The West Virginia Supreme Court of Appeals recently opened the door further for a landlord’s insurer subrogating against a tenant for damages to the landlord’s property. The Supreme Court reversed a lower court’s finding that the tenant was an equitable insured under the landlord’s homeowner’s policy. In Farmers & Mechanics Mutual Insurance Co. v. Allen, 2015 WL 6201490 (Oct. 14, 2015), the tenant’s son died from a grease fire in the leased premises. The tenant had purchased renters insurance, as the lease required. The landlord's homeowner’s insurer paid out insurance proceeds to its landlord/insured and then filed a subrogation claim against the tenant's estate.
The estate argued, and the circuit court agreed, that the tenant had an insurable interest in the landlord’s policy. Therefore, the estate contended the tenant could not be subrogated against as he was an equitable insured under the landlord’s homeowners policy. The circuit court did not rule that the tenant was a named, additional, or definitional insured under the policy. The circuit court, however, held that the tenant was an “equitable insured” and had an insurable interest in the landlord’s policy because his base monthly payments were allocated to it.
The West Virginia Supreme Court reversed, stating that if an insurance policy is unambiguous as to the definitional insured, courts cannot enlarge coverage to include other individuals foreign to the insurer. Here, the tenant was not a named or definitional insured under the policy and the lease stated that he was solely responsible for any damage he caused to the property. The Supreme Court went further, explaining why the “equitable insured” approach was inappropriate. The Court rejected the “equitable insured” viewpoint as it makes every homeowner’s insurance policy subject to side agreements between the named landlord and third-party tenants. Such tenants, though not named in the policy or known to the insurer, would be covered under the policy and expose insurers to unpredictable liability. The West Virginia Supreme Court reasoned that a “court may not, by judicial construction, enlarge the coverage to include other individuals foreign to the insurer.” Further, the tenant’s insurer would receive a windfall by accepting premiums for foreseeable risks and not having to pay for their insured’s negligence.
The West Virginia Supreme Court’s approach emphasizes the insurer’s contractual relationship with the landlord. The Court relied on policy considerations supporting contractual freedom to strike a unique balance in the Sutton world.