In case of fire--do not call your lawyer! A landlord's ability to recover for property damage from a negligent tenant

Kiselis, Anthony J

INTRODUCTION

Most insurance policies contain a subrogation provision that allows the insurance company to bring an action against a tortfeasor who imposed a loss upon an insured for which the insurance company had to pay money in compensation. Even if the insurance policy is silent on this matter, the law in most (if not all) states would allow the insurance company to sue the tortfeasor on a theory of equitable subrogation. However, there is a firm principle in the law that an insurance company cannot subrogate against its own insured.1 Indeed, if an insurance company could subrogate against its own insured, it would, for obvious reasons, defeat the purpose of the insurance contract.

Parties to commercial leases often insist that the lease must provide that any insurance procured by the lessor or the lessee contain a provision that bars the insurance company from seeking to subrogate against the other party to the lease. The reason for the inclusion of such a clause is obvious. Suppose, for example, that a fire or other casualty damages the leased premises and the business assets of the lessee; that the lessor has insurance to cover damage to its real estate; and the lessee has insurance that protects its business assets. If the fire were the fault of the lessor, the lessee's insurance company would be posed to file a subrogation action against the lessor. Conversely, if the fire or other casualty was the fault of the lessee, the lessor's insurance company could file a subrogation action against the lessee for monies paid by reason of the damage to the real estate. At the time the lease is entered, the lessor and the lessee, who are unable to tell the future, often decide that they must protect their mutual interests by requiring the lessor to purchase insurance. That policy typically provides that the insurer will not seek to subrogate against the lessee in the event of a casualty produced by the lessee's negligence. It also provides that the lessee agrees to purchase corresponding insurance whereby the insurance company agrees not to subrogate against the lessor for damage produced by that entity's negligence.

Substantive insurance law over the last 42 years has also developed a corollary principle. For example, in some states, in cases involving non-commercial leases, an insurance company is precluded from filing a subrogation action against a lessee absent the most explicit language to the contrary. An examination of the substantive law in Illinois, California, and New York is illustrative of this development. The Illinois and California experiences serve to highlight how, absent the most explicit language to the contrary, courts have extended the non-subrogation provisions otherwise found in commercial leases to those non-commercial leases that are silent on the issue.

II.

THE ILLINOIS EXPERIENCE

The law in Illinois provides that, in the absence of an express agreement to the contrary, a tenant is liable for damage to the leased premises resulting from his or her negligence.2 Although this principle has long been the law in Illinois, that law has taken a particular turn since 1955. In effect, the Illinois courts now find an implicit intent on the part of the lessor and the lessee to exempt the lessee from liability for loss by fire resulting from the lessee's negligence (despite the fact that not a single lease so construed has contained an explicit provision to this effect).3 As one Illinois court has noted, "[a]t common law a tenant is responsible for damage to leased premises resulting from his own negligence, but exculpatory clauses in the lease which relieve the tenant from responsibility for such losses have been given effect in Illinois and in a majority of jurisdictions."4

In the case of Cerny-Pickas & Co. v. C.R. Jahn Co.,5 Cerny-Pickas leased a large industrial building with machinery and equipment to C.R. Jahn Co. The building was subsequently destroyed by a fire caused by the negligence of C.R. Jahn. Cerny-Pickas and the Orient Insurance Company, as subrogee under the insurance policy issued by Orient to Cerny-Pickas, brought an action in the Superior Court of Cook County (now the Circuit Court of Cook County) against Jahn to recover damages sustained secondary to the loss of the leased building, machinery and equipment.

The yield-back provision at issue in Cerny-Pickas stated, in relevant part, "Lessee will keep said premises, including all appurtenances, in good repair, . .; and upon the termination of this lease, in any way, will yield up said premises to Lessor in good condition and repair (loss by fire and ordinary wear excepted)."6

The lessor claimed $125,000 in damages; the subrogee, Orient Insurance Company, claimed $23,617.54. The plaintiffs alleged that the fire was caused by the lessee's violation of Chicago municipal ordinances regulating the construction of partitions in the building as well as the installation of a gas water heater and other acts of negligence. The case was decided in the Superior Court of Cook County on the pleadings. A judgment was entered favoring the defendant/lessee on the grounds that, as a matter of law, the yield-back provision in the lease completely exonerated it from liability for loss due to fire even if the fire was caused by its own negligence. Citing public policy considerations, the Illinois appellate court reversed. That court concluded that exculpatory provisions in a contract should not be construed to exempt the party from liability for loss resulting from its own negligence or the violation of a positive duty imposed by law. Accordingly, the court held that the yield-back provision in the lease was not a bar to recovery by the plaintiffs. The lessee then sought further review by the Illinois Supreme Court.

The supreme court focused primarily on the exculpatory yield-back clause in the lease and held that the lessee was protected by that clause from a lawsuit for a fire caused by its own negligence. The court also found that the lease, read as a whole and read in context, supported the parties' intent, in executing the lease, that the lessor look solely to insurance as compensation for any fire damage.

In ruling that the yield-back provision exempted the lessee from liability for fire damage caused by its own negligence, the Illinois Supreme Court explained:

The word "fire" is used without qualification throughout the lease before us. Its natural meaning would include all fires, regardless of their origin. To express the meaning for which the lessor contends, the lease would have to be altered to modify the word "fire" by the qualifying words "not due to lessee's negligence." It is more reasonable to assume, we think, that laymen would regard the word "fire" as including all fires whether of negligent origin or otherwise. Under familiar standard fire insurance policies, the insurer is obligated to pay for fires caused by negligence.7

The Illinois high court also examined other lease provisions in reaching its decision. These included provisions that: (1) the lessor was to pay for fire insurance; (2) the lessee would be responsible for any increases in the premiums due to the nature of the lessee's business; (3) the lessor could terminate the lease if the premises became untenantable by fire or other casualty; and (4) the lessee would keep all improvements to the leasehold in good repair at his own expense, except where the repair was necessitated by damage secondary to fire or other causes beyond the lessee's control. The court found that these provisions, read together, indicated that the parties contemplated that the risk of fire loss would be borne by the lessor's insurance company, and that the parties further contemplated a customary insurance policy which covered both fires caused by negligence and fires resulting from acts of God or other non-negligent causes. Accordingly, the court held that the lessor could seek compensation only from its insurer for damage caused by any kind of fire.

The Cerny-Pickas court also emphasized that if it were to adopt the lessor's position, both parties to a lease would be required to carry fire insurance in order to insure that each was protected in the event of fire loss. Thus, the lessor and lessee would each have to secure insurance to protect against fires resulting from their own negligence. The court questioned whether such coverage would be available to the parties and dismissed the lessor's argument that the terms of the lease mandated that course of action.

In Stein v. Yarnall-Todd Chevrolet, Inc.,8 the Supreme Court of Illinois considered an action for fire damage to leased premises resulting from the negligent use of an oxyacetylene torch by one of the lessee's employees in an automobile repair shop located on the leased premises and operated by the lessee. The owners of the premises brought suit against the defendant/car dealership for damage to the leased property. The trial judge dismissed the complaint on the grounds that the lease provisions relieved the lessee from any responsibility for fire damage to the real estate whether caused by its own negligence or otherwise. The Illinois appellate court reversed and remanded the case to the trial court with directions to deny the motion to dismiss and to proceed with the litigation. However, the Illinois Supreme Court reversed again and reinstated the judgment of the trial court.

The yield-back provision in the Stein lease provided as follows: "At the termination of this lease by lapse of time or otherwise, lessee shall return the premises and all leasehold improvements and fixtures therein in as good condition as when lessee took possession, ordinary wear and tear or damage by fire or other casualty beyond lessee's control excepted."9 The Stein court noted that the provisions in the yield-back clause were strikingly similar to the provisions construed by that same court in Cerny-Pickas & Co. v. C.R. Jahn Co., discussed above. Accordingly, it held that the exculpatory clause would bar any lawsuit filed by the lessor to recover for the negligently inflicted fire damage.

The Stein court also noted the existence of lease provisions forbidding the lessee from undertaking any activities which would increase insurance premiums or invalidate an insurance policy and that the lessee was responsible to obtain insurance against the breakage of plate glass, injuries to its own employees, public liability, and loss or damage secondary to boiler explosions. The court gleaned from the totality of these provisions that "it was contemplated that the lessor would carry insurance on the property and look to the insurance for compensation for any loss by fire. If the parties had intended otherwise, there would have been no reason for such a provision."10 The Illinois Supreme Court also observed that if the parties to the Stein lease had intended that the lessee bear any loss occasioned by a fire secondary to its own negligence, that intention would have been articulated in a provision requiring the purchase of insurance against such an occurrence by the lessee. The court explained:

A reading of the lease makes it apparent that the parties, particularly, the lessors, were conscious of the importance of insurance. The lease required the lessee to procure and maintain during the term of the lease insurance to cover plate glass damage on the premises, damage by boiler or boiler explosion, public liability, and damage or injury to employees of the lessee. The lessee was required to deposit with the lessors the policies it procured covering plate glass breakage and the lease specified minimum coverage limits for the public liability and boiler insurance to be procured by the lessee. Though the lessors here did not expressly undertake to procure fire insurance, as the lessor had done in the Cerny-Pickas lease, it is obvious, pursuant to a common business practice which the lessors acknowledge, that they would make certain that valuable commercial property, commanding a rental of $436,600 over a 9-year period, would be insured against the catastrophic hazards of fire. As the lessee was required by the lease to maintain other coverages, we conclude that this insurance was to be maintained by the lessors. It is plain that the cost of this insurance was considered in calculating the rental, and an economically realistic conclusion is that the premiums were in practical effect to be paid by the lessee.11

The Stein court was the first tribunal in Illinois to recognize that the lessor's cost of securing fire insurance was calculated in rent costs. As a matter of practical reality, the premiums were effectively paid by the lessee. Accordingly, the lessor's exclusive remedy was the fire insurance it had purchased.

In One Hundred South Wacker Drive, Inc. v. Szabo Food Service, Inc.,12 the Wacker Drive entity owned a commercial building in Chicago, a portion of which was rented to Szabo Food Service, Inc. On April 3, 1968, a fire occurred in the Szabo leasehold which caused substantial damage to the premises. The plaintiff Wacker sought damages in the amount of $500,000, but the trial judge entered judgment on the pleadings in favor of Szabo. Although the Illinois appellate court reversed, the Supreme Court of Illinois reversed again and reinstated the trial court judgment.

The yield-back provision in the lease between Wacker and Szabo read as follows:

At the termination of this lease by lapse of time or otherwise:

2. Tenant shall return the Leased Premises and all equipment and fixtures of Landlord in as good condition as when Tenant originally took possession. . . ordinary wear and loss or damage by fire or other casualty . . . excepted, failing which Landlord may restore the Leased Premises to such condition and Tenant shall pay the cost thereof.13

Following the precedent established in the Cerny-Pickas and Stein cases, the Illinois Supreme Court held that the yield-back clause exculpated the lessee from liability for fire damage attributable to the lessee's negligence.

In Ford v. Jennings,14 the defendant/vending company leased a commercial building in Morris, Illinois, from the plaintiff. "The written lease specified that the building was to be occupied by the lessee as a vending business only and that the premises were not to be sublet without the consent of the lessor."15 After the defendant took possession of the premises, however, the defendant, doing business as Coffeehouse Management, used part of the building for storage and repair of restaurant equipment. The remainder of the premises was occupied by the defendant Grundy Vending Company. On February 12, 1976, the building was destroyed by a fire originating in a deep fat fryer that was being repaired by an employee of Coffeehouse Management. The plaintiff filed an action to recover damages for loss of the building, and the trial judge entered summary judgment in favor of the lessee/defendants.

The plaintiff appealed, arguing that the lease as a whole was ambiguous about whether a tenant would be responsible for damage to the premises by fire secondary to its own negligence. It further claimed "that this ambiguity resulted in a genuine issue of material fact so as to preclude the entry of summary judgment" in favor of the lessee.16

The Illinois Appellate Court affirmed the judgment in favor of the lessee. The court explained:

We think the yield-up clause in the case at bar exculpating "loss by fire or inevitable accident" is within the rule recognized in One Hundred South Wacker Drive, Inc., and is even less ambiguous than the phrase considered there, "fire or other casualty." Of similar import are two other cases holding the lessee not liable for fire caused by his own negligence.17

However, the court reversed the judgment with regard to the unauthorized sublease. In refusing to extend the yield-back clause to the unauthorized sublease, the court stated:

In the absence of either the consent of the owner or privity of contract, the sublessee cannot rely upon an exculpatory provision in the original lease to bar liability for its negligence as against the owner of the leased property. Instead, the owner-landlord can recover from the sublessee for the damage caused by the sublessee's negligence.18

In Windsor at Seven Oaks v. Kelly,19 the Illinois appellate court was confronted with another fire loss case involving a landlord/tenant relationship. The plaintiff/landlord sustained damage to its premises by reason of the negligence of the defendant. The only issue was whether the defendant could be held liable for the damages produced by her own negligence. On that issue, the trial judge awarded summary judgment to the defendant.

One paragraph of the lease provided that "upon termination of this lease in any way, Lessee will immediately yield up the Apartment to the Lessor in as good condition as when the same was entered upon by Lessee, ordinary wear and tear excepted, and shall then return keys to Lessor."20 Another paragraph provided that "[t]he Lessee will, in the case of fire or other casualty, give immediate notice thereof to Lessor, who shall, at its option, terminate the lease or make the required repairs to the Apartment ...."21 The lease contained yet a third paragraph providing that the lessor:

shall not be liable for any damage done or occasioned by or from plumbing, gas, water, steam, or other pipes, sewerage, or the bursting, leaking or running of any cistern, tank, washstand, water closet or waste pipe, in, above, upon or about the said building or Apartment, . The Lessee further understands and agrees that it shall be the Lessee's own obligation to insure his personal property located in the Apartment,. ..22

The court held that the lease, read as a whole, exculpated the lessee from any liability for loss or damage flowing from the lessee's own negligence. The court observed:

An exculpatory clause in the lease exempts a Lessee from common law liability for loss by fire resulting from the Lessee's negligence. The intention of the parties in establishing liability is to be determined by considering the lease as a whole. The defendant is therefore exempted from liability for the loss to the plaintiff if her lease exculpates her.

The provisions of the defendant's lease demonstrate that the parties did not intend that the defendant be held liable for the damage to the plaintiff's property caused by the fire.23

The court then analyzed various provisions in the lease and concluded that the lease language "clearly demonstrates that it is the [landlord] and not the [tenant] who is to be the insurer of the [landlord's] property."24

The Windsor court also invoked an old common law rule of contract interpretation known as contra proferentum. This rule provides that ambiguous terms in a contract shall be interpreted adversely to the party who drafted the contract.25 As noted by the Windsor court:

[T]he language of a lease will be construed against the party who drafted it. Where a landlord has drafted the lease, a court will not impose a responsibility upon the tenant unless the circumstances and the contract clearly indicate that the tenant intended to assume such a responsibility.26

In Anderson v. Peters,27 the Illinois appellate court held that a landlord's insurance company could not file an action, based on subrogation principles, against a tenant with an oral lease who had negligently imposed a fire loss on the leased premises. This decision is most significant since it was not based on yield-back provisions (or other terms of the lease) which might exonerate a tenant from responsibility for such a loss. Rather, the court held that, absent clear language to the contrary, a tenant should be deemed to be a co-insured with a landlord, despite the lack of specific language to that effect in either the lease or the insurance policy.

In Anderson, a fire produced extensive damage in an apartment owned by the plaintiffs and leased to the defendants. The plaintiffs' insurance carrier paid the plaintiffs $16,223 for damages to the premises. The plaintiffs and their insurance carrier filed a lawsuit against the defendants to recover the damages. The lease at issue in Anderson was a standard oral lease to rent an apartment. Accordingly, there was no yield-back provision of any kind incorporated into the oral agreement. Holding that the landlord's insurance company could not recover from the defendants, even if the defendants had negligently caused the fire, the court explained:

Under the facts and circumstances in this record the subrogation should not be available to the insurance carrier because the law considers the tenant as a co-insured of the landlord absent an express agreement between them to the contrary, comparable to the permissive-user feature of automobile insurance. This principle is derived from a recognition of a relational reality, namely, that both landlord and tenant have an insurable interest in the rented premises, - the former owns the fee and the latter has a possessory interest. Here the landlords (Suttons) purchased the fire insurance from Central Mutual Insurance Company to protect such interests in the property against loss from fire. This is not uncommon. And as a matter of sound business practice, the premium paid had to be considered in establishing the rent rate on the rental unit. Such premium was chargeable against the rent as an overhead or operating expense. And of course it follows that the tenant actually paid the premium as part of the monthly rental.

The landlords of course could have held out for an agreement that the tenant would furnish fire insurance on the premises. But they did not. They elected to themselves purchase the coverage. To suggest the fire insurance does not extend to the insurable interest of an occupying tenant is to ignore the realities of urban apartment and singlefamily dwelling renting.28

It is apparent from the analysis above that the Illinois courts have come full circle between the years 1955 and 1986. In 1955, the Supreme Court of Illinois searched for language in a lease which would exculpate a tenant from liability for loss caused by its own negligence. In 1986, the Illinois appellate court effectively held that, absent language imposing liability on a tenant for fire loss, the court would assume that the landlord would seek recompense only from its insurance.

There are five appellate districts in the State of Illinois. The Anderson case was decided by the Third District. In 1988, the Illinois Court of Appeals, Second District, concurred with the holding in Anderson. In McGinnis v. LaShelle,29 the landlord's insurance company sought to recover damages from the defendants by way of a subrogation claim. The landlord and the defendants entered into the one-year lease of a supper club. At the time the lease was executed, the landlord/subrogor had obtained insurance on the supper club. A fire destroyed the supper club for which the insurer paid the plaintiff $64,000. The insurance company "filed a subrogation complaint which alleged that the defendants' negligent act of thawing pipes with a kerosene heater caused the fire at the supper club."30 The trial judge dismissed the plaintiff's complaint. The appellate court in McGinnis upheld the dismissal:

It is clear that the defendants, as tenants, were co-insureds of the plaintiff. There is no right of subrogation against a person who holds the status of an additional insured or co-insured. It follows that C.I.E. did not have a right of subrogation against the defendants because of their status as co-insureds, and, therefore, the trial court properly dismissed the plaintiff's complaint.31

The plaintiffs in McGinnis had sought to distinguish the holding in Anderson, discussed above, because Anderson involved an oral lease for residential property whereas McGinnis involved a written lease for commercial property. The court flatly rejected this contention:

The plaintiff fails to explain why the principles which the Anderson court applied to oral leases concerning residential property should not be applied to written leases concerning commercial property.... In our view, the type of premises leased or the nature of the lease executed has no bearing on the Anderson rule.32

In Reich v. Tharp,33 the court was faced with an unusual division of property interests. A fire allegedly began in the apartment of the defendant, Mildred Tharp. The fire damaged Ms. Tharp's apartment, a shoe store located in the same building, and the nearby premises of the plaintiffs.34 At the time of the fire, the owners of the shoe store occupied the premises pursuant to a contract for deed of the same building. The Hills, as the grantees in the contract for deed, agreed to and purchased fire insurance for the building. However, in violation of their contractual agreement, they failed to name Tharp as an additional named insured under the policy.

After the insurer paid $117,500 for the fire loss, it brought suit against Tharp. The trial judge, inter alia, dismissed that count of the plaintiffs' complaint seeking to recover damages on behalf of the insurer against Tharp, based on negligence for fire damage to the personal property of the plaintiffs (i.e., the contents of their men's wear store). In affirming the trial court's ruling, the Illinois Court of Appeals, Fifth District, observed that:

The doctrine of subrogation is designed to place the ultimate responsibility for a loss upon the one on whom in good conscience it ought to fall and to reimburse the innocent party who is compelled to pay.... It is axiomatic that for a right of subrogation to exist, the subrogor must possess a right that he could enforce against a third party and that the subrogee must seek to enforce the subrogor's right. The subrogee can have no greater rights then [sic] the subrogor and can enforce only such rights as the subrogor could enforce against a third party.... No right of subrogation can arise in favor of an insurer against its own insured since, by definition, subrogation arises only with respect to rights of the insured against third persons to whom the insurer owes no duty.35

The court then held that under the facts and circumstances of the case, Tharp should be deemed to be a co-insured with the Hills. Accordingly, the insurer would have no right of subrogation against her. In reaching this conclusion, the Reich court relied on the decision of the Supreme Court of Alaska in Alaska Insurance Co. v. RCA Alaska Communications, Inc.36 The Reich court employed the Alaska decision as follows:

[I]n recent years a number of courts have denied a cause of action to landlords and the right of subrogation to their insurers, when the landlord covenants to carry fire insurance on the leased premises, and the fire damage is allegedly due to the negligence of the tenant. Absent an express provision in the lease establishing the tenant's liability for loss from negligently started fires, the trend has been to find that the insurance obtained was for the mutual benefit of both parties, and that the tenant "stands in the shoes of the insured landlord for the limited purpose of defeating a subrogation claim."37

The Anderson principle finding that a tenant was a co-insured with a landlord, absent an express agreement to the contrary, was later overruled by the Illinois appellate court for that same district in Fire Insurance Exchange v. Geekie.38 Despite the decision in Geekie, however, the weight of Illinois law favored the premise that a tenant was indeed a co-insured with his or her landlord. Accordingly, the landlord's insurance company was barred from seeking subrogation recovery from the tenant for fire damage to the rental property caused by the tenant's negligence. This conflict in Illinois law was apparently resolved by the Supreme Court of Illinois in Dix Mutual Insurance Co. v. LaFramboise.39

In Dix Mutual, the tenant had leased a rural residence. That property was damaged by a fire allegedly caused by the tenant's negligence. The landlord's insurance company paid the landlord $40,579 for the fire loss. By way of subrogation, the insurer sought to recover that sum of money from the tenant. The trial judge dismissed the insurance company's complaint, however, for failure to state a claim. The Illinois appellate court reversed and remanded the case for trial. The Supreme Court of Illinois later allowed the tenant's appeal.

The lease between the landlord and the tenant was a non-standard lease apparently drafted by the landlord and the tenant. The lease, in its entirety, read as follows:

LEASE AGREEMENT

This Lease is made between Terry LaFramboise, Tenant, and acting Landlord, J.S. Ludwig.

The house is leased beginning September 15, 1986 through September 15, 1987 for $325.00 per month. This amount is payable on the 15 [sic] of the month. TERMS:

(A) $325.00 deposit has been made and will be considered the last month's rent of the year.

(B) The Tenant is to furnish their [sic] own utilities.

(C) The Tenant is to mow and keep the yard and area around the house neat at all times and the farm buildings.

(D) The Tenant will not xxxxxxxxxxxx [sic] in walls, paint, or make any additions to the home that are permanent without approval of the landlord.

(E) The Tenant will assume their [sic] own risk for their [sic] personal property and Landlord, J.S. Ludwig, will not be responsible for fire, wind, or water damage.

DESCRIPTION:

The house is located on the Mitchell Farm in Vermillion County, Pilot township.'40

Based on this lease, the Supreme Court of Illinois held that the tenant was a co-insured with the landlord under the insurance policy. Thus, the insurance company was precluded from seeking subrogation from the tenant. The court reasoned: The doctrine of subrogation is a creature of chancery. It is a method whereby one who has involuntarily paid a debt or claim of another succeeds to the rights of the other with respect to the claim or debt so paid.... Subrogation is allowed to prevent injustice and unjust enrichment but will not be allowed where it would be inequitable to do so. There is no general rule which can be laid down to determine whether a right of subrogation exists since this right depends upon the equities of each particular case.41

The court then applied its reasoning and determined that the insurance company could not recover from the tenant. In its holding, the court relied upon its earlier decisions in Cerny-Pickas, Stein and One Hundred South Wacker Drive, noting that:

Although a tenant is generally liable for fire damage caused to the leased premises by his negligence, if the parties intended to exculpate the tenant from negligently caused fire damage, their intent will be enforced. The lease between the landlord and the tenant must be interpreted as a whole so as to give effect to the intent of the parties.42

The court thus concluded that the lease, read as a whole and read in context, contemplated that each party would be responsible for its own property:

We find it significant that the parties, who obviously considered the possibility of fire, expressly provided for the tenant's personal property but failed to do so with respect to the leased premises. This fact indicates to us that the parties intended for each to be responsible for his own property.43

The holding in Dix Mutual purported to be based on the facts and circumstances of that case. However, the court went on to make a pronouncement which, read literally, would bar any landlord's insurance company in the State of Illinois from ever seeking subrogation against any tenant, no matter what the language of the lease might say.44 The court's pronouncement contained no further explanation:

It is well settled that an insurer may not subrogate against its own insured or any person or entity who has the status of a co-insured under the insurance policy. Under the particular facts of this case, the tenant, by payment of rent, has contributed to the payment of the insurance premium, thereby gaining the status of co-insured under the insurance policy. Both the landlord and tenant intended that the policy would cover any fire damage to the premises no matter who caused it, and to conclude otherwise would defeat the reasonable expectations of the parties.45

Of the seven Illinois Supreme Court justices, one concurred in this determination and one dissented. Justice Freeman, in his opinion, concurred with the result, but did not agree that the tenant was a co-insured with the landlord under the landlord's insurance policy. Interestingly, he observed that:

[T]he majority's holding on this point sweeps too broadly, serving to eviscerate the common law principle that a tenant is responsible for damage to leased premises resulting from his own negligence. Indeed, the majority's holding, while stated to be limited to "the particular facts of this case" [597 N.E.2d at 626], serves to elevate the status of every tenant to that of a co-insured under his or her landlord's insurance policy, unless expressly indicated otherwise. By logical extension, the tenant might then also be considered a co-insured of the landlord with respect to personal property or negligence liability on the premises.

Notably, Anderson v. Peters, a decision holding that a tenant is considered a co-insured, despite the absence of any indication of the parties' intent, was expressly overruled by Fire Insurance Exchange. The majority opinion returns us, sub silentio, to Anderson.46

Justice Heiple of the Illinois Supreme Court filed a dissenting opinion. He summarized the evolving law in this area as follows:

The lead case which determined that a tenant should be treated as a coinsured, absent an express agreement to the contrary, is Sutton v. Jondahl. The reasons expressed for reaching this conclusion were that: ( 1 ) an insurance policy protects all property interests and both the tenant and landlord have insurable interests in the premises; (2) in reality the tenant pays for part of the insurance premium through the payment of rent; (3) the reasonable expectations of tenants is for the landlord to provide fire insurance which will cover them; and (4) equity calls for placing the risk of fire loss upon the insurer which has collected premiums for the risk, rather than upon the tenant, which is a party in privity with the landlord.47

Justice Heiple then enumerated several jurisdictions which had followed Sutton, including Alaska, Idaho, Nebraska, California and Michigan.48 Justice Heiple's dissent also noted that several jurisdictions had reached a contrary result. These included Kentucky, Iowa, North Carolina and New Jersey.49

Justice Heiple's dissent echoed Justice Freeman's concern that the decision in Dix Mutual effectively would make all tenants co-insureds of their landlords. Thus, the tenants would be immune from suit for negligently destroying or damaging the leasehold: "The effect of this unfortunate decision is to make all tenants at any time and at any place co-insureds with their landlords. The only exception would be if the parties had a clear agreement to the contrary."50 In concluding his attack on the majority's decision, Justice Heiple emphasized the fallacy implicit in the majority opinion:

Sad to say, there are no facts in this case, either particular or general, that would cause one to conclude that the tenant contributed to the payment of the insurance premium or expected to be treated as a coinsured. That assumption is as gratuitous as saying that the payment of rent included maid service and clean linens.51

The next Illinois case on this subject, however, proved that the fears of both Justices Freeman and Heiple were somewhat unfounded. In Nelson v. Greenberg,52 the court entirely rejected the notion that a tenant became the landlord's co-insured on payment of rent. The Nelson court took pains to distinguish the clear precedent handed down by the supreme court in Dix Mutual, absolving a tenant from damages for negligently destroying the leasehold.

In Nelson, the plaintiffs leased to the defendant two parcels of property located at 613 and 615 7th Street in Rockford, Illinois. The properties were leased under separate lease agreements. The leases for the two parcels of property were essentially similar and stated as follows:

DEPOSIT MADE HEREWITH WILL BE REFUNDED UPON DEPARTURE PROVIDED THE FOLLOWING REQUIREMENTS ARE MET:

1. TENANTS REMAINING ONE YEAR - FULL REFUND.

2. TENANTS REMAINING 90 DAYS - ONE-HALF REFUND.

3. TENANTS REMAINING LESS THAN 90 DAYS - NO REFUND.

SUBJECT TO 30 DAY NOTICE IN ANY CASE.

UTILITIES - Gas, lights and water will be paid by management.

OCCUPANCY SHALL BE LIMITED TO ABOVE NAMED TENANT. Tenant agrees not to sublet the apartment or assign this agreement. Tenant agrees to conduct him or herself in a manner which will not be inconsiderate of others' rights. NO PETS-PARTIES-CHILDREN.

IF ANY legal action be necessary, fees will be paid by tenants.

MAJOR MAINTENANCE will be handled by management. Right to enter the apartment during reasonable business hours for the purpose of making repairs, or make routine inspection pursuant to making repairs, is reserved by management.

REPOSSESSION of apartment by management may be made upon three days written notice for non-payment of rent, disorderly conduct or other proper reason.

COLLECTION COSTS - Should tenant not pay the rent due under this agreement, management may take whatever steps necessary to collect said rents, and any collection costs will be added to amount due. BREAKAGE - Tenants will be charged for all breakage.

NO OUTSIDE STORAGE - waste or trash to be removed weekly by tenant.53

A fire destroyed both premises, causing over $100,000 in damages. Pursuant to the policy issued to the plaintiffs, the insurer paid the plaintiffs the entire amount for the fire loss. The insurer then filed an action in the plaintiffs' names, alleging that the defendants negligently caused the fire. The insurer sought to recover the monies paid to its insureds. The defendant filed a motion for summary judgment, alleging that the plaintiffs had been reimbursed by their insurer for the fire loss. It also argued that, pursuant to the ruling in McGinnis v. LaShelle, a landlord's insurer had no subrogation claim against a tenant who negligently damaged leased premises. The plaintiffs, on the other hand, urged the trial court to follow Fire Insurance Exchange v. Geekie, which held that, absent an express provision to the contrary, a tenant would be liable for damage to leased premises resulting from his or her own negligence.54 The trial court granted the defendant's motion for summary judgment and the plaintiffs appealed.

The Nelson court began its analysis by recognizing that the Illinois Supreme Court had decided Dix Mutual after the parties to the Nelson appeal had filed their briefs. The Nelson court went on to note that according to Dix Mutual, leases "should be viewed `as a whole' and the intent of the parties should determine who bears the burden of risk."55 It then adopted the "whole lease" approach prompted by the opinion in Dix Mutual. Following that approach, the Nelson court reversed the award of summary judgment to the defendant, stating:

Given the guidelines set forth in Dix, we must determine the intent of the parties in the present case by viewing the lease "as a whole." Similar to the lease in Dix, there is a provision in the instant lease which addresses the parties' responsibility for breakage. The breakage provision provides that the "tenants will be charged for all breakage." Absent language in the lease relating to fire insurance and reading the lease agreement as a whole, we find that it was the intent of the parties that the tenant be liable for the losses resulting from the tenant's negligence. We therefore hold that the tenant may be liable for fire damage caused by his negligence.56

The more recent Illinois case of American National Bank & Trust Co. v. Edgeworth57 took up the same issue. In that case the defendant signed a lease for an apartment owned by the plaintiff. The lease contained the following relevant provisions:

Nothing herein contained shall in the event of fire, explosion, or other casualty impose on OWNER any obligation to make repairs greater or different from the provisions set forth in the paragraph 10 of this lease (Fire and Casualty) ....In the event that any repair or replacement is necessitated by any negligence or wilfull act of TENANT, TENANT shall on demand reimburse OWNER for the cost thereof.... TENANT shall not suffer or commit any waste in and about the Apartment or the Building and shall at TENANT's expense keep the Apartment in good order and repair (except to the extent OWNER has in the Lease agreed to make repairs). On termination of this lease, TENANT shall return the Apartment to OWNER in like condition, reasonable wear and tear excepted. If TENANT fails to keep the Apartment in such condition and repair, OWNER or OWNER's agent may enter and put the Apartment in good condition and repair. On demand TENANT shall pay OWNER the cost of such work.58

The building was severely damaged by fire, and the plaintiff was reimbursed by its insurer for those damages. The insurer then filed a lawsuit against the defendant to recover the damages it had paid. The defendant followed with a motion for summary judgment which was later granted, and the insurer appealed.

The insurer argued on appeal that "the parties did not intend to exculpate defendant for fire damage negligently inflicted on the building,"59 citing as evidence the lease provision that required the tenant to reimburse the owner for any repair or replacement cost necessitated by the tenant's negligent or willful act. Rejecting that argument, the appellate court relied heavily on Cerny-Pickas and Dix Mutual. Affirming the trial court's award of summary judgment to the defendant, the appellate court reasoned:

In light of these authorities [Cerny-Pickas and Dix Mutual], we must disagree with plaintiff's argument in the instant case that the fire insurance it purchased covered only fire damage which was caused accidentally to the premises. We are bound to follow the unequivocal holding of our supreme court that because it would be incongruous to require both the landlord and the tenant to obtain fire insurance on the same premises, and because the tenant in essence pays for the insurance out of his rent, the tenant, as a matter of law, is exculpated from liability for negligently causing fire damage to the building where the landlord procures insurance thereon, and the landlord must look solely to the insurer for reimbursement for such losses.60

Interestingly enough, the First District appellate court went beyond the Illinois Supreme Court's holding in Dix Mutual that under appropriate facts the tenant was a co-insured with its landlord. The Edgeworth court held that, as a matter of law, the tenant was not responsible for her own negligence.

In summary, Illinois courts have been and continue to be of different minds on this issue. However, it appears from a careful review of the case law that most Illinois courts will do whatever they must to relieve a negligent tenant from the burden of paying for repair of the leasehold - even if that means broadly interpreting lease provisions or creating the legal fiction that tenants are co-insureds with their landlords.

III.

THE CALIFORNIA EXPERIENCE

California law on this particular issue substantially parallels the law in Illinois. Thus, California courts generally prohibit a landowner (and by extension, his or her insurer) from pursuing an action against a tenant who negligently causes a fire upon the landowner's premises. One of the first California cases to address this issue was that of Fred A. Chapin Lumber Co. v. Lumber Bargins, Inc.,61 decided in 1961. In Chapin, the appellate court held that a lessee might contractually protect against a lawsuit seeking compensation from the lessee for negligent fire damage. Since Chapin, the California courts have issued several opinions in the area, refining the law and bringing California law into harmony with the majority of jurisdictions (including Illinois). These jurisdictions generally do not permit landlords to maintain suit against lessees for fire damage allegedly caused by the lessees' negligent acts. The relevant California decisions are analyzed seriatim.

In Chapin, a commercial lessor brought suit against its lessee following destruction of the leasehold by a fire allegedly caused by the lessee's negligence. The key issue in Chapin was whether a lease provision requiring the lessor to maintain fire insurance covering the value of the buildings was a provision made for the benefit of the lessee as well as the lessor. The provision at issue read, "[I]essor agrees to maintain in full force and effect and to pay all premiums for fire, earthquake and storm insurance to cover the value of the buildings."62 Although this particular provision did not specifically refer to the interests of either party, the court deemed it reasonable to conclude that the fire insurance provision indemnified both the lessee and the lessor from any loss resulting from fire. In reaching this conclusion, the court relied on the legal principle that "[a]n interpretation which will give effect and purpose to a provision is more reasonable than one which leaves it devoid of effect or purpose."63 Inferring mutuality of benefit from the nature and purpose of the agreement as a whole, the court noted that the insurance provision would serve no reasonable purpose unless it required that the insurance should be maintained for the benefit of both parties.

The Chapin court rejected the lessor's argument that a provision exonerating a lessee from its own negligence was void as against public policy. According to the court, public policy does not "prohibit the parties to a contract from agreeing that one of them shall maintain fire insurance and apply the proceeds therefrom toward the reimbursement of any fire loss covered by such insurance, although caused by the other's negligence."64 Thus, the Chapin decision clearly allows that in California, a lessee may contractually protect against suit for negligently caused fire damage without contravening public policy.

In Sacramento-Yolo Port District v. Cargill of California, Inc.,65 the Port District leased a grain elevator to Cargill's predecessor. That lease was subsequently assigned to Cargill. The grain elevator was destroyed by fire, admittedly caused by Cargill's negligence. The Port District later filed suit against Cargill and obtained summary judgment against Cargill for the fire damage to the leased premises. Judgment was awarded to the Port District in the amount of $72,500. Cargill then appealed.

The appellate court reversed the judgment for the Port Authority and remanded the case with directions to enter judgment for Cargill. Its accompanying analysis thoroughly examined provisions of the original lease, as well as the contents of several letters that were exchanged between the Port District and Cargill regarding a waiver of the subrogation clause:

The original [] lease contain[ed] no provision definitive of the risk of loss of, or damage to, the leased premises because of fire; nor [did] it cover whose obligation it [was] to keep the premises insured from that casualty. It [did, however,] . . . include a standard termination provision in the event of a fire loss amounting to more than 50 percent of the value of the leased premises. If a less than 50 percent fire loss, or loss "from unforeseen or extraordinary cause not the fault or negligence of Lessee" occur[red], lessor agree[d] to repair the leased premises.66

Paragraph 10 of the lease contained "the standard clause waiving Sections 1941 and 1942 of the California Civil Code (obliging the lessor to make repairs). But, as a part of that clause requiring the lessee to make repairs at its own expense, `damage by fire or other casualty [was] excepted.' "67 Paragraph 11 of the lease contained yet another standard clause requiring the lessee" `subject to the exceptions specified in Paragraph 10 immediately preceding' [] not to commit waste and to surrender the premises in good repair."68

The appellate court ultimately determined that "[t]he lease provisions [cited above] furnish[ed] nothing but a framework within which to discuss the [subsequent] correspondence" between the parties.69 The court used the correspondence in order to supplement and interpret provisions of the lease, and ultimately to decide whether or not Cargill would be responsible for the $72,500 judgment.

In a series of letters exchanged between the parties, Cargill made it clear that it wished to know whether the insurance policy procured by the Port District contained a waiver of subrogation clause that would release Cargill from any liability to the insurer. When informed by the Port District that the policy of insurance procured by it did not contain such a clause, Cargill requested that the underwriters include a waiver of subrogation clause in all policies written on premises leased to Cargill. The Port District subsequently agreed to attach waiver of subrogation clauses to the policies of insurance covering the grain elevator leased to Cargill, among other properties. An additional premium was charged for the inclusion of the "waiver of subrogation" endorsement on the policies involved.

Cargill argued, on appeal, that "before the fire Port had undertaken to insure the premises for such loss" and that said insurance was procured to protect both the lessor and the lessee.70 In addition, Cargill argued that the waiver of subrogation clause appended to the policy of insurance providing coverage for the grain facility "allow[ed] release of the insured's lessee (in this case Cargill) from liability to the insurer for the [insurer's] outlay in paying the fire loss."71

The Port District, on the other hand, argued that the subsequent correspondence between the parties "was not intended to extend fire insurance protection for the benefit of Cargill because to so construe it would be to create an indemnification absolving a party from its own negligence."72 The Port District further argued that section 1668 of the California Civil Code would render such an agreement void as against public policy.73

Refuting the arguments of the Port District, the appellate court initially observed that:

[S]ection 1668 has never been construed as meaning, and certainly was not intended to provide, that an owner or other party interested in property could not insure the premises against damage by fire caused by his own negligence. . . [o]therwise, few insured fire claims would be paid without controversy and most would require litigation.74

The court then went on to note:

[W]hen a lessee contracts with a lessor for the latter to maintain fire insurance and to obtain waiver of subrogation clauses in its policies, in the very nature of the transaction, absolution of risk of loss from the lessee's own negligence has to be a prime purpose of the contract.75

Hence, the policy of insurance, coupled with the request for and provision of a waiver of subrogation clause in the said policy, dictated a judgment in favor of Cargill.

The case of Gordon v. J.C. Penney Co.,76 decided in the same term as Cargill, involved a store that was leased by the plaintiffs to J.C. Penney. The store was damaged by a fire which a jury found to be caused by J.C. Penney's negligence. Defending an action brought by the Gordons' insurer, J.C. Penney asserted that it was released from liability under the "damage" and "insurance" clauses of the written lease:

The "damage" clause of the lease obligated the Gordons to "repair and/or rebuild" the leased premises in the event of any loss from fire or any other cause regardless of the extent of such loss.

The "insurance" clause obligated the Gordons to keep the leased premises fully insured against loss or damage by fire and stated that "it is agreed that such insurance shall be carried for the mutual benefit of the Landlord and Tenant."77

Attempting to convince the court to allow them to recover against J.C. Penney, the Gordons sought to avoid the contract provision expressly noting the mutual benefit of any fire insurance. In furtherance of that goal, the Gordons therefore argued that a policy of insurance is mutually beneficial "even though it does not protect a [lessee] from his [or her] own negligence because it affords a fund out of which the insured premises can be restored."78 The court rejected this theory, however, noting that under an insurance plan that does not cover a lessee's negligence, the negligent lessee bears ultimate responsibility for replenishing the fund used to restore the premises. As the court observed, "[r]estoration of the leased premises would indeed be small comfort to a lessee who ultimately had to bear the restoration expenses. Insurance so providing has scant 'mutual' benefit."79 The Gordon court further observed that "[a] fire insurance policy which does not cover fires caused or contributed to by the insured would be an oddity indeed."80 Ultimately, the court concluded that a policy "for the benefit" of a lessee does not exclude coverage for fire damage caused by the lessee's own negligence unless the lease includes an express provision indicating that damages caused by a lessee's own negligence are not covered. In other words, to exclude coverage for fires caused by a lessee's negligence, the parties must expressly indicate such an intent in the lease itself.

In the case of Parsons Manufacturing Corp. v. Superior Court,81 the California appellate court was asked to interpret a lease containing a surrender clause much like those discussed in the earlier Illinois cases. The surrender clause at issue in Parsons read as follows:

By entry hereunder, Lessee accepts the premises as being in good and sanitary order, condition and repair and agrees on the last day of said term, or sooner termination of this lease, to surrender unto Lessor all and singular said premises with said appurtenances in the same condition as when received, reasonable use and wear thereof and damage by fire, act of God or by the elements excepted, and to remove all of Lessee's signs from said premises.82

The Parsons court began its examination of the effect and validity of the surrender clause with an extensive discussion of the Chapin decision, specifically noting the principle that "a lessee may, by contract with the lessor, establish some protection against a suit for negligently caused fire damage."83 However, the court specifically disclaimed the existence of any California authority on the type of language necessary to establish such protection. The court posited that simply excepting "damage by fire" from the lessee's duty to return the premises in good condition might not protect a lessee from his or her own negligence. Conversely, "Fred A. Chapin Lumber Co. shows that an express requirement that the lessor maintain fire insurance for the premises might provide such protection."84 A problem arises, the court noted, in those cases falling between these two extremes.

Before concluding that the Parsons lease evinced a sufficient intent that the lessor would procure insurance on the premises for the mutual benefit of both the lessor and the lessee, the court adopted instructional language from the case of Rizzuto v. Morris.85 The following language from Rizzuto was applicable:

First, it would be undue hardship to require a tenant to insure against his own negligence when he is paying, through his rent, for the fire insurance which covers the premises in favor of the lessor. Second, insurance companies expect to pay their insureds for negligently caused fire, and they adjust their rates accordingly. . . Third, the ordinary and usual meaning of "loss by fire" includes fires of negligent origin.86

Such reasoning demonstrates a clear distaste on the part of the California courts for requiring a lessee to maintain insurance against his or her own negligence. Despite this obvious distaste, however, the Parsons court did acknowledge that a lessor is not prohibited from shifting "to the lessee the burden of insuring against the lessee's negligence."87 Accordingly,

where the agreement adverts to the possibility of fire and there is no clear language or other admissible evidence showing an agreement to the contrary, a lease agreement should be read to place on the lessor the burden of insuring the premises (as distinguished from the lessee's personal property) against lessor and lessee negligence.88

Applying these principles to the lease provisions under consideration, the Parsons court concluded that "the lease agreement alone was a sufficient showing [of intent] by lessee, because it was rife with hints that lessor would procure insurance on the premises" although the lease did not expressly require the lessor to do so.89 Additionally, "the lessee was entitled to expect that such insurance would be for its benefit as well as for the lessor's."90

One other California case deserves mention. The dispute in Allstate Insurance Co. v. Gip9' likewise involved lessees who were sued by their lessor's insurance company following a fire allegedly caused by the lessees' negligence. According to the facts of the case, the defendant-tenants entered into a lease agreement with their landlord. The lease was later modified to substitute Mr. George Ku as the landlord/lessor, and to extend the term and increase the rent payments and security deposit.

In pertinent part, the original lease agreement provided that the tenants would pay the landlord insurance premiums on the premises, including "all insurance premiums for fire, extended coverage, liability, and any other insurance that Landlord deem[ed] necessary on the Premises."92 The lease further provided that the tenants were, "upon the expiration or sooner termination of the lease [], [to] surrender the premises to the landlord in good condition, . . . ordinary wear and tear damage from causes beyond the reasonable control of the tenants excepted. .."93 Another lease provision indemnified the landlord and held him harmless "against and from any and all claims arising from the Tenant's use of the premises. . . or arising from any act or negligence of the Tenant."94 Still another clause in the lease provided that the tenants were, at their own expense, to:

obtain and keep in force during the term of this lease a policy of comprehensive public liability insurance insuring [both the] Landlord and the Tenant against any liability arising out of the ownership, use, occupancy or maintenance of the premises.... All such policies of insurance shall be written as primary policies not contributing with and not in excess of coverage which Landlord may carry.95

Pursuant to the comprehensive public liability insurance clause of the lease, the defendants obtained a comprehensive general liability policy. The policy also included special additional excess coverage for fire or legal liability in the amount of $75,000.

Mr. Ku, as the new landlord/lessor, obtained property insurance from Allstate Insurance Company. He sent the defendants a bill for their pro rata share of the premium for the policy pursuant to the provisions of the lease, and the defendants paid that share. A fire later occurred at the leased premises. Allstate paid $249,567.75 to Mr. Ku to repair the damage to the building. This money was paid under the policy to which the defendants had contributed premium payments.

When filing their motion for summary judgment, the defendants asserted that "the Allstate policy issued to [the landlord] was taken out for the mutual benefit of both the lessor and the lessees. This being so, the defendants contended that they were the implied-in-law co-insureds under the Allstate policy, and, therefore, Allstate ha[d] no subrogation rights against them."96

For its part, Allstate asserted:

[The] defendants were required to indemnify the landlord for damages caused by negligence in the use or occupancy of [the leasehold]. Allstate further contend[ed] that the parties intended that the defendants' insurance policy would be primary and any policy procured by [the landlord] would be excess. Therefore, Allstate contend[ed] that it possess[ed] a right of reimbursement, under equitable principles of subrogation, because it paid an obligation that the primary insurer was obligated to pay.97

The court held that a genuine issue of material fact existed regarding whether the parties intended the Allstate policy to be for their mutual benefit. It noted that several paragraphs of the lease seemed to indicate the parties' intent that the Allstate policy was procured for the benefit of the landlord and the landlord alone. According to the court:

Paragraph 11A of the lease agreement required the lessees to return the property in good condition, normal wear and tear excepted. Paragraph 14 required lessees to indemnify the lessor against any and all claims arising from lessees' use of the property. Paragraph 16 required defendants to procure a comprehensive public liability policy (CPL) which (1) insured both landlord and tenant against any liability arising out of the ownership, use, occupancy, or maintenance of the premises and (2) was written as primary insurance, not just in excess of a policy procured by lessor.98

Based on these provisions, the Gip court reasoned that the trier of fact would have to determine whether Allstate had a right of subrogation against the defendant.

In sum, it is well-settled under California law that a lessee may contractually protect against suit for negligently caused fire damage. However, even in those cases in which the lease does not explicitly provide this protection, the courts will nevertheless interpret the lease to burden the lessor with insuring the premises for the mutual benefit of the lessor and the lessee. In order to exclude coverage for fires caused by a lessee's negligence, the parties must expressly indicate such an intent in the lease itself.

IV.

THE NEW YORK EXPERIENCE

New York authority suggests a presumption in favor of imposing liability on a negligent lessee, absent clear contractual language to the contrary. In this regard, New York law imposes a greater burden upon a lessee to exempt itself from liability for fire damage to the premises caused by its negligence than does either Illinois or California law. An examination of the relevant New York case law follows.

The seminal New York case discussing a tenant's liability for fire damage to the demised premises allegedly caused by the lessee's negligence is Galante v. Hathaway Bakeries, decided in 1958.9 The Galante lease provided that the lessor would make all repairs to the roof and exterior of the building. The lessee, however, was required to make all repairs to the interior of the building, "damage by fire and unavoidable casualty excepted."100 The New York Supreme Court Appellate Division noted the established principle of New York law that a "contract will not be construed to exempt the party from liability for his negligent acts unless such intention is expressed in unequivocal terms," and held that the lease provided no defense to an action by the lessor against the lessee.101 If the lessor and lessee intended to form a contract by which the lessee would be released from damages produced by the lessee's own negligence, the parties were obligated to state that intention in unequivocal terms. In fact, the court concluded that the tenant "was charged with legal knowledge that if it intended to exempt itself from its own acts of negligence, clear and unequivocal language to that effect was required."102 Since such exculpatory language did not appear in the Galante lease, the lessee had no defense based on the lease.

The Galante court declined to accept the proposition, found in cases from other jurisdictions, that the cost of the lessor's insurance is considered in fixing the lessee's rent and then paid, in part, by the lessee. The New York court concluded that "[a] policy of fire insurance is a personal contract which does not attach to the property insured nor in any manner run with the land."103 Accordingly, a lessee in New York acquires no legal or equitable rights under a contract of insurance issued to the lessor simply because of their relationship.

The holding in Galante forms the basis for the subsequent decision in Jaylinn, Inc. v. Star Supermarkets, Inc. 104 In Jaylinn, a fire insurance carrier, as subrogee of the insured lessor, sought recovery from the lessee for fire loss allegedly caused by the lessee's negligence. Clause 20 of the lease specifically provided as follows:

Lessor shall carry adequate fire insurance and broad form extended coverage protecting the demised premises and the buildings of which the demised premises are a part .... In no event shall lessee, its agents, employees or invitees be liable for damages of any nature whatsoever resulting from fire or casualty, regardless of cause or origin, and lessor shall cause its insurers to waive their subrogation rights against lessee, its agents, employees or invitees. . . 105

The Jaylinn court first acknowledged the Galante rule requiring a clear and unequivocal expression of exculpatory intent in order to protect the lessee from that lessee's own negligence. In Jaylinn, the lessor's insurer sought to recover as subrogee of the lessor's rights against the lessee and argued that Clause 20 was not sufficiently clear to exculpate the lessee from its own negligence. Alternatively, the insurer-subrogee argued that if Clause 20 was found to clearly and unequivocally exculpate the lessee from its own negligence, the clause was void as against public policy.

The court, however, rejected the insurer's public policy argument stating that "[i]f the exculpatory Clause 20 between [the lessor and the lessee] is clear and unequivocal, then it may be enforced.... No question of public policy exists."106 In this respect, the New York courts and the California courts adopt a similar approach. If the exculpatory clause is sufficiently clear, it poses no threat to public policy and will be given effect.

The Jaylinn court next focused on the clarity of the exculpatory lease language. It concluded that, although the lease did not specifically exempt negligent acts of the lessee, "the language used [was] not so broad and general that it runs afoul of the general rule as set forth in Galante" (i.e., that a lessee must include clear and unequivocal exculpatory language in the lease agreement to avoid liability for that lessee's own negligence).107 Even though Clause 20 did not specifically advise about the consequences of a loss occasioned by the lessee's negligence, the last portion of the lease was instructive. Thus language specifing that the" `lessor shall cause its insurers to waive their subrogation rights against lessee' [was] a clear expression of intention to exculpate [the lessee]" - even from that lessee's own negligence.108 Accordingly, the insurer had no right of subrogation against the lessee since the insurer necessarily stood in the shoes of the lessor for purposes of a subrogation lawsuit.

The sufficiency of an exculpatory clause was also the focus of Siebel v. McGrady. 109 The relevant lease provision in Siebel read as follows:

FOR INJURY TO PROPERTY OR RIGHTS OF LANDLORDS caused by negligence or fault of tenant, his agents, family or guests, tenant agrees to reimburse landlords promptly in the amount of the loss. Tenant also specifically agrees to pay for repairs and service to plumbing when the plumbing trouble is caused by tenant, his family or guests. Tenant is not liable for damage from ordinary wear and deterioration, from reasonable use or from fire or act of God.110

Invoking fundamental principles of contract law and noting that an agreement should be construed so as to give meaning and purpose to each provision, the Siebel court held that the exculpatory clause would be given its ordinary meaning when read as a whole. The court reasoned:

[R]eading that paragraph as a whole, its first sentence makes tenants responsible for injury to the landlord's property due to tenants' negligence. The second sentence explicitly states that tenants are liable for plumbing damage when the plumbing trouble is caused by tenants. As liability for plumbing trouble caused by the tenants' negligence is treated separately from negligence covered in the first sentence, so also is exemption from liability for fire in the last sentence.111

Accordingly, the court held that the exculpatory language in the third sentence of the provision was sufficiently clear to bar any claim, by the lessor, for fire damage allegedly caused by the negligence of the lessee.

A final facet of New York law bears brief mention. When the lessee pays the premiums for fire insurance, the lessor or its insurer has no cause of action from the fire loss caused by that lessee's alleged negligence.112 In Sandoro v. Harlem-Genesi Market & Nursery, Inc.,113 the allegedly negligent sublessee had paid the fire insurance premiums. The court held that the lessors could state no cause of action against the sublessee: "Since insurance proceeds for the fire loss were derived from a policy which was paid for . . . by [the sublessee], evidence of such payment is admissible in mitigation of damages."114

New York law is clear that a lease will not presumptively protect a lessee from fire damage produced by its own negligence unless the lease contains a clear and unequivocal exculpatory clause. Nor does such a clause contravene New York public policy. This standard, however, must be interpreted in light of Meadvin and Sandoro. When the lessee or the sublessee, as in Sandoro, has paid the premiums for the fire damage insurance, the lessor has no cause of action against the lessee or sublessee. New York law is not clear, however, as to what result would obtain if the lessor and the lessee both share in the payment of fire insurance premiums.

V.

THE AUTHORS' PERSPECTIVE

Which state - or states - adopt the correct approach? The authors believe that the New York approach is best. As noted at the beginning of this article, the longstanding common-law rule makes a tenant liable for damage to the leased premises resulting from its own negligence. The Illinois and California decisions, however, completely vitiate that rule when a tenant's negligence causes a fire which damages or destroys the leasehold. They accomplish this end by reading exculpatory provisions into a lease or by creating the legal fiction that the tenant is a co-insured of the landlord. Doing so permits admittedly negligent tenants to escape liability for losses caused by their own careless acts while subjecting a blameless landlord to an adverse loss history and the concomitant payment of higher insurance premiums. Tenants should be held accountable for their negligent acts when those acts destroy the leaseholds unless the parties to the lease have expressly provided otherwise through clear and unequivocal language. Such an approach would place the ultimate financial responsibility where it appropriately belongs - on the culpable party.

1See, e.g., Duggan v. Builders Assoc., Inc., 648 N.E.2d 1063 (III. App. Ct. 1995)(cert. denied).

2See Barr v. Cutler, 381 N.E.2d 413, 414 (Ill. App. Ct. 1978); Ford v. Jennings, 387 N.E.2d 1125 (Ill. App. Ct. 1979).

3See Cerny-Pickas & Co. v. C.R. Jahn Co., 131 N.E.2d 100 (III. 1955); Stein v. YarnallTodd Chevrolet, Inc., 241 N.E.2d 439 (III. 1968); One Hundred South Wacker Drive, Inc. v. Szabo Food Service, Inc., 326 N.E.2d 400 (Ill. 1975); Ford v. Jennings, 387 N.E.2d 1125 (III. App. Ct. 1979); Windsor at Seven Oaks v. Kelly, 448 N.E.2d 251.(I11. App. Ct. 1983); Continental Cas. Co. v. Polk Bros., Inc., 457 N.E.2d 1271 (III. App. Ct. 1983); Reich v. Tharp, 521 N.E.2d 530 (Il. App. Ct. 1987); McGinnis v. LaShelle, 519 N.E.2d 699 (Ill. App. Ct. 1988); Dix Mut. Ins. Co. v. LaFramboise, 597 N.E.2d 622 (I11. 1992).

4Ford, 387 N.E.2d at 1127 (citation omitted).

5131 N.E.2d 100 (III. 1955).

61d. at 102.

7'd. at 103 (citations omitted). 8241 N.E.2d 439 (Ill.1968).

9 Id. at 440.

10 Id. at 442 (quoting United States Fire Ins. Co. v. Phil-Mr Corp.;139 N.E.2d 330, 333 (Ohio 1956))

"I'd.

12326 N.E.2d 400 (111.1975). '31d. at 401.

"387 N.E.2d 1125 (Ill. App. Ct. 1979). '51d. at 1126.

1d. at 1127.

"Id. (citing Barr v. Cutler, 381 N.E.2d 413 (III. App. Ct. 1978) ("fire or other inevitable accidents"); Stein v. Yarnall-Todd Chevrolet, Inc., 241 N.E.2d 439 (Ill. 1968)(" `fire or other casualty beyond the lessee's control"'). 18Id. at 1128-29.

19448 N.E.2d 251 (Ill. App. Ct. 1983).

20 Id at 252

21 Id.

22 Id

23. Id at 252-53 (citing Ford v. Jennings, 387 N.E.2d 1125 (Ill. App. Ct. 1979): Cerny-Pickas v. C. R. Jahn Co., N.E. 2d 100 (Ill. 1955)).

2"The following is one explanation of the rule of contra proferentem: "Contra Proferentem is a rule of contract interpretation which provides that when the words of a contract have been chosen by one party and another merely assents to those words, that fact alone may tip the balance against the party drafting the contract." Franklin Life Ins. Co. v. Commonwealth Edison Co., 451 F. Supp. 602, 616 (S.D. Ill. 1978). 26Windsor, 448 N.E.2d at 253 (citation omitted). 27491 N.E.2d 768 (Ill. App. Ct. 1986).

2Id. at 771 (quoting Sutton v. Jondahl, 532 P.2d 478, 482 (Okla. Ct. App. 1975)). 29519 N.E.2d 699 (Ill. App. Ct. 1988). 3Id. at 700.

31Id. at 701 (emphasis added; citation omitted). 321d.

33521 N.E.2d 530 (III. App. Ct. 1987), rehearing denied March 25, 1988. 34Id. at 531.

351d. at 533.

36623 P.2d 1216 (Alaska 1981).

37Reich, 521 N.E.2d at 535 (quoting Alaska Ins. Co. v. RCA Alaska Communications, Inc., 623 P.2d 1216, 1218 (Alaska 1981) (quoting Rizzuto v. Morris, 592 P.2d 688, 690 (Wash. Ct. App.1979)). The Reich court also noted: "Similarly, the court in Rizzuto referred to `the trend of modern case law . . . to relieve the lessee from liability for fire damage caused by his own negligence where the circumstances lead the court to conclude the parties intended such a result.' " Id. 38534 N.E.2d 1061 (III. App. Ct. 1989). 39597 N.E.2d 622 (III.1992).

4Id. at 624.

"Id. (citations omitted). 421d. at 625 (citations omitted). 431d. at 626.

'4+The authors express no opinion as to whether this statement was intended to be the ratio decidendi or mere dictum.

45Dix Mut., 597 N.E.2d at 626 (citations omitted). 'Id. at 627-28 (Freeman, J., concurring)(citations omitted).

47"d. at 629 (Heiple, J., dissenting)(citing Sutton v. Jondahl, 532 P.2d 478, 482 (Okla. Ct. App. 1975)).

"See Alaska Ins. Co. v. RCA Alaska Communications, Inc., 623 P.2d 1216 (Alaska 1981); Safeco Ins. Co. v. Weisgerber, 767 P.2d 271 (Idaho 1989); Reeder v. Reeder, 348 N.W.2d 832 (Neb. 1984); Safeco Ins. Co. v. Capri, 705 P.2d 659 (Nev. 1985); Monterey Corp. v. Hart, 224 S.E.2d 142 (Va. 1976); Liberty Mut. Fire Ins. Co. v. Auto Spring Supply Co.,131 Cal. Rptr. 211 (Ct. App. 1976); New Hampshire Ins. Group v. Labombard, 399 N.W.2d 527 (Mich. Ct. App. 1986); Fashion Place Inv., Ltd. v. Salt Lake County/Salt Lake County Mental Health, 776 P.2d 941 (Utah Ct. App. 1989); Cascade Trailer Court v. Beeson, 749 P.2d 761 (Wash. Ct. App. 1988).

49See Britton v. Wooten, 817 S.W.2d 443 (Ky. 1991); Sears, Roebuck & Co. v. Poling, 81 N.W.2d 462 (Iowa 1957); Winkler v. Appalachian Amusement Co., 79 S.E.2d 185 (N.C. 1953); Zoppi v. Traurig, 598 A.2d 19 (N.J. Super. Ct. Law Div. 1990). IDix Mut., 597 N.E.2d at 628 (Heiple, J., dissenting).

5'Id.

52603 N.E.2d 1237 (Ill. App. Ct. 1992).

131d. at 1238.

541d. at 1239 (citations omitted). 551d.

5"Id. at 1240 (citations omitted). The Nelson court distanced itself from its prior holding in McGinnis by noting that the McGinnis lease contained a provision requiring the tenant to pay for insurance. The lease at issue in Nelson contained no such provision. The Illinois Supreme Court refused to address the apparent conflict in judicial authority presented by the Nelson decision and denied the defendant's petition for leave to appeal. See Nelson v. Greenberg, 612 N.E.2d 515 (Ill. 1993).

5'618 N.E.2d 899 (Ill. App. Ct. 1993). 5"Id. at 900-01. 591d. at 900.

60 Id. at 902.

6'11 Cal. Rptr. 634 (Ct. App. 1961).

62ld. at 635. 63Id. at 638. 6Id. at 635.

684 Cal. Rptr. 822 (Ct. App. 1970).

661d. at 824. Id. 68Id.

6Id. at 825.

701d. at 823. 7'1d.

721d. at 827.

73That section of the Civil Code reads: "All contracts which have for their object, directly or indirectly, to exempt anyone from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law." CAL. CIV. CODE 1668 (West 1997). "Cargill, 84 Cal. Rptr. at 827. 751d. at 827-28.

7686 Cal. Rptr. 604 (Ct. App. 1970). 77Id. 60405. 'ld. at 606. l91d. SOlId.

8'203 Cal. Rptr. 419 (Ct. App. 1984).

821d. at 422.

83ld. at 423 (citations omitted). sld. (citing Chapin, supra note 61). s592 P.2d 688 (Wash. Ct. App. 1979).

86 Parsons, 203 Cal. Rptr. at 424 (quoting Rizzuto v. Morris, supra note 85).

87 Id

88. Id.

89. Id.at 425

90 Id.

91. 797 .F Supp. 736 (N.D. Cal 1992)

92 Id. at 764

93. Id.

94"Id. 95 Id.

%Id. at 765. YM

981d. at 767.

9176 N.Y.S.2d 87 (App. Div. 1958).

'oold. at 89. ''Id. at 92. 'ld. at 95.

"Id. at 94 (citations omitted). 1348 N.Y.S.2d 85 (Sup. Ct. 1973). 'Id. at 86.

1d. at 88. 'Id. at 89. loe Jd

'o9566 N.Y.S.2d 736 (App. Div. 1991). "old. at 737.

"'Id. at 738.

"2See, e.g., Meadvin v. Buckley-Southland Oil Co., 451 N.E.2d 491 (N.Y. 1983); Sandoro Harlem-Genesi Market & Nursery, Inc., 482 N.Y.S.2d 165 (App. Div. 1984). "3482 N.Y.S.2d 165 (App. Div. 1984). "41d. at 166-67.

Anthony J. Kiselis is a partner in the Chicago firm of Williams & Montgomery, Ltd. A 1977 graduate of the University of Chicago Law School, he is licensed to practice in Illinois and New York and is a member of the Bar of the United States District Courts for the Northern District of Illinois, the Northern District of New York, and the Southern District of New York. Mr. Kiselis is also a member of the Bar of the Seventh Circuit Court of Appeals, the Court of International Trade, the Federal Circuit, and the Supreme Court of the United States. He is a member of the Society of Trial Lawyers, the Federation of Insurance & Corporate Counsel, and the Illinois Association of Health Care Attorneys. Mr. Kiselis concentrates his practice in commercial, professional liability, and medical malpractice litigation.

Bradley C. Nahrstadt is an associate at the firm of Williams & Montgomery. He received his B.A., summa cum laude, from Monmouth College and his J.D., cum laude, from the University of Illinois College of Law. Mr. Nahrstadt's current areas of practice are in medical malpractice, product, and general liability. He is licensed to practice law in Illinois and is a member of the Bar of the United States District Court for the Northern District of Illinois, the United States District Court for the Eastern District of Michigan, and the United States Supreme Court. Mr. Nahrstadt is a member of the Illinois State and the Chicago Bar Associations.

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