Sharing the Spoils

When can a tenant take the benefit of a landlord’s insurance?

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It is not uncommon for a lease to impose an obligation on one party or another to insure the subject property against the usual insured risks. But difficult questions can arise when the party placing the insurance is not the party in occupation. When and to what extent can the proceeds be shared? And what impact does such an arrangement have on damage caused by the occupier’s negligence?

This question arose in the case of Fresca-Judd v Golovina (QBD, 5 February 2016). The facts were that the tenant, G, took an 18-month lease of a cottage in Wiltshire. The tenancy contained a covenant requiring the landlord (F) to insure and also required G to leave the heating on if leaving the cottage vacant during the winter months.

G moved in shortly before Christmas, but after the festive period she returned to London. During her absence, the property was found to have suffered extensive flood damage. F was compensated in full by her insurers, who then commenced proceedings in her name in the exercise of their rights of subrogation. It was alleged that the heating had been found switched off, and that the water had frozen causing the pipes to burst.

G denied liability on the facts. She also argued that, on a proper construction of the lease, F had been required to insure for the joint benefit of both herself and G, and that in the event of damage by an insured risk such as flooding she was required to look to insurers rather than to G for compensation. In the exercise of their subrogated rights, insurers could be in no better position than F and were thus precluded from bringing a claim.

Holgate J acceded to this argument. He carried out a review of authorities such as Mark Rowlands v Berni Inns [1985] 1 QB 211, Lambert v Keymood [1999] Lloyds Rep IR 80 and Gard Marine & Energy Ltd. –v- China National Chartering Co Ltd. [2015] 1 Lloyds Rep 381, and drew from them the following principles:

  1. The court was required to construe the terms of the tenancy agreement to determine how the parties had chosen to allocate risk;
  2. The presence of a covenant to insure is an important indication that the parties intended that the tenant (a) need not take out his or her own insurance and (b) will not be liable in the event that a claim for damage caused by an insured risk is met;
  3. The strength of that indication will depend on the other terms of the lease;
  4. The indication is stronger where the tenant is obliged to pay an insurance rent;
  5. Similarly, the existence of other terms, such as a term relieving the tenant from an obligation to repair, requiring the landlord to lay out insurance proceeds on repairs, or suspending the tenant’s obligation to pay rent in the event that the property is rendered uninhabitable, can all fortify the strength of the indication in 2) above; but its application does not depend on the inclusion of all or any of those terms;
  6. The principle will defeat a claim in negligence even in the absence of a claim expressly absolving the tenant of liability for his or her negligent acts.

Applying those principles to the lease before him, Holgate J was particularly influenced by the fact that the tenant was obliged to meet any increase in the insurance premium (a covenant similar to one which featured in a Canadian case, Agnew Surpass Shoes Ltd. v Cummer-Yonge Investments Ltd. (1975) 55 DLR (3d) 676), that the lease required G to pay sums which were irrecoverable from insurers, and that the insuring covenant required the insurance “to cover any public liability as well as compensation for any loss suffered by the Landlord”.  He also noted that a rent suspension clause operated unless the tenant was guilty of an act or omission which vitiated the insurance (and would therefore bite in the event of negligence falling short of that); and that the lease contained a provision expressly requiring the tenant to pay compensation for damage caused by fires lit by the tenant within the grounds. These clauses were all, in the Judge’s view, consistent with the inference that the obligation to insure was (save where the lease expressly provided otherwise) to enure for the benefit of both landlord and tenant.

For good measure, the Judge also held that the evidence adduced by F did not actually eliminate the possibility that there was an alternative cause of the failure of the heating, namely simple mechanical breakdown. He applied dicta in The Ikarian Reefer [1995] 1 Lloyds Rep 455 at 459 to hold that, by failing to exclude what was a substantial, as opposed to a remote or fanciful possibility, F had not discharged the burden of proof.

This is thought to be the first English case in which a Court has had to consider the entitlement of a residential (as opposed to commercial) tenant to take the benefit of a landlord’s insuring covenant. While much will turn on the terms of an individual lease, it will clearly facilitate argument on the part of tenants that they should be entitled to take the benefit of such covenants, particularly in the absence of any clear indication to the contrary in the lease.

The announcement about this case can be seen here