Case Title: Rausch v. Allstate

Citation: 388 Md. 690

Docket Number: 6m/04

State: maryland

Court: Maryland Supreme Court

Date: 2005-09-08T00:00:00Z

Document:
IN THE COURT OF APPEALS OF MARYLAND
Misc. No. 6
September Term, 2004
______________________________________
FELIX RAUSCH, ET UX.
v.
ALLSTATE INSURANCE COMPANY
______________________________________
No. 128
September Term, 2004
______________________________________ 
HARFORD MUTUAL INSURANCE
COMPANY
v.
JANICE D. HARKINS
______________________________________
Bell, C.J.
Raker
Wilner
Cathell
Harrell
Battaglia
Greene,
   JJ.
______________________________________
Opinion by Wilner, J.
______________________________________
Filed:    September 8, 2005
It is not uncommon for a fire insurance policy to contain a subrogation clause that
permits the insurer to recover, from any person (other than the insured) who causes a covered
loss under the policy, amounts paid by the insurer by reason of that loss.  Under such a
clause, the insurer stands in the shoes of the insured and can seek to recover those amounts
to the same extent that the insured could have recovered them from the person causing the
loss, had there been no insurance.  
The question before us in the two cases that we have consolidated for appellate
purposes is under what circumstances, if any, the insurer may pursue its contractual right of
subrogation against a tenant of the insured who negligently damaged the insured premises
and thereby caused the loss.  Although, as we shall see, most of the courts that have
addressed the issue have ended up holding in the tenant’s favor, denying recovery, the
theories used to support that result vary. 
Part of the difficulty in agreeing on a single theory to support the result arises from
the differing circumstances underlying the cases – the wide variety in lease provisions that
define the landlord-tenant relationship, whether the leased property is commercial or
residential, whether the lease is of a single-unit structure or part of a multi-unit structure.  In
large measure, the issue presents a clash between what a direct application of basic and well-
established legal principles would produce and what the courts have come to regard as either
impractical or inequitable to tenants, or at least certain classes of tenants. 
THE CASES BEFORE US
-2-
Rausch
In January, 1999, John Dunlop purchased 5037 Netherstone Court, in Columbia, as
a piece of rental property.  The property was a single-family dwelling.  In September, 1999,
he appointed American Relo Realty, Inc. to manage the property.  The agreement between
Dunlop and American Relo required Dunlop to maintain fire insurance for damage that might
arise from the occupancy or management of the house.  In March, 2000, American Relo
leased the property to the Rausches, for a period of six months, at a rental of $1,500/month.
Included in the written lease were provisions that:
(1) Prohibited the tenants from doing anything on the property in contravention of any
hazard insurance policy in force or which would increase the premium on such a policy;
(2) Required the tenants to indemnify the owner for any liability for injury, death,
property damage, or other loss arising within those portions of the property within the
exclusive control of the tenants or occasioned by any act or omission of the tenants;
(3) Required the tenants to surrender the property at the end of the lease in the same
condition as when received, ordinary wear and tear excepted;
(4) Declared, with respect to the portions of the property within the exclusive control
of the tenants, that the owner was not responsible for any loss or damage to goods or chattels
placed in the property or for personal injury to the tenants and that it was the responsibility
of the tenants to “obtain and pay the costs of any insurance to protect Tenant from loss or
damage to Tenant’s personal property placed on, in or about the Property, and to maintain
-3-
adequate personal liability insurance.”  (Emphasis added); 
(5) Declared that, if the property were rendered totally uninhabitable by fire or certain
other causes, or if the property were partially damaged and the owner elected not to repair
the damage, the tenancy would immediately terminate and all rent would cease as of the date
of the occurrence; and
(6) Made the tenants responsible for “any and all damages to the Property caused by
any act of negligence of Tenant” or other residents of the property as well as for the cost of
all repairs, replacements, and related services if the need for the same resulted from the
negligence or misuse by the tenants.
Although Item (4) above clearly required the Rausches to maintain “adequate personal
liability insurance” and insurance to protect their property, and Item (1) anticipated that the
owner would likely have a fire insurance policy of his own in force, nothing in the lease itself
required the owner to maintain such insurance, and there is no indication that the tenants
were aware of that requirement in the management agreement.  The owner, in fact, purchased
a fire insurance policy from Allstate Insurance Company that remained in force during the
tenancy.  
On April 12, 2000, Ms. Rausch caused a fire in the property by leaving a flammable
item on the rear burner of the electric range that had been turned to “high” and then leaving
1 Although the policy provided $170,000 of insurance, no issue is raised here as to
the $138,000 that was paid.
-4-
the house.  The fire caused nearly $152,000 in damage.  Allstate paid $138,000 to Dunlop.1
The Allstate policy contained a subrogation clause, which provided that (1) if Allstate paid
any loss, the “insured person’s rights to recover from anyone else become ours up to the
amount we have paid,” (2) the insured person “must protect these rights and help us enforce
them,” but (3) the insured could waive “your rights to recover against another person for loss
involving the property covered by this policy” if the waiver was in writing and was given
prior to the date of loss.  There is no indication that Dunlop directly made such a waiver.
Exercising its rights as subrogee, Allstate sued the Rausches in U.S. District Court to
recover the $138,000 it had paid to Dunlop.  The complaint alleged both negligence and
breach of contract.  The Rausches moved for summary judgment, arguing that the law
prohibited subrogation actions by a landlord’s insurer against the landlord’s tenants on the
ground that the tenants were regarded as implied co-insureds.  Both sides acknowledged that,
although there were cases on the issue around the country, this Court had never addressed
it.  Because it was an unanswered question in Maryland, the court, invoking the Maryland
Uniform Certification of Questions of Law Act (Maryland Code, § 12-601 through 12-613
of the Cts. & Jud. Proc. Article) (CJP) and Maryland Rule 8-305, certified the following two
questions:
“(1) Does Maryland law recognize the doctrine of ‘implied co-
insureds’ so that a tenant is an implied co-insured of the
-5-
landlord?
 (2) If so, is Allstate barred from bringing the instant
subrogation action against tenants of its insured?”
We shall address those questions as framed by the court, but, because theories other
than “implied co-insured” have been used by courts to preclude subrogation actions against
tenants, we shall, in our response, take account of those theories as well.  The statute does
permit this Court to reformulate the certified questions so long as our answer properly
disposes of the questions as certified.  See CJP § 12-604; also Mardirossian v. Paul Revere
Life, 376 Md. 640, 647 n.4, 831 A.2d 60, 64 n.4 (2003) (citing Piselli v. 75th Street Medical,
371 Md. 188, 202 n.4, 808 A.2d 508, 516 n.4 (2002)).
Harkins
In May, 1999, Janice Harkins entered into a one-year lease for Apartment 28 in the
Oak Court Apartments, a multi-unit apartment development.  The lease, signed on behalf of
the owner by its leasing agent, United Homes, Inc., ran from June 1, 1999 through May 31,
2000.  Included in the written lease were provisions that:
(1) Made available a storage space for Ms. Harkins but, in that provision, stated:
“Resident expressly agrees that landlord shall not be liable for
any loss, damage or injury to property.  Tenant shall have
insurance coverage for this storage area as well as Renter’s
Insurance for the apartment.  Landlord is not responsible for
such loss which may be incurred.”  (Emphasis added);
(2) Required the tenant to reimburse the landlord for “any loss, damage or actual cost
-6-
of repairs or service caused in the apartment or apartment complex by improper use or
negligence of tenant or tenant’s guests or occupants”; and
(3) Required the tenant, when moving out, to “surrender the apartment in the same
condition as when received, reasonable wear expected.  Reasonable wear means occurring
without negligence, carelessness, accident, or abuse.”
Other than the reference in Item (1) to renter’s insurance, which Ms. Harkins obtained,
the lease was silent with respect to insurance.  In fact, the owner obtained a fire insurance
policy from Harford Mutual Insurance Company that was in effect during Ms. Harkins’s
tenancy.  The policy contained a subrogation clause, stating that, “[i]f any person or
organization to or for whom we make payment under this policy has rights to recover
damages from another, those rights are transferred to us to the extent of our payment” and
that the payee “must do everything necessary to secure our rights and must do nothing after
loss to impair them.”  The clause permitted the insured to waive its rights against another
party in writing (1) prior to a loss, or (2) after a loss if the party is a tenant.  The owner never
directly waived its rights against Ms. Harkins.
On March 29, 2000, Ms. Harkins lit one or more scented candles on a nightstand in
her bedroom and then left the room to answer the telephone.  While on the telephone, the
smoke alarm went off, but Ms. Harkins thought it had malfunctioned.  When she smelled
smoke, Ms. Harkins investigated and discovered that her bedspread was on fire.  After an
unsuccessful attempt to extinguish the fire, she left the apartment.  The fire and smoke
-7-
caused extensive damage to the second floor of the apartment building.  Harford paid over
$83,000 to repair the damage and then, exercising its rights as subrogee, sued Ms. Harkins
in the Circuit Court for Harford County to recover the amount it had paid.
Harkins moved for summary judgment on the grounds that (1) as a matter of law, she
was not negligent in causing the fire, and (2) the subrogation clause relied on by Harford was
unenforceable because (i) she was an implied co-insured under the policy, (ii) the clause was
against public policy, and (iii) it would be inequitable to enforce the clause against her.  The
Circuit Court was unable to conclude that there was an absence of negligence, as a matter of
law, but, relying on the holding and pronouncements in Sutton v. Jondahl, 532 P.2d 478
(Okla. Ct. App. 1975) and other cases adopting those pronouncements, found that Harkins
was an implied co-insured under the Harford policy and that, as a result, the subrogation
clause could not be enforced against her.  On that ground, it entered summary judgment for
Ms. Harkins.  Harford appealed, and we granted certiorari on our own initiative prior to
proceedings in the Court of Special Appeals and consolidated the case with Rausch for
argument and decision.
DISCUSSION
Introduction
These cases involve the coalescence of at least five independent principles of law,
each fairly well-established.  The first is simply an application of general negligence
2 “It may be stated as a basic proposition in the law of landlord and tenant that it is
the duty of the tenant to exercise ordinary care, in the use of the leased premises or
property, not to cause any material and permanent injury thereto over and above the
ordinary wear and tear, and that he is liable to the landlord in damages for any such injury
unnecessarily resulting from his wrongful acts or his failure to exercise such care.”  Id.
-8-
principles to the landlord-tenant relationship.  It has long been recognized, although there are
a dearth of cases in Maryland, that, in the absence of any valid contractual provision to the
contrary, a tenant is liable in tort to the landlord if and to the extent that the tenant negligently
damages the landlord’s property.  See Pearson v. Wiltrout, 17 Md. App. 497, 302 A.2d 678
(1973); Liability of Tenant for Damage to the Leased Property Due to His Acts or Neglect,
10 A.L.R.2d 1012, 1014 (1950);2 1 FRIEDMAN ON LEASES § 9.9 (4th ed. 1997).   The
Legislature has recognized and given effect to that principle.  See, for example, Maryland
Code, § 8-203 of the Real Property Article, permitting residential landlords to demand
security deposits from tenants to protect, among other things, against damage to the leased
premises and, upon termination of the lease, to retain amounts for damage to the leased
premises in excess of ordinary wear and tear.  
A second principle, which is a corollary to the first, is that, although State law
prohibits clauses in a lease that purport to exonerate a landlord from liability for injury or loss
caused by the landlord’s negligence (see Maryland Code, § 8-105 of the Real Property
Article), there is no flat prohibition against a clause exonerating a tenant from liability for
loss caused by the tenant’s negligence or a provision waiving a landlord’s right to sue a
tenant for damage negligently caused by the tenant.  If a lease contains such a provision,
3 In that regard, see Maryland Code, § 8-113 of the Real Property Article, which
provides that a covenant by the tenant to restore, surrender, or yield the leased premises in
good repair does not bind the tenant to erect or pay for any building destroyed by fire or
otherwise “without negligence or fault on the tenant’s part.”  The implication from that
statute is that such a clause, standing alone and in the absence of any inconsistent
provision, will obligate the tenant to restore premises damaged as a result of the tenant’s
negligence or fault.
-9-
expressly or impliedly, and is otherwise valid, that provision may effectively negate any
common law tort liability on the part of the tenant.
The third principle is an application of basic contract law to the landlord-tenant
relationship.  Just as a lease may negate a tenant’s common law tort liability, it may,
independently of tort liability, contractually impose liability on the tenant for damage to the
leased premises resulting from the tenant’s negligent act or omission, either by a specific
lease provision to that effect or by a covenant on the part of the tenant to return the property,
save for ordinary wear and tear, in the same condition as the tenant received it.3  
The fourth and fifth principles arise from the law of subrogation and its application
to subrogation clauses found in insurance policies.  It has long been recognized, as a legal
principle, that an insurer may not recover from its insured, or a co-insured, as subrogee.  See
Wager v. Providence Ins. Co., 150 U.S. 99, 110, 14 S. Ct. 55, 58, 37 L. Ed. 1013, 1018
(1893).  In Aviation Ins. Co. v. Barclay, 237 Md. 318, 327, 206 A.2d 119, 123-24 (1965), we
noted, albeit in dicta, that “[t]he authorities are in complete accord, and it is conceded in the
instant case, that the insurer cannot recover, as subrogee, against its insured,” and that is
clearly the case.  See also R. Keeton and A. Widiss, INSURANCE LAW, 341 (1988).  Indeed,
4 Couch provides a more comprehensive basis for subrogation, looking at it from
the perspective of the insured, the insurer, and the tortfeasor.  From the insured’s
perspective, subrogation “has the objective of preventing the insured from recovering
twice for one harm, as would be the case if he or she could recover from both the insurer
and from a third person who caused the harm.”  16 COUCH ON INSURANCE 3d, § 222:8
(2000).  In essence, this is a contractual repudiation of the “collateral source rule” which
otherwise would apply in Maryland.  See Haischer v. CSX, 381 Md. 119, 848 A.2d 620
(2004).  From the tortfeasor’s perspective, Couch iterates the point made in Bachmann,
that the tortfeasor should not receive the windfall of being absolved from liability because
the insured procured, and paid for, insurance.  16 COUCH, supra.  Finally, as to the
insurer, Couch makes two points.  First, it is equitable, he says, that the insurer should be
reimbursed for its payment to the insured, to avoid either of the two prospects noted
(continued...)
-10-
any other construction would be absurd – because, as subrogee, the insurer stands in the
shoes of the insured, it would essentially involve the insured suing himself to recover
damages he sustained by his own conduct.  Those courts which find a tenant to be an implied
co-insured of the landlord use that principle to deny recovery.
   Apart from that legal limitation, equitable principles apply to subrogation.  In
Bachmann v. Glazer, 316 Md. 405, 412, 559 A.2d 365, 368 (1989), citing a number of earlier
cases, we observed that subrogation is founded on the equitable powers of the court and is
intended “to provide relief against loss and damage to a meritorious creditor who has paid
the debt of another.”  It is, we said, “a legal fiction whereby an obligation extinguished by
a payment made by a third person is treated as still subsisting for the benefit of this third
person” who “succeeds to the rights of the creditor in relation to the debt.”  Id.   The rationale
for the doctrine is “to prevent the party primarily liable on the debt from being unjustly
enriched when someone pays his debt.”4  Id.
4(...continued)
above – that the insured recover twice for the single loss or that the tortfeasor be relieved
of any responsibility for his/her tortious conduct.  Second, he notes that subrogation is in
a sense a salvage operation – that insurers are usually entitled, by way of salvage, to the
benefit of anything that may be received from the property insured or damages paid by
third persons for the same loss.  Id.
-11-
We noted in Bachmann that there were three categories of subrogation – legal, which
arises by operation of law when a third party, who pays another’s debt to protect his/her own
interests, is deemed entitled to reimbursement; conventional, which is provided for by
contract; and statutory, which, of course, arises from an act of the Legislature.  The basis of
conventional subrogation – the kind we have here –  is “an agreement, express or implied,
between a debtor and a third party or between a creditor and a third party that, upon payment
of the debt, the third party will be entitled to all the rights and securities of that debtor or that
creditor.”  Id. at 413-14, 559 A.2d at 369.  We confirmed in Bachmann, however, that,
though founded on contract, recovery on a theory of conventional subrogation is nonetheless
subject to principles of equity and that “[a] conventional subrogee is not necessarily entitled
to subrogation as a matter of legal right; the relative equities of the parties are still to be
balanced.”  Id. at 416, 559 A.2d at 370.
The theory espoused by the insurance companies in these cases is that the tenants,
through their own negligent acts or omissions, caused substantial damage to their landlord’s
property and that, as a result, were liable to the landlords, in both tort and contract, for the
damage they caused.  Had there been no insurance, the landlords would have been entitled
-12-
to sue the tenants to recover for the loss.  Pursuant to their own contractual obligation under
the fire insurance policies, the insurers paid at least part of the debt owed by the tenants and,
under the conventional subrogation clauses in those policies, they succeeded to the rights of
the landlords – their insureds – and were therefore entitled to be reimbursed by the tenants,
who were the principal debtors.  
Holding aside the lingering question of Harkins’s negligence, which was never
resolved, the defense in these cases invokes predominantly the assertion that the tenants are,
in effect, co-insureds with their landlords under the landlords’ policies and, as such, may not
be sued under the subrogation clauses.  Harkins adds the equitable defense – that it would
be inequitable to permit the insurers to proceed against the tenants under their subrogation
clauses.  Thus, although the tenants’ ultimate responsibility arises from principles of tort and
contract liability, the decisive issue before us is one of subrogation law.  Are the tenants to
be regarded, either as a matter of law or a matter of fact, as co-insureds under the landlords’
insurance policies and, if not, is there some other basis, including any paramount equity,
favorable to them that precludes the enforcement of an otherwise valid subrogation clause?
The Legal Landscape
Although the prospect of subrogation claims against tenants of the insured has long
existed, the actual emergence of such actions has been traced by at least one commentator,
Milton Friedman, to a 1950 case that inferentially involved but did not turn on a subrogation
5 The land was actually owned by several persons, but Goldman received an
assignment from the other owners and, for purposes of the case, was treated as the owner.
6 The majority opinion in the case omits many of these underlying facts, which
have to be gleaned from the dissenting opinion of Judge Sanborn.  Goldman, supra, 184
F.2d at 367-74.
-13-
claim – General Mills v. Goldman, 184 F.2d 359 (8 th Cir. 1950), cert. denied, 340 U.S. 947,
71 S. Ct. 532, 95 L. Ed. 683 (1951).  See Friedman, FRIEDMAN ON LEASES § 9.9 (4th ed.
1997).  In that case, Goldman purchased investment property for $110,000 and promptly
leased it to General Mills for a ten-year period at an annual rental of $15,000.5  Two years
into the lease, the processing plant situated on the land was destroyed by a fire that Goldman
contended was caused by the tenant’s negligence.  Goldman had obtained a fire insurance
policy that provided $100,000 of coverage for loss to the building and $15,000 for loss of
rental, and the company, in furtherance of that obligation, paid Goldman nearly $111,000.
Notwithstanding that payment, which exceeded the cost of the property, Goldman sued to
recover $342,000 from General Mills, for additional costs and loss of rental. 6   The insurer
intervened, as subrogee, to recover the amount it had paid Goldman.    
The case, governed by Minnesota law, turned on a general provision in the lease that
exonerated the tenant from liability for “loss by fire.”  Goldman, supra, 184 F.2d at 366.
Goldman’s position, and apparently that of the insurer, was that the exoneration did not apply
to a fire caused by the tenant’s negligence.  General Mills argued that the exoneration did so
apply because it was contemplated by the parties that any reimbursement for fire loss,
however caused, would come from the landlord’s fire insurance.  
-14-
Reversing a judgment for Goldman and the insurer, a majority of the appellate panel
concluded that there was no public policy in Minnesota that would preclude the parties from
resorting solely to fire insurance in the event of a fire, whether or not occasioned by the
tenant’s negligence, and it construed the lease as being to that effect.  In the court’s view, the
exoneration for “loss by fire” anticipated that the loss would be covered by insurance
regardless of any negligence and, if the landlord wished to limit that exoneration, it could
have done so in the lease.  In light of all of the other detailed provisions regarding tenant
liability and the court’s supposition that, because the property was purchased as an
investment the premiums for insurance coverage would come from the rent paid by General
Mills, the panel majority simply refused to read into the general exoneration the unwritten
exception sought by Goldman.  
The importance of the case, according to Friedman, FRIEDMAN ON LEASES § 9.9,
supra, lies in the fact that the court, in ultimately ruling for the tenant, was forced to rely on
the exoneration clause in the lease, thereby acknowledging “that in its absence the tenant
would have been liable to the landlord’s insurer under the doctrine of subrogation.”  Id. at
572-73.  Whether that nuance in fact encouraged insurers to seek to enforce subrogation
clauses against tenants is unclear.  Goldman has been frequently cited, but mostly for the
proposition that the parties, through express or implied exoneration clauses in the lease, can
7 Citing cases from Georgia, Kansas, Louisiana, Michigan, Missouri, North
Carolina, Texas, West Virginia, and the U.S. Court of Appeals for the Sixth Circuit,
Friedman notes that “Goldman has been followed by a series of cases in which insurance
companies recovered against tenants on the basis of subrogation.”  Friedman, FRIEDMAN
ON LEASES § 9.9 at 573.  Although some of the post-Goldman cases cited by Friedman
do, indeed, permit subrogated claims to proceed against tenants, none of them relied on
Goldman for that result.
8 There was, in fact, an earlier case upon which the Sutton court relied, at least in
part.  In New Hampshire Ins. Co. v. Ballard Wade, Inc., 404 P.2d 674 (Utah 1965), a fire
of undetermined origin damaged leased premises.  Although the lease required the tenant
to return the property in as good condition as when received, the landlord and his insurer,
without consulting the tenant, repaired the damage themselves.  The landlord’s fire
insurer, which had paid at least part of the loss, sued the tenant for indemnity based on the
tenant’s breach of contract.  The trial court ruled for the insurer, apparently on the theory
that the tenant was strictly liable to the lessor for the damage and therefore must be so to
the insurer.  
The appellate court reversed, holding that, although there might be strict liability to
the lessor, there was none to the insurer.  There was no mention of any subrogation clause
in the policy, and, indeed, the word “subrogation” appears nowhere in the opinion.  The
court treated the action as simply one of indemnity based on a clause in the lease
requiring the tenant to return the property in as good a condition as when received, but
noted that (1) the insurer was neither a party to, nor a third party beneficiary of, the lease,
and (2) because the landlord and the insurer, without consulting the tenant, stepped in and
repaired the damage themselves, the tenant was never afforded an opportunity to make
the repairs.  Apparently, but tacitly at best, viewing the insurer’s claim as one of legal,
rather than contractual/conventional subrogation, the court admonished that,
“when the assignee here has accepted a consideration to cover
a risk, it hardly lies in its mouth to claim indemnity from one
who has made a written guaranty against loss, to which
agreement the insurance company was neither a party nor
(continued...)
-15-
effectively shift the burden of liability from the tenant to the landlord’s insurance company.7
Indeed, it is that concept – the second principle noted above – that has taken root.
The generally accepted progenitor of the “no-subrogation” rule is Sutton, supra, 532
P.2d 478.8  In Sutton, the 10-year-old son of the tenant caused a fire in the leased premises
8(...continued)
expressly or impliedly a beneficiary, and the lessee was not
shown to be negligent. . .”  (Emphasis added).
Id. at 675.
-16-
while playing with his chemistry set.  The landlord’s insurer, which paid the loss, sued the
father and the son, alleging negligence on both their parts, and, after a full trial, won a verdict
against the father, but not the son.  The appellate court reversed, predominantly upon finding
error in jury instructions that plainly cast the burden on the defendants to prove that they
were not negligent.  That alone required a new trial.  The court then turned to the insurer’s
role, which is the relevant part of the opinion for our purposes.
Because the insurer paid the entire amount of the loss, the trial court found that the
landlords were no longer parties in interest, and it required that the insurer be substituted for
the landlords as the plaintiff.  That ruling does not appear to have been disturbed on appeal,
thus leaving the case as one between the insurer and the tenant.  The court treated the insurer
as a subrogee, although it is not clear whether there was a subrogation clause in the policy,
and, with a rhetorical flourish reminiscent more of lyrical poetry than stodgy equity
jurisprudence, characterized subrogation as “begotten of a union between equity and her
beloved – the natural justice of placing the burden of bearing a loss where it ought to be.”
Id. at 481-82.  In that regard, and without citing any authority whatever, the court concluded:
“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
-17-
landlord absent an express agreement between them to the
contrary, comparable to the permissive-user feature of
automobile insurance.”
Id. at 482.
That principle, the court added, was 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.”  Id. at 482.  Here, the court said,
the landlords purchased fire insurance “to protect such interests in the property against loss
from fire” and that “the premium paid had to be considered in establishing the rent rate on
the rental unit.”  Id.  From that, the court concluded that “the tenant actually paid the
premium as part of the monthly rental.”  Id.  Based on its own ex cathedra assumption of the
“realities of urban apartment and single-family dwelling renting,” the court determined that
tenants “rely upon the owner of the dwelling to provide fire protection for the realty (as
distinguished from personal property) absent an express agreement otherwise” and that
“[b]asic equity and fundamental justice upon which the equitable doctrine of subrogation is
established requires that when fire insurance is provided for a dwelling it protects the
insurable interests of all joint owners including the possessory interests of a tenant absent an
agreement to the contrary.”  Id. at 482.  Upon that determination, the court held that “[t]he
company affording such coverage should not be allowed to shift a fire loss to an occupying
tenant even if the latter negligently caused it.”  Id. (citing New Hampshire Ins. Co., supra,
404 P.2d at 674).
9 A curious, and unexplained, thing is what the court expected to be retried.  If the
reversal was based solely on the erroneous instructions that shifted the burden of proof, a
retrial would be in order, but if the court was also holding, as it seemed to be, that, on the
record established in this fully-tried case, the insurer – the only plaintiff left in the case – 
had no cause of action because it had no right of subrogation against the tenant, there
would be nothing to retry.  
-18-
As a final comment, the court observed that the failure of the pleadings and the
evidence to show that the insurer even had a right of subrogation against the tenant furnished
another reason why it was error to instruct the jury to return a verdict for the insurer unless
the tenant proved that he was not negligent.  With that, the court remanded the case for a new
trial.9  
Though the ultimate conclusion in Sutton was based, to some extent, on the court’s
perception of the tenant’s expectations under the lease, the case has been treated as
establishing at least a presumption, if not a per se rule, that, absent an express agreement in
the lease to the contrary, landlord and tenant are co-insureds under a landlord’s fire insurance
policy, and, as a result, the insurer has no right of subrogation against the tenant to recover
amounts paid on the policy by reason of a fire loss, even if caused by the negligence of the
tenant.  Several courts have followed the rigid approach taken by the Oklahoma intermediate
appellate court, although not necessarily the rationale for that approach.  See DiLullo v.
Joseph, 792 A.2d 819 (Conn. 2002); Lexington Ins. Co. v. Raboin, 712 A.2d 1011 (Del.
Super. 1998); North River Ins. Co. v. Snyder, 804 A.2d 399 (Me. 2002); Peterson v. Silva,
704 N.E.2d 1163 (Mass. 1999); United Fire & Cas. Co. v. Bruggeman, 505 N.W.2d 87
-19-
(Minn. App. 1993); Tri-Par Investments, L.L.C. v. Sousa, 680 N.W.2d 190 (Neb. 2004);
Safeco Ins. Co. v. Capri, 705 P.2d 659 (Nev. 1985); Community Credit Union of New
Rockford, N.D. v. Homelvig, 487 N.W.2d 602 (N.D. 1992); GNS Partnership v. Fullmer, 873
P.2d 1157 (Utah App. 1994); Cascade Trailer Court v. Beeson, 749 P.2d 761 (Wash. App.
1988).   The Oklahoma Supreme Court has acknowledged Sutton but has not yet blessed it.
See Travelers Insurance Companies v. Dickey, 799 P.2d 625 (Okla. 1990) (distinguishing
Sutton and holding that a roofing contractor was not a co-insured under the owner’s policy,
notwithstanding a provision in the roofing contract requiring the owner to maintain property
insurance).
Not all of those courts have rested their decision entirely on the assumptions made in
Sutton, however, but have offered additional “law and economics” justifications for the rule.
In DiLullo, supra, 792 A.2d at 822, for example, the Connecticut court noted the substantial
criticism of Sutton’s view of the tenant as a co-insured and agreed both that (1) “under
traditional rules of insurance law, a tenant is not a coinsured on his landlord’s fire insurance
policy simply because he has an insurable interest in the premises and pays rent,” and (2)
under “traditional rules of contract law, whether subrogation would or would not apply
ordinarily would depend, in large part, on a case-by-case analysis of the language of the
insurance policies and leases involved.”   It concluded, however, based on “matters of policy
and fairness,” that “the Sutton result is sound as a matter of subrogation law and policy.”  Id.
The court expressed concern, especially when dealing with a multi-unit structure, that
10 It is interesting to note that, in Middlesex Mut. Assur. Co. v. Vaszil, 873 A.2d
1030, 1032 (Conn. App. 2005), the intermediate appellate court of Connecticut regarded
the rule enunciated in DiLullo as a “default rule,” and held that subrogation would be
allowed if the lease requires the tenant to repair any damage he causes.  The court
observed that the goal of equitable subrogation is to avoid injustice by requiring payment
from the party that caused the harm and that “when financial injustice and some potential
for economic waste collide, subrogation jurisprudence places the weight of authority on
preventing injustice.”  Id. at 1035.  Whether the Connecticut Supreme Court will
acquiesce in that view of its DiLullo decision remains to be seen.
-20-
allocating responsibility to the tenant to maintain sufficient insurance in anticipation of a
subrogation claim would be “untenable” in that it might require tenants to insure for an
amount necessary to cover the replacement cost, not just of their unit, but of the entire
building.  That would produce layers of insurance to protect against the same loss, which the
court concluded would be economic waste.10  
Several of the Sutton followers have echoed that concern.  The GNS court concluded
that, at least for residential tenants, the Sutton presumption was “the most efficient way to
allocate insurance costs.”  GNS, supra, 873 P.2d at 1164.  See also North River, Ins. Co.,
supra, 804 A.2d 399.  Other Sutton followers have accepted more the notions that (1)
because the cost of insurance is presumably included in the rent charged by the landlord, the
tenant has actually paid the premiums on the policy and ought to be regarded as a co-insured
for that reason, or (2) insurance companies “expect to pay their insureds for negligently
caused fires and adjust their rates accordingly.”  See Safeco Ins. Co. , supra, 705 P.2d at 661;
also Tate v. Trialco Scrap, Inc. 745 F. Supp. 458 (M.D. Tenn. 1989); Community Credit,
supra, 487 N.W.2d 602; New Hampshire Ins. Group v. Labombard, 399 N.W.2d 527 (Mich.
-21-
App. 1986).  There is clearly not a single accepted theory, even among the Sutton followers,
and there is certainly no general consensus that landlords and tenants are co-insureds.
Notwithstanding language in some opinions to the effect that Sutton represents a majority
view, that is clearly not the case.  Only a handful of courts have actually embraced the Sutton
rationale.
At the other end of the spectrum, a number of courts have taken an opposite approach
and permitted an insurer to bring a subrogation claim against the tenant absent an express or
implied agreement precluding such a claim.  Some of those courts have looked, in making
that determination, to whether there was an agreement by the landlord either to maintain
insurance for the benefit of the tenant or to look only to its own insurance for compensation.
See Page v. Scott, 567 S.W.2d 101 (Ark. 1978); Neubauer v. Hostetter, 485 N.W.2d 87 (Iowa
1992); Britton v. Wooten, 817 S.W.2d 443 (Ky. 1991); Osborne v. Chapman, 574 N.W.2d
64 (Minn. 1998);  Zoppi v. Traurig, 598 A.2d 19 (N.J. Super. 1990); Galante v. Hathaway
Bakeries, Inc., 176 N.Y.S.2d 87 (N.Y. App. Div. 1958); Winkler v. Appalachian Amusement
Co., 79 S.E.2d 185 (N.C. 1953); Regent Ins. Co. v. Economy Preferred Ins. Co., 749 F. Supp.
191 (C.D. Ill. 1990); 56 Associates ex rel. Paolino v. Frieband, 89 F. Supp.2d 189 (D. R.I.
2000).  Those courts have applied basic contract and tort law and have roundly criticized the
assumptions and fictions employed by the Sutton group.
In Page, the Arkansas court noted that, had there been no insurance, the landlord
could clearly have recovered for damage negligently caused by the tenant and, applying its
-22-
version of the collateral source rule, held that the existence of fire insurance would not have
precluded such a recovery.  The court agreed that the insurer would have no subrogation “if
the parties had agreed as a part of the transaction that insurance would be provided for the
mutual protection of the parties,” id. at 103, or if such an agreement could be implied, but
in the absence of any such express or implied agreement, there was no reason not to allow
a subrogated claim.  The Page court expressly rejected the fiction that the tenant somehow
paid the insurance premium, noting that there was no evidence that the tenant paid any
greater rent because of the insurance than he would otherwise.  Such a fiction, it said,
“ignores the fact that more often than not the market, i.e., supply and demand, is the
controlling factor in fixing and negotiating rents.”  Id. at 104.
Although Appleman acknowledges Sutton as a modern trend, he criticizes the holding
and the trend:
“Sutton, the leading modern case denying subrogation of lessees,
cites no cases for the proposition that the lessee is a co-insured
of the lessor, comparable to a permissive user under an auto
insurance policy.  Contrary to the court’s statement, the fact
both parties had insurable interests does not make them co-
insureds.  The insurer has a right to choose whom it will insure
and did not choose to insure the lessees, and under this holding
the lessee could have sued the insurer for loss due to damage to
the realty, e.g., loss of use if policy provides such coverage.”
6A, J. A. Appleman, INSURANCE LAW AND PRACTICE, § 4055, at 78 (2005). 
In Neubauer v. Hostetter, supra, 485 N.W.2d at 90, the Iowa court agreed with that
criticism and refused to accept that “fire insurance on an entire dwelling includes the interest
11 See General Acc. Fire & Life Assur. Corp. v. Traders Furniture Co., 401 P.2d
157 (Ariz. Ct. App. 1965); Page, supra, 567 S.W.2d 101; Fire Ins. Exchange v.
Hammond, 99 Cal. Rptr. 2d. 596 (Cal. Ct. App. 2000); U.S. Fidelity & Guar. v. Let’s
Frame It, 759 P.2d 819 (Colo. Ct. App. 1988); Middlesex Mut. Assur. Co., supra, 873
(continued...)
-23-
of both landlord and tenant as a matter of law.”  That argument, it said, “disregards the fact
that these are separate estates capable of being separately valued and separately insured.”
Id.  The 56 Associates court, applying Rhode Island law, noted that an insurance policy is a
contract between the insurer and the insured, and it is not for the courts to add additional
insureds to the policy – to “rewrite a policy or read provisions into it in order to achieve what
the court subjectively may believe to be a desirable result.”  56 Associates, supra, 89 F.
Supp.2d at 193.  Echoing the point made by Appleman, the court pointed out that the mere
fact that a tenant may have an insurable interest or that part of his rent payment may be used
to pay premiums on the policy does not make him a co-insured.  If the tenant were a co-
insured, he/she would be entitled to some part of the proceeds, which even the Sutton
followers have not suggested.
Most of the courts that have dealt with this issue, including some that have been
characterized as being in one or the other of the two camps noted above, have taken a middle
approach.  They have adopted the basic underpinning of Sutton (and Goldman) that a tenant’s
liability in a subrogation action should be determined by the reasonable expectations of the
parties to the lease but have rejected a per se or presumptive co-insured status and looked to
the lease as a whole to determine those expectations.11  That point was well-documented in
11(...continued)
A.2d 1030; Pettus v. APC, Inc., 293 S.E.2d 65 (Ga. Ct. App. 1982); Bannock Bldg. Co. v.
Sahlberg, 887 P.2d 1052 (Idaho 1994); Towne Realty, Inc. v. Shaffer, 773 N.E.2d 47 (Ill.
App. Ct. 2002), but compare Dix Mut. Ins. Co. v. LaFramboise, 597 N.E.2d 622 (Ill.
1992); Sears, Roebuck & Co. v. Poling, 81 N.W.2d 462 (Iowa 1957); New Hampshire Ins.
Co. v. Fox Midwest Theatres, Inc., 457 P.2d 133 (Kan. 1969); Britton, supra, 817 S.W.2d
443; Seaco Ins. Co. v. Barbosa, 761 N.E.2d 946, 950 (Mass. 2002) (rejecting Sutton with
respect to commercial leases); Fry v. Jordan Auto Co., 80 So.2d 53 (Miss. 1955); Rock
Springs Realty, Inc. v. Waid, 392 S.W.2d 270 (Mo. 1965); Phoenix Ins. Co. v. Stamell,
796 N.Y.S.2d 772 (N.Y. App. Div. 2005); U. S. Fire Ins. Co. v. Phil-Mar Corp., 139
N.E.2d 330 (Ohio 1956); Cincinnati Ins., Co. v. Control Serv. Technology, Inc., 677
N.E.2d 388 (Ohio Ct. App. 1996); Koch v. Spann, 92 P.3d 146 (Or. Ct. App. 2004),
review denied, 100 P.3d 217 (Or. 2004); Hardware Mut. Ins. Co. of Minn. v. C.A. Snyder,
Inc., 137 F. Supp. 812 (W.D. Pa. 1956), aff’d, 242 F.2d 64 (3 rd Cir. 1957); Wichita City
Lines, Inc. v. Puckett, 295 S.W.2d 894 (Tex. 1956); Monterey Corp. v. Hart, 224 S.E.2d
142 (Va. 1976); Allstate Ins. Co. v. Fritz, 2005 WL 1533103 (W.D. Va. 2005).
-24-
Union Mut. Fire Ins. Co. v. Joerg, 824 A.2d 586 (Vt. 2003).  There, the court observed:
“The majority of courts, however, have avoided per se rules and
taken a more flexible case-by-case approach, holding that a
tenant’s liability to the landlord’s insurer for negligence causing
a fire depends on the intent and reasonable expectations of the
parties to the lease as ascertained from the lease as a whole.
[extensive citations omitted].  Of the courts following this
approach, most that have denied subrogation have done so
because of the existence of specific provisions in the lease, such
as a provision obligating the landlord to purchase fire insurance
on the premises or a clause excepting fire damage from the
tenant’s responsibility to maintain or return the property in a
good state and condition.”
Id. at 589-90.  The holding of the Vermont court was that “where the lease requires the
landlord to carry fire insurance on the leased premises, such insurance is for the mutual
benefit of landlord and tenant, and, as such, the tenant is deemed a coinsured under the
landlord’s insurance policy and is protected against subrogation claims by the landlord’s
12 The courts that have denied subrogation on the assumption that the tenant was a
co-insured because the tenant was, in fact, paying the insurance premiums never
apparently considered whether the expectation by the parties to the insurance contract that
subrogation was available served to reduce the premiums and thus inured to the benefit of
the tenant. 
-25-
insurer.”  Id. at 591.
Conclusion
We believe that this middle approach, of looking to the reasonable expectations of the
parties to the lease, as determined from the lease itself and any other admissible evidence,
is the appropriate one to follow.  It avoids the court making assumptions and adopting
fictions that are largely conjectural, if not patently illogical, and instead applies basic contract
principles and gives proper credence to the equitable underpinning of the whole doctrine of
subrogation.12  
The notion that, barring some express provision to the contrary, landlords and tenants
are, as a matter of law, to be treated as co-insureds under the landlord’s policy has no valid
foundation.  The supposed basis for that conclusion is that the tenant has an insurable interest
in continued possession of the leased premises, and that may be so, but it does not make the
tenant a co-insured.  If, as a result of a fire, the premises becomes uninhabitable or, as is
commonly the case, the lease itself terminates, the tenant would have no right of recovery
under the landlord’s policy for the loss of possession, unless the policy provides such
coverage.  Nor can the landlord/tenant relationship properly be compared to a permissive user
-26-
in an automobile insurance policy, as the Sutton court supposed.  Permissive users are
regarded as insureds under such a policy because the policy expressly provides coverage for
them, usually by including them in the definition of “insured.”  What a few courts, eager to
reach the result ordained in Sutton, have done is to regard the tenant as a co-insured for the
sole purpose of precluding a subrogation claim, which serves only to make the unsupportable
fiction even more tenuous.  The 56 Associates court was absolutely correct: courts have no
business adding insureds to an insurance policy in order to achieve their perception of good
public policy. 
The middle approach, followed by the great majority of courts that have dealt with the
issue, provides an adequate and supportable analytical framework.  Although that framework
makes the analysis largely a case-by-case one, certain general principles emanating from
basic contract and subrogation law will control:
(1) Subrogation claims against tenants are not inherently against public policy. The
equitable principles that we noted in Bachmann, supra, 316 Md. 405, and that Couch
expounded upon (see ante, n. 4), if anything, favor the enforcement of subrogation claims
by insurers.  Such claims serve to avoid both a double recovery by the landlord and the
prospect of a culpable tenant routinely escaping responsibility for his/her negligent conduct.
There are, however, two general caveats.  
(a) First, provisions included in a lease that create or enhance a tenant’s
liability are subject to the normal rules of contract law.  To the extent they may be
13 This is an area in which legislation may be appropriate.  It is, after all, the
General Assembly that sets the public policy of the State, especially economic and social
policy.  Both the insurance industry and the landlord-tenant relationship are heavily
regulated by statute.  If the Legislature wishes to preclude or in some way limit or
condition subrogation claims by landlords’ insurers against tenants in general or against
one or more class of tenants, it is competent to do so.
-27-
ambiguous, they are to be construed against the draftsman, and, if the lease is found to be a
contract of adhesion and the provisions are found to be unfair, they may be declared invalid
as being in violation of public policy.  Subject to those and any relevant statutory constraints,
a lease provision that makes clear that the tenant is liable for damage to the leased premises
caused by the tenant’s negligence and that such liability includes a subrogation claim by the
landlord’s insurer is enforceable.13  In the face of such a provision, clearly stated, the tenant
is ordinarily hard-pressed to assert a contrary expectation.
(b) Second, there is no right of subrogation unless there is liability in the first
instance by the tenant to the landlord.  Because, notwithstanding general common law
liability for negligently caused damage, that liability usually emanates from or is tailored by
the lease and the reasonable expectations of the parties under the lease, the enforceability of
a subrogation claim against a tenant is likely to depend ultimately on the court’s construction
of the landlord/tenant relationship under the lease.
(2)  If, and to the extent that, the lease relieves the tenant of liability for fire loss,
either generally or as occasioned by the tenant’s negligence, there can be no subrogation
claim against the tenant because there would be no liability to the landlord in the first place.
-28-
(3) If, under the lease or by some other commitment, the landlord has communicated
to the tenant an express or implied agreement to maintain fire insurance on the leased
premises, absent some compelling provision to the contrary, the court may properly conclude
that, notwithstanding a general “surrender in good condition” or “liability for negligence”
clause in the lease, their reasonable expectation was that the landlord would look only to the
policy, and not to the tenant, for compensation for fire loss covered by the policy.  That
expectation would constitute an implied commitment in the lease to relieve the tenant of
liability to the extent of the policy coverage and it, too, would therefore preclude a
subrogation claim.
(4) If the leased premises is a unit within a multi-unit structure, absent a clear,
enforceable provision to the contrary, a court may properly conclude that the parties
anticipated and reasonably expected that the landlord would have in place adequate fire
insurance covering the entire building and, with respect to damage caused by the tenant’s
negligence to parts of the building beyond the leased premises, would look only to the policy,
to the extent of its coverage, for compensation.  That expectation has a rational and practical
basis.  Whatever general common law liability a tenant may have for damage to another
person’s property caused by the tenant’s negligence, it is not likely, unless faced with a very
clear contractual obligation to the contrary, that the tenant is thinking beyond the leased
premises or, as a practical matter, would be able to afford, or possibly even obtain, sufficient
liability insurance to protect against such an extended loss. Nor should the law encourage the
-29-
economic waste that would result from multiple layers of insurance by the individual tenants
to cover the same loss.  
Within the construct of these principles, a court must look at the lease as a whole,
along with any other relevant and admissible evidence, to determine if it was reasonably
anticipated by the landlord and the tenant that the tenant would be liable, in the event of a fire
loss paid by the landlord’s insurer, to a subrogation claim by the insurer. In terms of the two
cases now before us:
As to Rausch, we answer the certified questions as follows:
(1) Maryland does not subscribe to the doctrine of “implied co-insureds” as
enunciated in Sutton, namely, that, absent an express provision to the contrary, a tenant is,
as a matter of law, an implied co-insured of the landlord;
(2) Whether Allstate is barred from bringing the instant subrogation action against the
tenants of its insured will depend on the determination by the certifying court of the
reasonable expectations of Dunlop and the Rausches, applying the principles of Maryland
law set forth in this Opinion.
As to Harkins, to the extent that the $83,000 claim by Harford included payments
made for damage to parts of the building beyond the leased premises, summary judgment was
properly granted.  On the state of this record, however, we hold that summary judgment was
inappropriate with respect to liability for amounts paid by Harford to repair damage done to
the leased premises.  
-30-
Although the motion for summary judgment was not based just on the Sutton principle
of co-insurance, the summary judgment itself was founded solely on that principle, which we
have rejected.  The lease required Ms. Harkins to obtain “Renter’s Insurance for the
apartment,” and she did, in fact, obtain such a policy.  Neither that policy nor its terms are
in the record before us, however, so we cannot determine, as a matter of law, what the
reasonable expectations of the parties were with respect to damage to the leased premises.
Having concluded that there was sufficient evidence of negligence on Ms. Harkins’s part to
create a triable issue, the court will have to examine the lease and such other admissible
evidence in order to determine whether there is a triable issue as to the reasonable
expectation of the parties, and, if necessary, deal further with the issue of Ms. Harkins’s
negligence.
IN MISC. NO. 6 (RAUSCH), QUESTIONS ANSWERED
AS HEREIN SET FORTH,  COSTS TO BE EQUALLY
DIVIDED BETWEEN THE PARTIES; IN NO. 128
(HARFORD MUTUAL), JUDGMENT OF CIRCUIT
COURT FOR HARFORD COUNTY AFFIRMED IN PART
AND REVERSED IN PART; CASE REMANDED TO
THAT COURT FOR FURTHER PROCEEDINGS IN
CONFORMANCE WITH THIS OPINION INCLUDING,
IF NECESSARY, RESOLUTION OF THE ISSUE OF
HARKINS’S NEGLIGENCE; COSTS TO BE EQUALLY
DIVIDED BETWEEN THE PARTIES.