Foran Glennon Palandech Ponzi & Rudloff

December 2014

Indiana Rejects the Anti-Subrogation Rule in Cases Involving Tenants

Todd Weston

At its core, the very basic concept of property subrogation is that an insurer “steps into the shoes” of its insured and inherits all “those rights which the latter could enforce” against any responsible third party.  Continental Casualty Co. v. Polk Brother, Inc., 457 N.E.2d 1271 (1983).  However, over the last forty years, a growing number of US jurisdictions adopted the “Sutton Rule,” which created a legal fiction giving a tenant the status of a “co-insured” under its landlord’s property insurance policy.  As a result of this rule, courts throughout the United States have held that subrogation by a landlord’s property insurer against a tenant is barred.  However, just recently, George Ferreti and Todd Weston of Foran Glennon, through a successful appeal, were able to stem the tide in Indiana in favor of insurers in LBM Realty, LLC v. Mannia, No. 71A03-1402-PL-66, 2014 WL 5461791 (Ind. Ct. App. Oct. 28, 2014).

In 1975, the Oklahoma Court of Civil Appeals created the “Sutton Rule,” under which subrogation against a tenant by a landlord’s property insurer is prohibited based on the legal fiction that presumes a tenant is a co-insured under the landlord’s insurance policy through the payment of rent, even if the lease is silent on the issue.  Sutton v. Jondahl, 532 P.2d 478 (Okla. Ct. App. 1975).  Since that ruling, courts in multiple jurisdictions have fully adopted the rule, while some others will only permit subrogation if there is a clear statement within the lease supporting an action against the tenant, i.e., the “case-by-case approach.”

In 2011, Foran Glennon filed suit in Indiana on behalf of its insurer client in a case arising from a fire in an apartment complex caused by a tenant.  The tenant’s lease contained several provisions holding the tenant responsible for all damages she caused to the property, but the lease was silent concerning the landlord’s insurance obligations or with respect to the possibility of subrogation.

At the time, Indiana courts had not addressed the applicability of the Sutton Rule.  Nonetheless, the trial court granted Summary Judgment in favor of the tenant, ruling that subrogation was barred under either the Sutton Rule or the case-by-case analysis approach.  Foran Glennon filed an appeal, arguing that the Sutton Rule improperly relies upon alegal fiction that would trump the plain language of the parties’ lease contract.  Foran Glennon argued that the court should instead formally adopt the middle ground or case-by-case approach, which focuses on determining the parties’ intent within the four corners of the lease.

On October 28, 2014, the Court of Appeals of Indiana issued its opinion and reversed the Summary Judgment ruling in part.  The Court rejected the Sutton Rule and formally adopted the case-by-case approach.  Although the Court limited the insurer’s recovery to damage to the tenant’s unit based on its interpretation of the lease,Indiana now joins the ranks of fellow jurisdictions which allow a landlord’s insurer to pursue subrogation against tenants.