Equitable subrogation is a common law doctrine that permits an insurance company which has paid its insured for a loss covered under an insurance policy to substitute itself for the insured and proceed against a third party for a loss caused by the third party.   The doctrine of equitable subrogation is rooted in the policy that a tortfeasor should not be unjustly enriched by the fortuitous circumstance that a loss sustained by another due to the tortfeasor’s negligence is covered by insurance.

In DiLullo v. Joseph, 259 Conn. 847, 851 (2002), the Connecticut Supreme Court established a default rule under which a landlord’s insurer does not have a right of subrogation against a tenant unless the landlord and tenant have made a specific agreement which notifies the tenant of the potential liability for damage to the property.  The Supreme Court in DiLullo did not specify the details of what must be included in a lease agreement in order for the right of subrogation to exist in favor of a landlord’s insurer.

In a recent decision, the Connecticut Supreme Court held that lease provisions requiring the tenant to obtain insurance for the benefit of the landlord and to hold the landlord harmless from any loss arising from the use of the property were sufficient to permit a right of subrogation by the landlord’s insurer against the tenant for damage caused by the tenant.  Amica Mut. Ins. Co. v. Muldowney, 328 Conn.428 ( 2018).  You can read the decision here.

The tenants in Muldowney  left the property they leased vacant for an extended period during a winter vacation and failed to ensure that the heating system had sufficient fuel to operate.  While the tenants were away, the heating system failed due to insufficient fuel and an interior pipe burst due to low temperatures, causing property damage.   Under their lease agreement, the tenants were responsible for ordering and paying for oil and were required to purchase liability and property insurance for the benefit of the landlord.  They were also responsible for holding the landlord harmless from any loss and paying lost rent and other damages arising from a breach of any obligation under the lease.  The Supreme Court affirmed the trial court and appellate court decisions which rejected the tenant’s argument that it could not be held liable to the landlord’s insurance company in subrogation without a specific provision in the lease that authorized subrogation by the insurer.  The Court ruled that an express provision that notifies a tenant of their responsibility for negligence and the need to obtain insurance to cover liability for negligence is the type of agreement under DiLullo which will overcome a presumption against subrogation.

Following the Connecticut Supreme Court’s decisions in Muldowney and DiLullo, it is important for individual and commercial tenants to understand the terms of their lease and their obligations under the lease in order to properly manage the risk of liability to the landlord or the landlord’s insurer for damage to the leased property.  It is equally important that tenants purchase the appropriate insurance coverage necessary to protect against the risk of liability to the landlord and its insurance company, and to understand whether their insurance policy provides coverage for all potential liability to the landlord.