In a recent Virginia Supreme Court case, Erie Insurance Exchange v. Alba, a condominium association’s (“Association’s”) Insurer (“Insurer”) paid for fire damage caused by a tenant (“Tenant”) of a unit owner (“Owner”). After paying for the damage, Insurer brought suit against Tenant to recover the payments it made.
Insurer alleged that Tenant or her guest negligently caused the fire by failing to dispose of cigarettes properly. Insurer argued the subrogation waiver was inapplicable to Tenant because Tenant was not an “insured.” In response, Tenant filed a third-party complaint against Owner for indemnification in the event Insurer prevailed on its claim against Tenant.
Lower Court Ruling
The circuit court held that Insurer could not pursue a subrogation claim against Tenant. The court relied on Monterey Corp v. Hart, for the proposition that a “tenant can be relieved from common law negligence liability for fire damage if it was the intent of the parties that the tenant be relieved from such liability.” The court looked to the Association’s Declaration, Bylaws, and Rules & Regulations (collectively, “Association Documents”), and held the Association Documents intended that Tenant “be bound by all requirements of an owner” and obtained the “same benefits” as the owner, including the subrogation waiver.
Holdings
- Tenant was not an “insured” under the applicable policy and, therefore, Tenant was not protected by the subrogation waiver.
- Association could not unilaterally imply coverage for Tenant, even if Association’s governing documents could be construed as agreements between the Association and unit owner’s tenants.
- Nothing in the lease between Owner and Tenant altered Tenant’s common law accountability for negligent actions.
- Tenant was not an implied insured of the Association.
Court’s Reasoning
The Court focused on the insurance policy (the “Policy”) to determine who qualified as an “insured.” Under the plain language of the Policy, the only “insureds” were the Association and unit owners. Because Tenant was neither, Tenant was not an “insured” under the Policy.
Under the Policy, Insurer only waived subrogation (i.e. insurer’s right to stand in the shoes of its insured and seek indemnification from the negligent party) with respect to claims against the named and additional “insureds.” Insurer did not, therefore, expressly intend to waive subrogation with respect to claims against tenants and non-owner occupants. Without any such express intent, there could be no implied waiver of subrogation. The express Policy language was the only source of the waiver, and any differing intent from the Association Documents was irrelevant. Only the Policy could bind the Insurer.
Even if the Association Documents were relevant, they did not show any intent to consider the Tenant an “implied insured” of the Association. The residential lease and Association Documents showed no intent by the Association to relieve tenant from liability for negligence. Because the Association never agreed to assume or absolve Tenant’s liability for negligence, the Association did not intend to subvert Insurer’s ability to recover.
Significance
An insurance policy’s definition for who is an “insured” is critical. If the tenants do not qualify as “insureds,” they likely will not be protected from subrogation claims. To protect themselves, tenants need to verify they are expressly within the applicable policy definition of “insureds” or obtain their own insurance to cover outstanding risk. Tenants should not assume coverage, even if association documents suggest there should be coverage. Fitting within a policy’s definition of an “insured” is essential.
