Union Mutual Fire Insurance Co. v. Joerg

Union Mutual Fire Insurance Co. v. Joerg (2001-336); 175 Vt. 196; 824 A.2d 586

2003 VT 27

[Filed 28-Mar-2003]


       NOTICE:  This opinion is subject to motions for reargument under
  V.R.A.P. 40 as well as formal revision before publication in the Vermont
  Reports.  Readers are requested to notify the Reporter of Decisions,
  Vermont Supreme Court, 109 State Street, Montpelier, Vermont 05609-0801 of
  any errors in order that corrections may be made before this opinion goes
  to press.


                                 2003 VT 27

                                No. 2001-336


  Union Mutual Fire Insurance Company	         Supreme Court

                                                 On Appeal from
       v.	                                 Orleans Superior Court


  Elmer J. and Jacqueline Joerg	                 March Term, 2002


  Howard E. VanBenthuysen, J.


  Paul R. Bowles, Montpelier, for Plaintiff-Appellant.

  Stephen J. Soule of Paul, Frank & Collins, Inc., Burlington, for
    Defendants-Appellees.


  PRESENT:  Amestoy, C.J., Dooley, Morse (FN1), Johnson and Skoglund, JJ.

        
       ¶  1.  DOOLEY, J.   Plaintiff, Union Mutual Fire Insurance Company,
  appeals from the decision of the superior court granting defendants' motion
  to dismiss in its subrogation action against tenants of its insured and
  their guest.  On appeal, plaintiff argues that the court erred by: (1)
  determining that defendants, Elmer and Jacqueline Joerg (tenants), were
  implied coinsureds under their landlord's fire insurance policy, thereby
  precluding a subrogation claim against them by plaintiff; (2) holding that
  the tenants had no duty to supervise Francis Roy, Jacqueline Joerg's
  father, who was living with them and who caused the fire underlying this
  case; and (3) concluding that no direct cause of action existed against Mr.
  Roy.  We affirm.

       ¶  2.  This litigation arises from a fire that occurred on June 5,
  1999 at a house owned by Mark Johnson (landlord) and rented to tenants
  pursuant to a lease-purchase contract.  At the time of the fire, the
  tenants lived in the house with their two minor children and Francis Roy,
  Mrs. Joerg's seventy-three-year-old father.  The fire was allegedly caused
  when Mr. Roy fell asleep or passed out while smoking.  As a result of the
  fire, the house was severely damaged, and Mr. Roy was killed.

       ¶  3.  In accordance with the Union Mutual fire insurance policy that
  landlord maintained on the house, plaintiff paid approximately $97,000 to
  landlord.  Plaintiff then instituted a subrogation claim against the
  defendants - the tenants individually and Mrs. Joerg as administratrix of
  her father's estate - alleging that Mr. Roy negligently caused the fire and
  that tenants were negligent in their supervision of Mr. Roy.  Defendants
  filed a motion to dismiss pursuant to V.R.C.P. 12(b)(6), arguing that (1)
  plaintiff had no right of subrogation against tenants because they were
  implied coinsureds under the landlord's policy, (2) tenants were not
  negligent because they had no duty of care to supervise Mr. Roy, and (3)
  plaintiff had no right of subrogation against Mr. Roy as an invitee.  The
  trial court granted the motion, and plaintiff subsequently brought this
  appeal.
   
       ¶  4.  A motion to dismiss a cause of action for failure to state a
  claim upon which relief may be granted should be denied "unless it appears
  beyond doubt that there exist no facts or circumstances that would entitle
  the plaintiff to relief."  Amiot v. Ames, 166 Vt. 288, 291, 693 A.2d 675,
  677 (1997) (internal quotation marks omitted).  In reviewing the
  disposition of a V.R.C.P. 12(b)(6) motion to dismiss, "this Court assumes
  that all factual allegations pleaded in the complaint are true . . .
  accept[s] as true all reasonable inferences that may be derived from
  plaintiff's pleadings and assume[s] that all contravening assertions in
  defendant's pleadings are false."  Richards v. Town of Norwich, 169 Vt. 44,
  48-49, 726 A.2d 81, 85 (1999).  In this case, the allegations in the
  complaint were supplemented by a copy of the lease. (FN2) 

       ¶  5.  Plaintiff's first argument on appeal is that the trial court
  erred in holding that tenants were implied coinsureds under landlord's
  insurance policy with plaintiff and therefore plaintiff was precluded from
  bringing a subrogation action against them.  We reject this argument for
  the following reasons.
   
       ¶  6.  Subrogation is an equitable doctrine that is based on a
  theory of restitution and unjust enrichment.  See Norfolk & Dedham Fire
  Ins. Co. v. Aetna Cas. & Sur. Co., 132 Vt. 341, 344, 318 A.2d 659, 661
  (1974).  Subrogation "enables a secondarily liable party who has been
  compelled to pay a debt to be made whole by collecting that debt from the
  primarily liable party, who, in good conscience, should be required to
  pay."  Nationwide Mut. Fire Ins. Co. v. Hamelin, 173 Vt. 45, 52, 786 A.2d 1078, 1084 (2001).  In the insurance context, subrogation allows an insurer
  in some situations to recover what it pays to an insured under a policy by
  "standing in the shoes" of the insured and suing the wrongdoer, even if the
  policy lacks an express provision providing for such a claim.  See R.
  Keaton & A. Widiss, Insurance Law § 3.10(a)(1), at 219 (Practitioner's ed.
  1988); Ulm v. Ford Motor Co., 170 Vt. 281, 296, 750 A.2d 981, 992 (2000). 
  However, "an insurer cannot recover by means of subrogation against its own
  insured."  Peterson v. Silva, 704 N.E.2d 1163, 1164 (Mass. 1999) (internal
  quotation marks omitted); Keaton & Widiss, supra § 3.10(a)(1), at 221. 
  This prohibition extends to coinsureds under the policy, both express and
  implied.  See 6A J. A. Appleman & J. Appleman, Insurance Law & Practice §
  4055, at 146 (1972) ("Subrogation cannot be obtained against another
  insured under the same policy, even if such protection is indirect."
  (Footnotes omitted.)).

       ¶  7.  Thus, if we find that the tenants are express or implied
  coinsureds under the landlord's fire insurance policy, plaintiff will not
  be able to exercise a right of subrogation against them.  In reaching its
  decision that the tenants were implied coinsureds, the superior court
  adopted a per se rule, holding that a tenant, as a matter of law, is deemed
  a coinsured under a landlord's fire insurance policy, absent an express
  agreement to the contrary.  This rule is best expressed in the leading case
  of Sutton v. Jondahl, 532 P.2d 478, 482 (Okla. Ct. App. 1975), and has been
  followed by several courts.  See Alaska Ins. Co. v. RCA Alaska
  Communications, Inc., 623 P.2d 1216, 1218 (Alaska 1981); Lexington Ins. Co.
  v. Raboin, 712 A.2d 1011, 1016 (Del. Super. Ct. 1998); N. River Ins. Co. v.
  Snyder, 804 A.2d 399, 403-04 (Me. 2002); Peterson, 704 N.E.2d  at 1165; N.H.
  Ins. Group v. Labombard, 399 N.W.2d 527, 531 (Mich. Ct. App. 1986); United
  Fire & Cas. Co. v. Bruggeman, 505 N.W.2d 87, 89 (Minn. Ct. App. 1993);
  Safeco Ins. Co. v. Capri, 705 P.2d 659, 661 (Nev. 1985); Cmty. Credit Union
  v. Homelvig, 487 N.W.2d 602, 605 (N.D. 1992); GNS P'ship v. Fullmer, 873 P.2d 1157, 1163 (Utah Ct. App. 1994).
           
       ¶  8.  We note, however, that the Sutton per se rule is only one of a
  number of alternative rules.  Some courts have rejected the implied
  coinsured rationale and allowed the insurer to bring a subrogation claim
  against the tenant, absent an express agreement to the contrary.  See
  Neubauer v. Hostetter, 485 N.W.2d 87, 89-90 (Iowa 1992); Zoppi v. Traurig,
  598 A.2d 19, 21 (N.J. Super. Cr. Law Div. 1990); Galante v. Hathaway
  Bakeries, Inc., 176 N.Y.S.2d 87, 92 (App. Div. 1958); Winkler v.
  Appalachian Amusement Co., 79 S.E.2d 185, 190 (N.C. 1953).  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 negligently causing a fire depends on the intent and reasonable
  expectations of the parties to the lease as ascertained from the lease as a
  whole.  See Page v. Scott, 567 S.W.2d 101, 103 (Ark. 1978); Fire Ins. Exch.
  v. Hammond, 99 Cal. Rptr. 2d 596, 602 (Ct. App. 2000); Continental Ins. Co.
  v. Kennerson, 661 So. 2d 325, 327 (Fla. Dist. Ct. App. 1995); Bannock Bldg.
  Co. v. Sahlberg, 887 P.2d 1052, 1055 (Idaho 1994); Dix Mut. Ins. Co. v.
  LaFramboise, 597 N.E.2d 622, 625 (Ill. 1992); Britton v. Wooten, 817 S.W.2d 443, 445-47 (Ky. 1991); Rock Springs Realty, Inc. v. Waid, 392 S.W.2d 270,
  277-78 (Mo. 1965); Agra-By-Products, Inc. v. Agway, Inc., 347 N.W.2d 142,
  146-50 (N.D. 1984); United States Fire Ins. Co. v. Phil-Mar Corp., 139 N.E.2d 330, 332 (Ohio 1956); 56 Assocs. v. Frieband, 89 F. Supp. 2d 189,
  194 (D.R.I. 2000); Tate v. Trialco Scrap, Inc., 745 F. Supp. 458, 467 (M.D.
  Tenn. 1989); Monterey Corp. v. Hart, 224 S.E.2d 142, 147 (Va. 1976);
  Rizzuto v. Morris, 592 P.2d 688, 691 (Wash. Ct. App. 1979).  Of the courts
  following 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 state and condition.  See
  Continental Ins. Co., 661 So. 2d  at 328 (lease provided that damage caused
  by fire "shall be repaired by and at the expense of Lessor"); Safeco Ins.
  Cos. v Weisgerber, 767 P.2d 271, 272 (Idaho 1989) (lease required tenant to
  maintain premises in a good state and condition of repair "damage by . . .
  fire excepted"); Rock Springs Realty, Inc., 392 S.W.2d  at 271 (lease
  required tenant to maintain premises in good condition, "loss by fire . . .
  excepted"); United States Fire Ins. Co., 139 N.E.2d  at 333 (lease provided
  that tenant would pay possible increase in fire insurance premiums due to
  tenant's activities); Agra-By-Products, Inc., 347 N.W.2d  at 144 (lease
  required lessor to keep insurance and lessee to reimburse lessor for
  premiums); Tate, 745 F. Supp.  at 460 (lease required lessor to purchase
  insurance coverage on building); Monterey Corp., 224 S.E.2d  at 144 (lease
  contained "except fire" provision); see also Britton, 817 S.W.2d  at 446
  (subrogation allowed because there was no clause requiring purchase of fire
  insurance by landlord); 56 Assocs., 89 F. Supp. 2d  at 194 (subrogation
  allowed where lease did not address question of fire insurance).
   
       ¶  9.  Although we noted in Aetna Casualty & Sur. Co. v. Barasch,
  158 Vt. 638, 638-39, 603 A.2d 380, 380-81 (1992) (mem.), that the Sutton
  rule is one possible approach, we find the case-by-case approach to be the
  most consistent with Vermont law.  In determining the rights of the parties
  to a lease, this Court has consistently looked to the intent of the
  contracting parties as ascertained from the terms of the lease.  See
  Fairchild Square Co. v. Green Mountain Bagel Bakery, Inc., 163 Vt. 433,
  436, 658 A.2d 31, 33 (1995); Lamoille Grain Co. v. St. Johnsbury & Lamoille
  County R.R., 135 Vt. 5, 8, 369 A.2d 1389, 1390 (1976); Spero v. Bove, 116
  Vt. 76, 90-92, 70 A.2d 562, 570-71 (1950).  Our decision in Fairchild
  Square is particularly instructive here.  It involved a subrogation claim
  by the landlord's insurer (brought through its insured, the landlord)
  against the tenant and the tenant's employee for damages from fire caused
  by the employee.  We held that the tenant was protected against such a
  claim because of specific provisions in the lease pertaining to fire
  insurance.  Fairchild Square Co., 163 Vt. at 436-40, 658 A.2d  at 33-35.  We
  did not rely on a per se rule; to the contrary, we stated explicitly that
  "[w]hether landlord waived its right to recover against tenant for
  negligently caused fire damage depends on the intent of the contracting
  parties as determined by the terms of the contract."  Id. at 436, 658 A.2d 
  at 33.  The dissent echoed this emphasis on the intent of the parties,
  stating that "[w]e should enforce the contract that was made, not one we
  wish they made."  Id. at 444, 658 A.2d  at 38 (Dooley, J., dissenting). 


       ¶  10.  Holding that the presence of a provision in the lease
  requiring the landlord to carry fire insurance on the leased premises is
  determinative on the issue of subrogation is in line with the public policy
  considerations underlying this rule that we recognized approvingly in
  Fairchild Square.  First, if the landlord and tenant agree that one of the
  parties will purchase insurance, "it is only natural that they assume that
  the insurance is for their mutual benefit and that the parties will look
  only to the insurance for loss coverage."  Id. at 443, 658 A.2d  at 37
  (quoting Tate v. Trialco Scrap, Inc., 745 F. Supp. 458 (M.D. Tenn. 1989)). 
  Second, where the lease expressly requires the landlord to maintain
  insurance on the premises, the landlord will take the cost of the insurance
  into account when setting rent.  Therefore, since "the lessee ultimately
  pays for insurance through his rent checks . . . simple equity would
  suggest that he be able to benefit from that payment unless he has clearly
  bargained away that benefit."  Id.  Finally, this rule prevents the
  economic inefficiency that would result from having multiple insurance
  policies - with multiple premiums - on the same building.  Id.

       ¶  11.  We therefore hold that, where the lease requires the landlord
  to carry fire insurance on the leased premises, such insurance is for the
  mutual benefit of landlord and tenant, and, as a result, the tenant is
  deemed a coinsured under the landlord's insurance policy and is protected
  against subrogation claims by the landlord's insurer.
   
       ¶  12.  Although we disagree with the trial court's reasoning, we
  agree with its result.  See Sorge v. State, 171 Vt. 171, 174 n.*, 762 A.2d 816, 818 n.* (2000) (Court may affirm correct result below but use
  different rationale).  We conclude that the trial court was correct in its
  finding that the lease contemplates that the landlord will procure fire
  insurance on the premises.  Paragraph 11 of the lease specifically provides
  that "[t]he landlord shall be responsible for maintaining the insurance,
  taxes and mortgage of the property."  (Emphasis added).  Paragraph 3 made
  the tenants responsible for a "tenants liability policy."  The superior
  court found that the former paragraph included fire insurance on the
  premises, and the latter referred to insurance on liability "to guests,
  invitees or others entering the property who suffer injury due to tenant's
  negligence" as well as fire coverage for the tenants' personal property. 
  We agree with the superior court that the provisions are plain and
  unambiguous, and, as such, must be given effect and enforced in accordance
  with their language.  KPC Corp. v. Book Press, Inc., 161 Vt. 145, 150, 636 A.2d 325, 328 (1993).  In fact, the landlord complied with the requirement
  of paragraph 11 and purchased fire insurance on the premises through
  plaintiff.

       ¶  13.  We therefore hold that the superior court correctly granted
  the motion to dismiss with respect to tenants.  In view of our holding, we
  need not reach plaintiff's second argument, that the court erred in holding
  as a matter of law that tenants were not responsible for the actions of Mr.
  Roy under a failure to supervise theory.  Since plaintiff cannot bring a
  subrogation action against tenants for the losses paid to landlord, we do
  not reach the issue of whether its liability theory is valid.  See
  Continental Ins. Co. v. Bottomly, 817 P.2d 1162, 1165 (Mont. 1991) (because
  subrogation was denied, court declines to reach issue of negligence).
   
       ¶  14.  Finally, plaintiff argues that the trial court erred in
  concluding that no cause of action existed against Mr. Roy, and now his
  estate, because he was not a tenant and the implied coinsured rationale
  does not apply to him. (FN3)  The superior court rejected this claim,
  concluding that we held in Barasch, 158 Vt. at 639, 603 A.2d  at 380, that
  the insurer cannot bring a subrogation action against a negligent guest of
  a tenant.  Again, we agree with the superior court's result, but not its
  rationale.

       ¶  15.  The facts and claims in Barasch are somewhat similar to those
  in this case, but the holding is not determinative to the issue before us. 
  Barasch involved a subrogation claim brought by a condominium owner's
  insurer against the owner's employee and the employee's adult daughter,
  invitees of the owner.  The insurer sought to recover sums paid to the
  owner as a result of a fire allegedly resulting from the invitees'
  negligence.  Without addressing the cause of action against the daughter,
  and without relying on the insurance issue resolved in this case, we held
  that the insurer had no right of subrogation against the father because the
  insurer presented no evidence that would suggest that the father's actions
  directly caused the fire, id. at 638, 603 A.2d  at 380, and made no showing
  that the father could be held responsible for fire allegedly caused by his
  adult daughter's negligence, id. at 638-39, 603 A.2d  at 380.  Nowhere did
  we hold that subrogation was prohibited against either the father or the
  daughter because of their status as invitees.
   
       ¶  16.  Although Barasch does not govern, we conclude that family
  members living in the leased premises should be included as implied
  coinsureds.  The complaint in this case stated that Francis Roy was
  "living" in the rented premises with his daughter and her family.  He was
  in the same position as tenants' children.  We would greatly undermine our
  holding that a subrogation action cannot be brought against the tenants
  because the lease showed that the landlord was responsible for fire
  insurance if we allowed the subrogation action to be brought against family
  members living in the home.  For purposes of the implied coinsured
  rationale, it makes no difference that the fire was started by Mr. Roy as
  opposed to one of the Joergs.

       ¶  17.  This result is supported by the reasoning of Fairchild Square
  Co. where we held that the insurer could not bring a subrogation action
  against either the corporate tenant or its employee.  We reached that
  result based primarily on policy grounds and the expected scope of
  coverage.  See 163 Vt. at 442-43, 658 A.2d  at 36-37.  For much the same
  reasons, we conclude that plaintiff cannot bring a subrogation action
  against tenants' resident family members.

       Affirmed.



                                       FOR THE COURT:



                                       _______________________________________
                                       Associate Justice



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                                  Footnotes


FN1.  Justice Morse sat for oral argument but did not participate in this
  decision.

FN2.  Defendants filed the motion to dismiss, and plaintiff responded
  attaching the lease to its memorandum of law.  In their reply memorandum,
  defendants indicated that because the lease had been referenced in the
  complaint, they were treating the lease as part of the complaint and,
  therefore, part of the record for the motion.  The superior court
  apparently accepted this procedure.  In any event, plaintiff has not
  objected to it.

FN3.  Plaintiff actually argues at one point that Roy was a tenant, but goes
  on to argue as if he were an invitee.  If he was a tenant, we would
  conclude that he is an implied coinsured based on that status in light of
  the lease terms.