By recent decision, the Virginia Supreme Court weighed in on an insurance subrogation dispute arising out of a fire at a Virginia condominium. The case is illustrative as to situations that sometimes face community associations when there are casualty losses.
Subrogation: A Basic Explanation
Subrogation is a legal doctrine where a party who pays a loss on another’s behalf is permitted to “step into the shoes” of the payee (person receiving the funds) and enforce their rights as to a legal claim. An elementary principle of subrogation is that an insurer may not subrogate against its own insured. In other words, an insurer cannot sue its own insured for negligence under a subrogation theory. This is intuitive because if an insurer could sue an insured to recover such losses then there would not be much of a concept of insurance coverage (as any time the insurer paid a loss to an insured, there would be a strong incentive for the insurer to sue its own insured to recover the loss). Subrogation may be waived by contract.
A common illustration of subrogation is when a driver (“Driver 1”) negligently crashes into another driver (“Driver 2”). By virtue of Driver 1’s negligence, Driver 2 now has a legal claim against Driver 1. Driver 2 goes to her Insurance Carrier and reports the claim. The Insurance Carrier pays Driver 2’s losses under the terms of Driver 2’s policy. The Insurance Carrier is then “subrogated” to the rights of Driver 2, and may legally enforce Driver 2’s negligence claim against Driver 1. Insurance Carrier will often file suit against Driver 1 seeking to recover the amounts of money that it paid to Driver 2 under the insurance policy.
This same scenario can occur in the context of community associations, including property owners’ associations and condominium associations. Situations involving subrogation often arise when there is a casualty loss arguably caused by some third party’s negligence (water leak, fire, etc.). Subrogation claims frequently arise when a non-insured third party negligently causes the damage (such as a guest or non-owner). Additionally, subrogation disputes may arise when there are multiple insurance policies involved, and one or more carriers are seeking to recover their losses paid under a particular insurance policy.
Subrogation claims in the context of community associations require the analysis of the applicable insurance polices and also the community association’s governing documents (recorded declaration, bylaws, etc.).
The facts of the case were relatively straightforward. A Unit Owner had rented a unit to a Tenant. The Tenant allegedly acted negligently and caused a fire to start at the Condominium, causing substantial losses. Specifically, the Insurer of the Condominium alleged that the Tenant failed to properly dispose of cigarette remains. The Insurer paid the Condominium losses (over $800,000.00) per the terms of the Condominium Association’s insurance policy on the Condominium. The Insurer, seeking to recover its losses paid out as a result of the fire, sought to sue the Tenant for negligence under a theory of subrogation.
The Insurer filed suit against the guest and Tenant. The Tenant filed a third party claim against the Unit Owner for subrogation (alleging that Unit Owner ought to indemnify her for any damages sustained).
At the Trial Court level, the Insurer argued that it never waived its right to subrogation against the Tenant or the guest because they were not named insureds under the policy. Contrarily, the Tenant argued that there was no cause of action against her under the governing documents of the Association, and that the subrogation waivers applied to her (thereby preventing suit against her by the Insurer).
The Trial Court agreed with the Tenant and held that the governing documents were intended to cover her because she was obligated to comply with the governing documents pursuant to her lease (and was therefore entitled to the protections of the governing documents). As a result, the Trial Court held that the subrogation waivers applied to the Tenant, and that Insurer could not proceed against Tenant by subrogation. The Insurer appealed to the Virginia Supreme Court.
Virginia Supreme Court’s Analysis
On appeal, the Virginia Supreme Court analyzed the applicable insurance policy and the governing documents of the Association. The Virginia Supreme Court ultimately reversed the Trial Court and held that the Tenant was not an implied insured for purposes of subrogation, and, as a result, the Insurer could sue the Tenant for damages allegedly caused by her negligence in starting the fire.
Specifically, the Virginia Supreme Court focused on the fact that the lease between Tenant and Owner provided that the Tenant agreed to be responsible for her own actions, and to replace/be responsible for damages caused by her own negligence inside the Unit. Moreover, the Association’s rule and regulations provided that a master insurance policy covered the Condominium itself, but that the deductible would be paid by the unit owner responsible for the claim.
The Virginia Supreme Court also pointed out that the Condominium Association’s bylaws provided that the Association’s insurance policies were expressly for the benefit of the Association, its owners, and their mortgagees. The Declaration of the Condominium also permitted owners to buy their own insurance if they so chose. The Declaration of the Condominium additionally provided “that the insurer waives its rights of subrogation as to any claims against Unit Owners and the Association, their respective servants, agents and guests.”
As the Virginia Supreme Court pointed out, the insurance policy at issue named each unit owner as an additional insured under the policy. The policy also expressly waived its right to subrogation against additional insureds. The Virginia Supreme Court analyzed the policy and found it clear on its face. The Virginia Supreme Court held that tenants were clearly not listed as insureds under the policy. Rather, “insureds” under the policy were the Association and the unit owners.
As to the Tenant’s claim of being an “implied insured”, the Virginia Supreme Court reasoned that there was no evidence of that and no contract between Tenant and Association that would give rise to such an inference. Likewise, the Virginia Supreme Court pointed out that the governing documents were clear in protecting only the Association and unit owners with the master insurance policy, thereby creating a possibility that tenants would be responsible for their own negligence (and, therefore, that they could be pursued via subrogation for casualty losses).
The Virginia Supreme Court also reasoned that the lease obligated Tenant to be liable for her own negligence, and that she would be responsible for negligently-caused losses. Moreover, the Virginia Supreme Court pointed out that there was no evidence that would indicate an agreement that Tenant would not be liable for her own negligence under common law principles. Under Virginia law, a tenant is responsible for his own negligence unless there is a contrary provision in a written lease. Ultimately, the Virginia Supreme Court reversed the Trial Court’s decision and remanded it for additional proceedings.
This decision provides a useful illustration of how the doctrine of subrogation may come up in the context of community associations. Community associations faced with claims of subrogation ought to consult experienced attorneys familiar with the interplay of the doctrine of subrogation and community association law.