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Insured’s lease bars carrier’s subrogation claim against tenant

11/7/24

By: Matthew Pakkala

The Michigan Court of Appeals reversed a seven-figure award obtained by a Plaintiff-subrogee, Hastings Mutual Insurance Company (“Hastings”), against a Defendant-lessee, Nidec CHS LLC (“Nidec”), resulting from a dispute over fire damage and the cost of repairs. 

The case, Hastings Mutual Insurance Company v. Nidec CHS LLC,¹ arose following a 2021 fire at a building used by Nidec to house their coil processing business. Nidec’s business involved the use of “paint booths” which allowed its employees to complete custom paint jobs for customers. Between each use, the employees used rags to clean excess paint from the booths. The rags would then be placed in fireproof bins as the rags are prone to spontaneously combust. 

In January 2022, Hastings, the insurer of the damaged building and subrogee of the landlord, R. Shafer Builder LLC (“Shafer”), filed suit against Nidec claiming that the 2021 fire was caused by Nidec’s failure to properly dispose of the combustible rags. Hastings alleged claims of negligence and breach of contract against Nidec and supported its allegations with an affidavit from a fire investigator. In the trial court, Nidec successfully moved for summary judgment on the negligence claim, leaving only the breach of contract claim to be decided.  

Hastings claimed that under the lease agreement, Nidec was required to (1) keep the building in “good repair” and return it in the “same like condition” and to (2) refrain from any acts or practices that “could injure the building.” Further, Hastings claimed that Shafer would not be responsible for repairs resulting from Nidec’s negligence pursuant to the agreement. Nidec countered by asserting that, under the terms of the lease agreement, Shafer was required to provide insurance for the building and invoice Nidec for the insurance premiums. Nidec argued that based on the lease’s language, itself and Shafer had contemplated the risk of fire damage and allocated that risk to Hastings through the insurance premiums. 

Hastings responded by asserting that there was no evidence that Shafer had ever invoiced the defendants for the premiums, nor was there evidence that Nidec expected their rental payments to be used for the insurance premiums.  

The trial court then granted summary judgment for Hastings, finding that the lease agreement did not require Nidec to pay the premiums, and further, that the agreement permitted, but did not require, Shafer to invoice Nidec for the premiums. The trial court reasoned that, because Shafer did not invoice Nidec, there was no agreement to have Shafer’s insurance policy (with Hastings) benefit Nidec. Therefore, under the terms of the agreement, Nidec was responsible for the cost of fire-related repairs as a violation of their duty to refrain from acts or practices that may “injure the building.” The trial court then granted Hastings’ motion for summary disposition of damages, awarding Hastings $1,165,450.85 (i.e., the cost to repair the building). 

On appeal, the Michigan Court of Appeals reversed, finding that the trial court misinterpreted the language of the lease agreement. The Appellate Court determined that the lease agreement did not assign liability to Nidec for fire-related damages and that the plain language of the agreement reflected the parties’ intent to have Shafer insure the building for his own benefit, as well as for Nidec’s.  

The Appellate Court reasoned that the provision excusing Shafer from repairs related to Nidec’s negligence did not also impose liability on Nidec. It merely excused Shafer from repairing the premises. Moreover, the Appellate Court found that the lease’s “Real Property Insurance” provision contained mandatory language (i.e., “will” and “shall”) which required Shafer to insure the building and invoice Nidec for the premiums.  

The Appellate Court concluded that such an arrangement in the lease, where the lessee agrees to pay for the insurance premiums associated with the coverage of the leased premises, entitles the lessee to coverage under the landlord’s insurance policy even if the landlord fails to ever actually invoice the lessee. Therefore, the Appellate Court determined that the intention of the parties to the lease (i.e., Nidec and Shafer) controlled the insurance policy held by Shafer. Accordingly, the Appellate Court held that Hastings was barred from seeking payment from Nidec, because “if Shafer cannot seek payment for repairs from defendants, the plaintiff, as Shafer’s subrogee, also cannot.” 

This decision highlights the importance of careful underwriting in the context of real property. While a landlord or property owner may be the named insured on a policy, an insurer’s subrogation rights may be affected by agreements (e.g., a lease) made by the named insured and that insured’s lessees or renters. An insurer’s failure to consider and account for such a situation leaves their ability to enforce their subrogation rights against an insured’s lessees or renters vulnerable to being contracted away. 

For more information, please contact Matthew Pakkala at matthew.pakkala@fmglaw.com or your local FMG attorney.  

1. No. 2022-000198-198-CB (Mich. Ct. App. Oct. 22, 2024).   ↩︎