the leased premises 7 Citing case s from G eorgia, Ka nsas, Lou isiana, Mic higan, M issouri, North Carolina, T exas, We st Virginia, an d the U.S . Court of A ppeals for the Sixth C ircuit, Friedman notes that Goldman has been followed by a series of cases in which insurance comp anies re covere d again st tenan ts on the basis of subrog ation. F riedma n, F RIEDMAN O N L EASES § 9.9 at 573. Althoug h some o f the post-Goldman cases cited by Friedman do, indeed, permit subrogated claims to proceed against tenants, none of them relied on Goldman for that result. 8 There was, in fact, an earlier case upon which the Sutton court relied, at le ast in part. In New Hampshire Ins. Co. v. Ballard Wade, Inc., 404 P.2d 674 (U tah 1965), a fire of undetermined origin damaged leased premises. Although the lease required the tenant to return the property in as good co ndition as when rec eived, the landlord and h is insurer, without consulting the tena nt, repaired the damage themselves. The land lord s fire insurer, which had paid at least part of the loss, sued the tenant for indemnity based on the tenant s breach of con tract. The trial court ruled for the insurer, appa rently on the theory that the tenan t was strictly liable to th e lessor for th e damag e and there fore mus t be so to the insu rer. The app ellate court rev ersed, holdin g that, althoug h there mig ht be strict liability to the lessor, there was none to the insurer. There was no mention of any subrogation clause in the policy, and, indeed, the word subrogation appears nowhere in the opinion. The court treated the action as simply one of indemnity based on a clause in the lease requiring the tenant to return the property in as good a condition as when received, but noted that (1) the insurer was neither a party to, nor a third party beneficiary of, the lease, and (2) because the landlord and the insurer, without consulting the tenant, stepped in and repaired the damage themselves, the tenant was never afforded an opportunity to make the repairs. A pparently, but tac itly at best, viewing the insurer s c laim as one of legal, rather than c ontractual/co nventiona l subrogatio n, the court a dmonish ed that, when the assignee here has accepted a consideration to cover a risk, it hardly lies in its mouth to claim indemnity from one who has made a written guaranty against loss, to which agreement the insurance company was neither a party nor (contin ued...) -15- while playing with his chemistry set. The landlord s insurer, which paid the loss, sued the father and the son, alleging negligence on both their parts, and, after a full trial, won a verdict against the father, but not the son. The appellate court reversed, predominantly upon finding error in jury instructions that plainly cast the burden on the defendants to prove that they were not negligent. That alone required a new trial. The court then turned to the insurer s role, which is the relevant part of the opinion for our purposes. Because the insurer paid the entire amount of the loss, the trial court found that the landlords were no longer parties in interest, and it required that the insurer be substituted for the landlords as the plaintiff. That ruling does not appear to have been disturbed on appea l, thus leaving the case as one between the insurer and the tenant. The court treated the insurer as a subroge e, although it is not clear wh ethe r there w as a s ubro gatio n cla use in the policy, and, with a rhetorical flourish reminiscent more of lyrical poetry than stod gy equity jurisprudence, characterized subrogation as begotten of a union between equity and her beloved the natural justice of placing the burden of bearing a loss whe re it ought to be. Id. at 481-82. In that regard , and witho ut citing any auth ority whatever, the court concluded: Under the facts and circumstances in this record the subrogation should not be available to the insurance carrier because the law considers the tenant as a co-insured of the 8 (...continued) expres sly or imp liedly a be neficia ry, and the lessee was not shown to be negligent. . . (Emphasis added). Id. at 675. -16- landlord absent an express agreement between them to the contrary, comparable to the permissive-user feature of autom obile ins urance . Id. at 482. That principle, the court added, was derived from a recognition of a r elational real ity, nam ely, that both landlord and tenant have an insurable interest in the rented premises the former owns the fee and the latter has a possessory interest. Id. at 482. Here, the court said, the landlords purchased fire insurance to protect such intere sts in the property against loss from fire and that th e premium paid had to be considered in establishing the rent rate on the rental unit. Id. From tha t, the court con cluded th at the tenant actually paid the premium as part of t he mo nthly renta l. Id. Based on its own ex cathedra assumption of the realities of urban apartment and single-family dwelling renting, the court determined that tenants rely upon the owner of the dwelling to provide fire protection for the realty (as distinguished from personal pro perty) absent an express agreement otherwise and that [b]asic equity and fundamental justice upon which the equitable doctrine of subrogatio n is established requires that when fire insurance is provided for a dwelling it protects the insurable interests of all joint owners in cluding the possessory inte rests of a tenant absent an agreement to the contrary. Id. at 482. Upon that determination, the court held that [t]he company affording such coverage should not be allowed to shift a fire loss to an occupying tenant even if the latter negligently caused it. Id. (citing New Hampshire Ins. Co., supra, 404 P.2d at 674). -17- As a final comment, the court observed that the failure of the pleadings and the evidence to show that the insurer even had a right of subrogation against the tenant furnished another reason why it was error to instruc t the jury to return a verdict for the insurer unless the tenant proved that he was not negligent. With that, the court remanded the case for a new trial.9 Though the ultimate conclusion in Sutton was based, to some exten t, on the court s perception of the tenant s expectations under the lease, the case has been treated as establishing at least a presumption, if not a per se rule, that, absen t an express agreeme nt in the lease to th e con trary, landlord and tenant are c o-insureds under a landlord s fire insurance policy, and, as a result, the insurer has no right of subrogation against the tenant to recover amounts paid on the policy by reason of a fire loss, even if caused by the negligence of the tenant. Several co urts have followed the rigid approach taken by the Oklah oma interm ediate appellate court, although not necessarily the rationale for that app roach. See DiLullo v. Joseph, 792 A.2d 819 (C onn. 200 2); Lexington Ins. Co. v. R aboin, 712 A.2d 1011 (D el. Super. 1998); North River Ins. Co. v. Snyder, 804 A.2d 399 (Me. 2002); Peterson v. Silva, 704 N.E.2d 1163 (Mass. 1999); United Fire & Cas. Co. v. Bruggeman, 505 N.W.2d 87 9 A curious, and unexplained, thing is what the court expected to be retried. If the reversa l was b ased so lely on the errone ous ins truction s that shi fted the burden of pro of, a retrial would be in order, but if the court was also holding, as it seemed to be, that, on the record established in this fully-tried case, the insurer the only plaintiff left in the case had no cause o f action because it had n o right of subrogation ag ainst the tenant, there would be noth ing to re try. -18- (Minn. App. 19 93); Tri-Par Investments, L.L.C. v. Sousa, 680 N.W.2d 190 (Neb. 200 4); Safeco Ins. Co . v. Capri, 705 P.2d 6 59 (Nev . 1985); Community Credit Union of New Rockford, N.D. v. Home lvig, 487 N.W.2d 602 (N.D. 1992); GNS Partnership v. Fullmer, 873 P.2d 1157 (U tah App . 1994); Cascade Trailer Court v. Beeson, 749 P.2d 761 (Wash. App. 1988). The Oklahoma Supreme Court has acknowledged Sutton but has not yet blessed it. See Travelers Insurance Companies v. Dickey, 799 P.2d 625 (Okla. 1990) (distinguishing Sutton and holding that a roofing contractor was not a co-insured under the ow ner s pol icy, notwithstanding a provision in the roofing contract requiring the own er to maintain p roperty insurance). Not all of those courts have rested their decision entirely on the as sumption s made in Sutton, however, but have offered additional law and economics justifications for the rule. In DiLullo, supra, 792 A.2d at 822, for example, the Connecticut court noted the substantial criticism of Sutton s view of the tenant as a co-insured and agreed both that (1) under traditional rules of insu rance law , a tenant is no t a coinsured on his landlord s fire insurance policy simply because he has an insurable interest in the premises and pays rent, and (2) under traditional rules of contract law, whether subrogation would or would not apply ordinarily would depend, in large part, on a case-by-case analysis of the language of the insurance policies and leases involved. It concluded, however, based on matters of policy and fairness, that the Sutton result is sound as a matter of subrogation law and policy. Id. The court expressed concern, especially when dealing with a multi-unit structure, that -19- allocating responsibility to the tenant to maintain sufficient insurance in anticipation of a subrogation claim wo uld be un tenable in th at it might requ ire tenants to insure for an amount necessary to cover the replacement cost, not just of their unit, but of the entire building. That would produce layers of insurance to protect against the same loss, which the court concluded would be economic waste.10 Several of the Sutton followers have echoed that concern. The GNS court concluded that, at least for residential tenants, the Sutton presumption was the most effic ient way to allocate insurance costs. GNS , supra, 873 P.2d at 1164 . See als o Nor th Rive r, Ins. Co ., supra, 804 A.2d 39 9. Other Sutton followers have accepted more the notions that (1) because the cost of in surance is p resumab ly included in the rent charged by the landlord, the tenant has actually paid the premiums on the policy and ought to be regarded as a co-insured for that reason, or (2) insurance compa nies expe ct to pay their insu reds for ne gligently caused fires and adjust their rates accordingly. See Safeco Ins. Co. , supra, 705 P.2d at 661; also Tate v. T rialco S crap, In c. 745 F. Su pp. 458 (M .D. Tenn . 1989); Community Cred it, supra, 487 N.W.2d 602; New Ham pshire Ins. Group v. Labombard, 399 N.W.2d 527 (Mich. 10 It is interesting to note that, in Middlese x Mut. A ssur. Co. v. V aszil, 873 A.2d 1030, 1032 (Conn. App. 2005), the intermediate appellate court of Connecticut regarded the rule enunciated in DiLullo as a default rule, and held that subrogation would be allowed if the lease requ ires the tenant to repair any damage he causes. The co urt observed that the goal of equitable subrogation is to avoid injustice by requiring payment from the party that caused the harm and that when financial injustice and some potential for economic waste collide, subrogation jurisprudence places the weight of authority on preventing injustice. Id. at 1035. W hether the C onnecticu t Suprem e Court w ill acquiesce in that view of its DiLullo decision remains to be seen. -20- App. 1986). There is clearly not a single accepted theory, even among the Sutton followers, and there is certainly no general consensu s that landlords and tenants are c o-insureds. Notwithstanding language in some opinions to the effe ct that Sutton represents a majority view, that is clearly not the case. Only a handful of courts have actually embraced the Sutton rationale. At the other end of the spectrum , a numbe r of courts h ave taken an oppo site approach and permitted an insurer to bring a subrogation claim against the tenant absent an express or implied agreeme nt precludin g such a c laim. Som e of those c ourts have looked, in making that determination, to whethe r there was an agreem ent by the land lord either to m aintain insurance for the benefit of the tenant or to look only to its own insurance for compensation. See Page v. S cott, 567 S.W.2d 101 (Ark. 1978); Neubauer v. Hostetter, 485 N.W.2d 87 (Iowa 1992); Britton v. Wooten, 817 S.W.2d 44 3 (Ky. 1991); Osborne v. Chapman, 574 N.W.2d 64 (Minn. 199 8); Zoppi v. T raurig, 598 A.2d 19 (N.J. Super. 1990); Galante v. Hathaway Bakeries, Inc., 176 N.Y.S.2d 87 (N.Y. App. Div. 195 8); Winkler v. Appalachian Amusement Co., 79 S.E.2d 185 (N.C . 1953); Regent Ins. Co. v. Economy Preferred Ins. Co., 749 F. Supp. 191 (C.D. Ill. 1990); 56 Associates ex rel. Paolino v. Frieband, 89 F. Supp.2d 189 (D. R.I. 2000). Those co urts have ap plied basic c ontract and tort law and have rou ndly criticized the assumptions and fictions employed by the Sutton group. In Page, the Arkansas court noted that, had there been no insurance, the landlord could clearly have recovered for damage negligently cau sed by the tena nt and, app lying its -21- version of the collateral source rule, held that the existence of fire insurance would not have precluded such a reco very. The co urt agreed th at the insurer w ould have no subrogatio n if the parties had agreed as a part of the transaction that insurance would be provided for the mutual protection of the parties, id. at 103, or if such an agreement could be implied, but in the absence of any such express or implied agreement, there was no reason not to allow a subrog ated cla im. The Page court expressly rejected the fiction that the tenant somehow paid the insurance premium, noting that there was no evidence that the tenant paid any greater rent because of the insurance than he would otherwise. Such a fiction, it said, ignores the fact that m ore often th an not the m arket, i.e., supply and demand , is the controlling factor in fixing and negotiating rents. Id. at 104. Although Appleman acknowledges Sutton as a modern trend, he criticizes the holding and the trend: Sutton, the leading modern case denying subrogation of lessees, cites no cases for the proposition that the lessee is a co-insured of the lessor, compara ble to a perm issive user un der an auto insurance policy. Contrary to the court s statement, the fact both parties had insurable interests does not make them coinsureds. The insurer has a right to choose whom it will insure and did not choose to insure the lessees, and under this holding the lessee could have sued the insurer for loss due to dam age to the realty, e .g., loss o f use if p olicy prov ides suc h cove rage. 6A, J. A . Apple man, I NSURANCE L AW AND P RACTICE, § 4055 , at 78 (2 005). In Neubauer v. Hostetter, supra, 485 N.W.2d at 90, the Iowa court agreed with that criticism and refus ed to accept that fire insurance on an entire dwelling includes the interest -22- of both landlord and tenant as a matter of law. That argu ment, it said, disregards the fact that these are separ ate estate s capab le of be ing sep arately va lued an d separ ately insur ed. Id. The 56 Associates court, applying Rhode Island law, noted that an insurance policy is a contract betwe en the in surer an d the ins ured, and it is not for the courts to add additional insureds to the policy to rewrite a policy or read provisions into it in order to achieve what the court subjectively may believe to be a desirable result. 56 Associates, supra, 89 F. Supp.2d at 193. Echoing the point made by Appleman, the court pointed out that the mere fact that a tenant may have an insurable interest or that part of his rent payment may be used to pay premium s on the po licy does not m ake him a co-insured . If the tenant were a coinsured, he/she w ould be en titled to some part of the proceeds, which even the Sutton followers have not suggested. Most of the courts that have dealt with this issue, including some that have been characterized as being in o ne or the oth er of the tw o camps noted abo ve, have tak en a midd le approach. They have adopted the basic underpinning of Sutton (and Goldman) that a tenant s liability in a subrogation action should be determined by the reasonable expectations of the parties to the lease but have rejected a per se or presum ptive co-insu red status an d looked to the lease as a w hole to determine those expectations.11 That poin t was we ll-docume nted in 11 See General Acc. Fire & Life Assur. Corp. v. Traders Furniture Co., 401 P.2d 157 (Ariz . Ct. App. 1 965); Page, supra, 567 S.W .2d 101; Fire Ins. Exchange v. Hammond, 99 Cal. R ptr. 2d. 596 (C al. Ct. App . 2000); U.S. Fidelity & Guar. v. Le t s Frame It, 759 P.2d 819 (Co lo. Ct. App . 1988); Middlesex Mut. Assur. Co., supra, 873 (contin ued...) -23- Union Mut. Fire Ins. Co. v. Joerg, 824 A.2d 586 (Vt. 2003). There, the court observed: The majority of courts, however, have avoided per se rules and taken a more flexible case-by-case approach, holding that a tenant s liability to the landlord s insurer for negligence causing a fire depends on the intent and reasonable expectations of the parties to the lease as ascertained from the lease as a whole. [extensive citations omitted]. Of the courts follow ing this approach, most that have denied subrogation have done so because of the existence of specific provisions in the lease, such as a provision obligating the landlord to purchase fire insurance on the premises or a clause excepting fire damage from the tenant s responsibility to maintain or return the property in a good s tate and conditio n. Id. at 589-90. The holding of the Vermont court was that where the lease requires the landlord to carry fire insurance on the leased premises, such insurance is for the mutual benefit of land lord an d tenan t, and, as such, the te nant is deemed a coinsured under the landlord s insurance policy and is protected against subrogation claims by the landlord s 11 (...continued) A.2d 10 30; Pettus v. APC, Inc., 293 S.E.2 d 65 (Ga . Ct. App. 1 982); Bannock Bldg. Co. v. Sahlberg, 887 P.2d 1052 (Idaho 1994); Towne Realty, Inc. v. Shaffer, 773 N.E .2d 47 (Ill. App. C t. 2002) , but compare Dix Mut. Ins. Co. v. LaFrambo ise, 597 N.E .2d 622 (Ill. 1992); Sears, Roebuck & Co. v. Poling, 81 N.W .2d 462 (Io wa 195 7); New Ham pshire Ins. Co. v. Fox Midwest Theatres, Inc., 457 P.2d 133 (Ka n. 1969); Britton, supra, 817 S.W.2d 443; Seaco Ins. Co. v. Barbosa, 761 N.E.2d 946, 950 (Mass. 2002) (rejecting Sutton with respect to co mmercia l leases); Fry v. Jordan Auto Co., 80 So.2d 53 (Miss . 1955); Rock Springs R ealty, Inc. v. W aid, 392 S.W .2d 270 (M o. 1965); Phoenix Ins. Co. v. Sta mell, 796 N.Y .S.2d 772 (N.Y. A pp. Div. 20 05); U. S. Fire Ins. Co. v. Phil-Mar Corp., 139 N.E.2d 3 30 (Ohio 1956); Cincinnati Ins., Co. v. Control Serv. Technology, Inc., 677 N.E.2d 3 88 (Ohio Ct. App. 1 996); Koch v. Spann, 92 P.3d 146 (O r. Ct. App. 2004), review denied, 100 P.3d 217 (Or. 2 004); Hardware Mu t. Ins. Co. of Minn. v. C.A. Snyder, Inc., 137 F . Supp . 812 (W .D. Pa. 1 956), aff d, 242 F.2d 64 (3 rd Cir. 1957) ; Wichita C ity Lines, Inc. v. P uckett, 295 S.W .2d 894 (T ex. 1956); Monterey Corp. v. Hart, 224 S.E.2d 142 (Va . 1976); Allstate Ins. C o. v. Fritz, 2005 WL 1533103 (W .D. Va. 2005). -24- insurer. Id. at 591. Conclusion We believe that this middle approach, of looking to the reasonable expectations of the parties to the lease, as determined from the lease itself and any other admissible evidence, is the appropriate one to follow. It avoids the court making assumptions and adopting fictions that are largely conjectural, if not patently illogical, and instead applies basic contract principles and gives proper credence to the equitable u nderpinn ing of the w hole doctrine of subrogation.12 The notion that, barring some express pro vision to the c ontrary, landlord s and tenan ts are, as a matter of law, to be treated as co-insure ds under th e landlord s policy has no v alid foundation. The supposed basis for that conclusion is that the tenant has an insurable interest in continued possession of the leased premises, and that may be so, but it does not make the tenant a co-insured. If, as a result of a fire, the premises becomes uninhabitable or, as is commo nly the case, the lease itself terminates, the tenant would have no right of reco very under the landlord s policy for the loss of possession, unless the policy provides such coverage. Nor can the landlord/tenant relationship properly be compared to a permissive user 12 The courts that have denied subrogation on the assumption that the tenant was a co-insured because the tenant was, in fact, paying the insurance premiums never apparently considered whether the expectation by the parties to the insurance contract that subrogation was available served to reduce the premiums and thus inured to the benefit of the tena nt. -25- in an automobile insurance policy, as the Sutton court supposed. Perm issive users are regarded as insureds under such a policy because the policy expressly provides coverage for them, usually by including them in the definition of insure d. Wha t a few co urts, eager to reach the result orda ined in Sutton, have done is to regard the tenant as a co-insured for the sole purpose o f precludin g a subrog ation claim, w hich serves only to make the unsuppo rtable fiction even more tenuous. The 56 Associates court wa s absolutely correct: courts have no business adding insureds to an insurance policy in order to achieve their perception of good public p olicy. The middle approach, followed by the great majority of courts that have dealt with the issue, provid es an ad equate and su pporta ble ana lytical fram ework . Although that framework makes the analysis largely a case-by-case one, certain general principles emanating from basic contra ct and sub rogation law will control: (1) Subrogation claims against tenants are not inherently against public policy. The equitable principles that we noted in Bachmann, supra, 316 Md. 405, and that Couch expounded upon (see ante, n. 4), if anything, fa vor the enf orcemen t of subrog ation claim s by insurers. Such claims serve to avoid both a double recovery by the landlord and the prospect of a culpa ble tenant ro utinely escaping responsibility for his/her neg ligent cond uct. There are, how ever, tw o gene ral cave ats. (a) First, provisions included in a lease that create or enhance a tenant s liability are subject to the normal rules of contract law. -26- To the extent they may be ambiguous, they are to be construed against the draftsman, and, if the lease is found to be a contract of adhesion and the provisions are found to be unfair, they may be declared in valid as being in violation of pub lic policy. Subject to those and any relevant statutory constraints, a lease provision that makes clear that the tenant is liab le for damage to the leased premises caused by the tenant s neg ligence and that such liab ility includes a subrogation claim by the landlord s insurer is enforceable.13 In the face of such a provision, clearly stated, the tenant is ordinarily hard-pressed to assert a contrary expectation. (b) Second, there is no right of subrogation unless there is liability in the first instance by the tenant to th e landlord. B ecause, no twithstandin g general common law liability for neglige ntly caused damage, that liability usually emanates from or is tailored by the lease and the reasonable expectations of the parties under the lease, the enforceability of a subrogation claim against a tenant is likely to depend ultimately on the court s construction of the landlord/tenant relationship under the lease. (2) If, and to the extent that, the lease relieves the tenant of liability for fire loss, either generally or as occasioned by the tenant s negligence, there can be no subrogation claim against the ten ant becau se there w ould be no liability to the landlord in the first place. 13 This is an area in which legislation may be appropriate. It is, after all, the General Assembly that sets the public policy of the State, especially economic and social policy. Both the insurance in dustry and the landlord-ten ant relationsh ip are heav ily regulated by statute. If the Legislature wishes to preclude or in some way limit or condition subrogation claims by landlords insurers against tenants in general or against one or more class of tenants, it is competent to do so. -27- (3) If, under the lease or by some other commitment, the landlord has communicated to the tenant an express or implied agreement to maintain fire insurance on the leased premises, absent some compelling provision to the contrary, the court may properly conclude that, notwithstan ding a gen eral surrend er in good condition or liability for negligence clause in the lease, their reasonable expectation was that the landlord would look only to the policy, and not to the tenant, for compensation for fire loss covered by the policy. That expectation would constitute an implied commitment in the lease to relieve the tenant of liability to the extent of the policy coverage and it, too, would therefore preclude a subrogation claim. (4) If the leased premises is a unit within a multi-unit structure, absent a clear, enforcea ble provision to the contrary, a court may properly conclude that the parties anticipated and reasonably expected that the landlord wo uld have in place ade quate fire insurance covering the entire building and, w ith respect to damage ca used by the tenant s negligence to parts of the building be yond the lease d premise s, would look only to the p olicy, to the extent of its coverage, for compensation. That expectation has a rational and practical basis. Whatev er general c ommo n law liability a tenant may have for damage to another person s property caus ed by the tenan t s negligenc e, it is not likely, unless f aced with a very clear contractual obligation to the contrary, that the tenant is thinking beyond the leased premises or, as a practical matter, would be able to afford, or possibly even obtain, sufficient liability insurance to protect against such an extended loss. Nor should the law encourage the -28- econom ic waste that would result from multiple layers of insurance by the individu al tenants to cove r the sam e loss. Within the constru ct of these p rinciples, a cou rt must look at the lease as a whole, along with any othe r relevant an d admissib le evidence , to determine if it was reaso nably anticipated by the landlord and the tenant that the tenant would b e liable, in the event of a fire loss paid by the landlord s insurer, to a subrogation claim by the insurer. In terms of the two cases now before us: As to Rausch, we answer the certified questions as follows: (1) Maryland does not subscribe to the doctrine of implied co-insureds as enunciated in Sutton, namely, that, absent an express provision to the contrary, a tenant is, as a matter of law, an implied co-insured of the landlord; (2) Whethe r Allstate is barred from bringing the instant subrogation action against the tenants of its insured will depend on the determination by the certifying court of the reasonab le expectations of Dunlop and the Rausches, applying the principles of Maryland law set forth in this Opinion. As to Harkins, to the extent that the $83,00 0 claim by H arford inclu ded payme nts made for dama ge to parts of the building beyond the leased premises, summary judgment was properly granted. On the state of this record, however, we hold that summary judgment was inapprop riate with respect to liability for amo unts paid by Har ford to rep air damag e done to the lease d prem ises. -29- Although the motion for summary judgment was not based just on the Sutton principle of co-insurance, the summary judgment itself was founded solely on that principle, which we have rejected. The lease required Ms. Harkins to obtain Renter s Insurance for the apartm ent, and she did, in fact, obtain such a policy. Neither that policy nor its terms are in the record before us, however, so we cannot determine, as a matter of law, what the reasonab le expectations of the parties were with respect to damage to the leased premises. Having concluded that there was sufficient evidence of negligence on Ms. Ha rkins s part to create a triable issue, the court will have to ex amine the lease and su ch other ad missible evidence in order to determine whether there is a triable issue as to the reasonable expectation of the parties , and, if nece ssary, deal furth er with the issue of M s. Harkins s negligence. IN MISC. NO. 6 (RAUSCH), QUESTIONS ANSWERED AS HEREIN SET FORTH, COSTS TO BE EQUALLY DIVIDED BETWE EN THE P ARTIES; IN NO . 128 (HARFORD MUTUAL), JUDGMENT OF CIRCUIT COURT FOR HARFORD COUNTY AFFIRMED IN PART AND REVERSED IN PART; CASE REMANDED TO THAT COUR T FOR F URTH ER PRO CEEDIN GS IN CONFORMANCE WITH THIS OPINION INCLUDING, IF NECESSARY, RESOLUTION OF THE ISSUE OF HAR KINS S NEGLIGENCE; COSTS TO BE EQUALLY DIVIDED BETW EEN THE PAR TIES. -30-