Ram Mut. Ins. Co. v. Rohde

820 N.W.2d 1

RAM MUTUAL INSURANCE COMPANY, Appellant,

v.Rusty ROHDE d/b/a Studio 71 Salon, Respondent.

No. A10–2146.

Supreme Court of Minnesota.

Sept. 5, 2012.

Syllabus by the Court

Whether an insurer may maintain a subrogation action against the negligent tenant of its insured is a question answered by examining the facts and circumstances of each case.

John Neal, Kirby Dahl, Willenbring, Dahl, Wocken & Zimmermann, PLLC, Cold Spring, MN, for appellant.

Matthew W. Moehrle, Rajkowski Hansmeier Ltd., Saint Cloud, MN, for respondent.

OPINION

GILDEA, Chief Justice.

In this subrogation action, appellant RAM Mutual Insurance Company seeks to recover payment it made to its insured for the repair of water damage allegedly caused by the negligence of respondent Rusty Rohde, the commercial tenant of RAM's insured. The district court granted Rohde's motion for summary judgment, dismissing RAM's subrogation claim as a matter of law, relying on the court of appeals decision in United Fire & Casualty Co. v. Bruggeman, 505 N.W.2d 87 (Minn.App.1993), rev. denied (Minn. Oct. 19, 1993). The court of appeals affirmed. RAM Mut. Ins. Co. v. Rohde, 805 N.W.2d 554, 557 (Minn.App.2011). We reject the rule from Bruggeman and conclude that the question of whether an insurer may pursue a subrogation action against the tenant of an insured, when the tenant's negligence caused damage to the insured's property, must be answered by examining the unique facts and circumstances of each case. Therefore, we reverse and remand.

This action arises out of the landlord and tenant relationship between JD Property Management, LLC, and Rusty Rohde. JD Property owns a rental property in Sauk Centre, Minnesota, containing three business suites. Rohde rents one of the suites and operates a salon business, the Studio 71 Salon, in the leased premises. Rohde's rental is governed by a 5–year commercial lease agreement (the “lease”) with JD Property.

After taking possession of the leased premises, Rohde replaced two pedicure chairs in his salon and installed water lines serving the chairs. In February 2008, one of the water lines allegedly burst, causing water damage to the Studio 71 Salon suite as well as an adjacent suite. JD Property filed an insurance claim with its property insurer, RAM, requesting payment for the water damage. RAM paid JD Property $17,509, the full amount of JD Property's claim, to repair the damage.¹ Because Rohde had installed the water line, allegedly without JD Property's knowledge in violation of the lease, RAM filed a subrogation action against Rohde, asserting breach of contract, negligence, and promissory estoppel. As subrogee of JD Property, RAM sought recovery of the $17,509 paid to JD Property for repair of the damage at the insured premises.

Rohde brought a motion for summary judgment, relying upon a line of cases from the Minnesota Court of Appeals beginning with United Fire & Casualty Co. v. Bruggeman, 505 N.W.2d 87 (Minn.App.1993), rev. denied (Minn. Oct. 19, 1993). Rohde argued that Bruggeman barred RAM's subrogation claim, regardless of whether Rohde was at fault for the losses occasioned by the water damage, because Rohde “as a tenant, is a co-insured under the RAM policy.” The district court granted Rohde's motion, determining that resolution of the case was governed by Bruggeman. Based on Bruggeman, the district court found that Rohde was a co-insured for purposes of JD Property's insurance policy. Because general principles of insurance law prohibit an insurer from bringing a subrogation claim against a co-insured, see16 Lee R. Russ & Thomas F. Segalla, Couch on Insurance § 224:1 (3d ed.1995), the court dismissed RAM's complaint with prejudice as a matter of law.

The court of appeals affirmed. RAM Mut. Ins. Co. v. Rohde, 805 N.W.2d 554 (Minn.App.2011). The court determined that the lease placed no express obligation on either JD Property or Rohde to procure property insurance providing coverage for the water damage at issue, and that under Bruggeman, Rohde was a co-insured under the RAM insurance policy. Id. at 556. Because Rohde was a co-insured, the court held that “RAM cannot maintain a subrogation action against Rohde.” Id. at 557. We granted RAM's petition for review.

I.

This case presents the question of whether an insurer may maintain a subrogation action against the insured's negligent tenant.² Subrogation “is the substitution of another person in place of the creditor to whose rights he or she succeeds in relation to the debt, and gives to the substitute all the rights, priorities, remedies, liens, and securities of the person for whom he or she is substituted.” 16 Lee R. Russ & Thomas F. Segalla, Couch on Insurance § 222:5 (3d ed.1995). In the insurance context, subrogation “involves the substitution of an insurer (subrogee) to the rights of the insured (subrogor).” Medica, Inc. v. Atl. Mut. Ins. Co., 566 N.W.2d 74, 76 (Minn.1997). Upon payment of a loss, the insurer is subrogated in a correspondingamount to the insured's right of action against any third party whose wrongful conduct caused the loss. See Blair v. Espeland, 231 Minn. 444, 446, 43 N.W.2d 274, 276 (1950); see also Buell v. United Firemen's Ins. Co., 167 Minn. 183, 185, 208 N.W. 819, 820 (1926). Subrogation arises “only with respect to rights of the insured against third persons to whom the insurer owes no duty”; consequently, “it has long been held that no right of subrogation can arise in favor of an insurer against its own insured.” Russ & Segalla, supra, § 224:1; see also Wager v. Providence Ins. Co., 150 U.S. 99, 108, 14 S.Ct. 55, 37 L.Ed. 1013 (1893). This basic principle extends to prohibit an insurer from bringing a subrogation action against its co-insured. See Rausch v. Allstate Ins. Co., 388 Md. 690, 882 A.2d 801, 807 (2005) (explaining that there can be no subrogation of an insurer against its own insured “because, as subrogee, the insurer stands in the shoes of the insured,” and subrogation against an insured would therefore “essentially involve the insured suing himself to recover damages he sustained by his own conduct”).

In response to Rohde's motion for summary judgment, the district court concluded that subrogation was not available based on the court of appeals decision in United Fire & Casualty Co. v. Bruggeman, 505 N.W.2d 87 (Minn.App.1993), rev. denied (Minn. Oct. 19, 1993). When considering an “appeal from summary judgment, we must determine whether there are any genuine issues of material fact, and whether the lower court erred in its application of the law.” Olmanson v. LeSueur Cnty., 693 N.W.2d 876, 879 (Minn.2005). We review the district court's “legal decisions on summary judgment under a de novo standard,” SCI Minn. Funeral Servs., Inc. v. Washburn–McReavy Funeral Corp., 795 N.W.2d 855, 861 (Minn.2011), and “view the evidence in the light most favorable to the party against whom judgment was granted,” Fabio v. Bellomo, 504 N.W.2d 758, 761 (Minn.1993).³

A.

Because the district court and court of appeals determined that Bruggeman was dispositive, we turn first to a discussion of that case. In Bruggeman, the court of appeals sought to interpret the application of basic subrogation principles to the specific question of when a landlord's insurer may bring a subrogation action against the landlord's negligent tenant. 505 N.W.2d at 88. The case arose when the landlord's property insurer brought a subrogation action against the tenants, alleging that the tenants had negligently caused fire damage to the landlord's building. Id. No written lease governed the landlord-tenant relationship, and the parties had no agreement regarding the provision of fire insurance. Id. But the landlord had purchased insurance, which provided coverage for the damage at issue. Id.

The Bruggeman court, following what it described as the “the majority position,” determined that “the landlord and the tenant were co-insureds because each had an insurable interest in the property—the landlord a fee interest and the tenant a possessory interest.” Id. at 88–89. The court grounded this result in its determination that by paying rent, tenants indirectly pay a landlord's insurance premiums. Id. at 89. Because an insurer cannot bring a subrogation action against its own insured, the court concluded that the tenants, as co-insureds of the landlord, were “not subject to subrogation” by the insurer. Id. at 90.

The court further reasoned that denying subrogation efficiently allocated economic resources because if “each tenant is responsible for all damages arising from its negligence in causing a fire and if each tenant was therefore responsible for its own fire insurance, the same property would be insured many times over.” Id. at 89. Moreover, the court stated that its holding that a landlord and tenant were co-insureds was consistent with the expectations of an insurer insuring rental property. Id. Even though an insurer “may not have control over who the individual tenants are,” the court determined that “[t]he insurer knows the risk it is undertaking when insuring a rental property” and “can increase its premiums to reflect increased risks presented by changing tenant use.” Id.

The court of appeals has followed the Bruggeman approach as the default rule in cases in which the parties to a lease have no express agreement regarding the procurement of insurance to cover the particular loss at issue. See, e.g., Bigos v. Kluender, 611 N.W.2d 816, 822 (Minn.App.2000) (explaining in a case of fire damage that the Bruggeman rule applies “unless an express agreement was entered into between the insured and its tenant requiring the tenant to carry its own fire insurance”), rev. denied (Minn. July 25, 2000); St. Paul Cos. v. Van Beek, 609 N.W.2d 256, 257–58 (Minn.App.2000), rev. denied (Minn. June 27, 2000). The court of appeals has extended Bruggeman to circumstances in which property damage occurs and a lease requires a tenant to carry...