It is not an unusual situation: A building burns down. The insurer of the building learns that it was occupied by a tenant and that the cause of the fire was tenant’s responsibility.
Most of the times the owner of the building reports such a loss to his insurer instead of pursuing a liability claim against his tenant. It is easier to establish the facts for insurance benefit: the owner only has to proof the fire (usually agreed) and the quantum of loss (usually subject to the assistance of an expert whose fees insurer will ultimately pay). The cause and course of the fire are of no relevance between the owner and his insurer.
The benefit to be gained from building insurance is more appealing as well: a liability claim is limited to the cash value at the time of the loss whilst building insurance usually covers the replacement value i.e. pays for an entirely new building.
So it is usually the insurer of the building that has to deal with the loss up front. Once he reimburses the owner any potential liability claim – like damages against the tenant – is transferred to him. In Germany subrogation does not need to be agreed in a policy; it is subrogation by law.
Yet, there is an unwritten exception from the law for that particular situation in building insurance. The German Federal Court of Justice (FCJ) assumes any owner has
- the general bona fide desire for an unbiased relationship with his tenant making it unbearable for the landlord to support his insurer during a subrogation action, and
- little interest in successful subrogation action which might have a severe adverse effect on tenant’s ability to pay rent (even if it helps keeping insurance premium low).
The FCJ further assumes that the insurer of a building generally respects these interests. Hence the FCJ reads an unwritten subrogation waiver agreement into building insurance policies protecting the tenant from liability for negligently caused losses. The insurer of the building shall not be entitled to make a subrogation claim against the tenant unless tenant’s action was deliberate or reckless.
Limiting the waiver to negligence is not discretionary. The language of the usual terms and conditions the market offers for building insurance does not indicate any intention of either party of the contract to agree a waiver. So, FCJ’s argument for inviting in owner’s interests to limit insurer’s subrogation action is the law.
Key justification of the interpretation is a general limitation of insurer’s interest (former Sec. 61 Insurance Contract Act = “VVG”). If a loss is caused by insured himself, insurer used to be entitled to deny cover if insured had caused the loss deliberately or recklessly. The reckless/deliberate state of mind was a make-or-break issue. A negligent action would not affect insurer’s reimbursement. The insurer of the building had to settle negligent losses despite owner’s responsibility.
The lawmaker’s motivation for that rule is simple: an insured owner must not be encouraged to act less diligent than an uninsured one. Technically, the insured risk of a building loss and its scope does not change just because the building is let to a tenant. For the FCJ this was reason enough to consider it fair to limit subrogation if the only reason for not applying Sec. 61 VVG was the tenancy.
However, even the FCJ questions the fairness of the above when the subrogation claim would have been subject to liability insurance cover on tenant’s side. The liability insurer must not be a lucky winner of owners foresight to buy building insurance. Yet, if there is a waiver, there is no liability claim. It is impossible to get to the tenant and subsequently to the liability insurer behind him.
The FCJ considers such a result to be an oversight of the lawmaker, i.e. an unwanted gap in the legal system. Even though there is no such thing as case law in Germany, it is a generally accepted rule to allow jurisdiction to close unwanted gaps until legislation is changed. The FCJ decided to do just that by applying the rules of double insurance.
Property and liability insurance do not qualify as double insurance by German standards because they do not cover the same risk even if they insurers might have to reimburse the same item. Yet, the FCJ considers the legal situation to be of the same structure as double insurance and therefore applies the system respectively. Insurers are made to share the loss. The insurer of the building is granted a direct claim against the liability insurer.
It must be noted though, that a liability insurer does only cover the cash value because a subrogation claim would be limited to that as well. Therefore, the loss is not simply split to equal shares; the compensation claim against the liability insurer might not add up to 50 % of the reimbursement payment. Nevertheless, this can be a substantial substitute for subrogation.
This judicial system has basically been applied whenever there is a loss in a leased building since the FCJ created and closed the gap in 2000. BUT: All is based on the above mentioned Sec. 61 VVG, the core foundation of the legal justification. That section of the law changed in 2008. Today, it is only the deliberate cause that allows a building insurer to deny cover (Sec. 81 Insurance Contract Act 2008). If an insured recklessly causes a loss, there still is a claim. It is only reduced by a proportionate share reflecting insured’s responsibility.
So, the rules have changed if the insured causes the building loss himself. If jurisdiction wants to be coherent, it should consider this new influence on tenant caused losses as well.
Nevertheless, the first published judgement of a court of appeal dealing with this issue declines the opportunity to change jurisdiction. It will now be up to the FCJ to review its judicial creation in light of the changed law and the fact that the lawmaker did not bother to close the gap. Jurisdiction in this economically important legal issue will be under the influence of no less than a cannabis related loss: tenant operated a cannabis plantation behind his bedroom carelessly handling butane gas during the production process. The case is currently pending under the FCJ’s file-number IV ZR 52/14.