MINDING THE LANDLORD-TENANT COVERAGE GAP
Even as more tenants buy renters’ insurance, there is no
common way to cover the risks in an airtight manner
[E]ven when landlords and their tenants are both
insured under commonly available policies, there
is potential for unpleasant surprises.
By Joseph S. Harrington, CPCU
In most cases, renter’s insurance serves the interests of both insured tenants and their landlords.
For a fraction of a monthly lease payment, the monthly share of renters’ policy premium protects tenants for loss of or damage to their personal property and covers defense and damages from third-party claims for bodily injury or property damage. (The property coverage is typically restricted to named perils and does not apply to building property. The liability coverage is typically subject to typical homeowners exclusions, most notably for automobile claims.)
Although renters’ coverage does not apply to landlords directly, building owners and managers also benefit from having their tenants insured.
With renters’ insurance in place, landlords are less likely to become entangled in disputes over damage to tenants’ property, which would be insured on a first-party basis. The liability coverage in a renter’s policy can shield a landlord from being sued over damage or injury caused by a tenant. It can also cover the cost to repair building damage caused by a tenant’s negligence.
In all, it’s not hard to see why more and more landlords are requiring residential tenants to carry renter’s insurance.
Yet, even when landlords and their tenants are both insured under commonly available policies, there is potential for unpleasant surprises.
For one thing, lease agreements, which are less standardized than property and general liability policies, can affect the transfer or risk and application of insurance in unexpected ways.
For example, in a 2019 case from Pennsylvania, the state’s superior court ruled that a property insurer could not subrogate against a former tenant whose alleged negligence caused a fire; she was deemed to be an “implied co-insured” under the lease agreement. (It is a defining principle of property and liability insurance, in contrast to surety coverage, that an insurer cannot subrogate against its own insured.)
There are three legal doctrines governing the ability of landlords’ insurers to subrogate against tenants:
- The generally prevailing “Sutton Rule,” named for a 1975 Oklahoma case, under which a tenant is presumed to be a co-insured on the landlord’s insurance policy, and thus shielded from subrogation by the landlord’s insurer unless there is a clearly expressed agreement otherwise;
- A countervailing doctrine in a minority of states that presumes a landlord’s insurer can subrogate against a tenant unless there is a clearly expressed prohibition against it; and
- The “case-by-case” doctrine, under which the “reasonable intentions” of the landlord and tenant are discerned from analysis of the lease, and the right of subrogation determined accordingly.
The Pennsylvania case was decided according to the case-by-case doctrine, the court finding that the language of the lease agreement created a reasonable expectation that the tenant would be an implied co-insured under the policy, and thus shielded from subrogation.
A November 2022 ruling by the Illinois Supreme Court effectively narrowed the scope for applying such reasoning in that state. In the Illinois case, the high court overturned an appeals court ruling to find that residential tenants were not implied co-insureds for purposes of defending a contribution claim.
In that case, the tenants sought defense and indemnity coverage under their landlord’s policy after a contractor, contesting a subrogation action by the landlord’s insurer, made a claim against the tenants for contributory negligence. Since the tenants were not the direct targets of the subrogation action, they were neither shielded from nor covered for the contractor’s claim.
In other words, at least in Illinois, status as an “implied insured” would only affect subrogation actions, and would not entitle a tenant, on its own, to the coverage provided by a landlord’s policy.
Everything discussed so far applies to accidental losses. Landlords also have to worry about intentional losses by disgruntled or malicious tenants.
Commercial property insurance commonly covers damage by certain intentional acts (though not by an insured), including arson, theft, and vandalism. However, many landlords’ policies include a provision similar to this:
Intentional damage caused by tenants, including, but not limited to malicious destruction before and during occupancy, or within 10 days of eviction or vacancy, is excluded.
Without such an exclusion in place, insurers of rental residential properties would see increased moral hazard among landlords tempted to collude with tenants to create a covered loss.
Even as more and more tenants buy renters’ insurance, there is no common way to cover the risks of the landlord-tenant relationship in an airtight manner. Risk transfer is never a complete substitute for rigorous risk underwriting.
Joseph S. Harrington, CPCU, is an independent business writer specializing in property and casualty insurance coverages and operations. For 21 years, Joe was the communications director for the American Association of Insurance Services (AAIS), a P-C advisory organization. Prior to that, Joe worked in journalism and as a reporter and editor in financial services.