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Whose shoes? What subrogation means and why it matters

Subrogation is a well-known principle of insurance law, which also affects real estate. It means that an insurer who has settled a claim may then “step into the shoes” of the insured and try to recover what it has paid from anyone who has contributed towards, or caused, the loss.

In real estate, landlords’ insurers can “subrogate” against a tenant if the tenant has contributed to the insured damage. As the tenant, in effect, pays for the insurance, that doesn’t sit well so tenants will typically get protection against this.

How do they do that? Mainly by getting the lease right. If the drafting requires the landlord to insure and to reinstate insured damage, and the tenant is required to contribute to the insurance premium but has no liability for damage by insured risks, the insurers cannot bring a subrogated claim against the tenant. This is generally known as the “Berni Inns” principle, after the case deciding it (Mark Rowlands v Berni Inns Ltd [1986] 1 QB 211). Generally, that should be enough, but (being cautious by nature) lawyers normally want to see more if possible.

Most professional property investors’ insurance policies include a clause by which the insurer expressly waives its subrogation rights against the tenant. Tenants often reinforce this with lease clauses requiring the landlord to ensure (or make efforts to ensure) that the policy includes a subrogation waiver.

The tenant could also be specifically named on the policy as a co-insured (or composite insured). This is more than being “noted” on the policy, which is covered through a “general interests” clause. However, co-insurance is not a normal arrangement, for both practical and technical reasons.

Tenants should also consider the position of their contractors carrying out works such as fit-outs. Neither co-insurance nor a subrogation waiver in favour of a tenant will automatically benefit a contractor and the Berni Inns principle won’t apply. The tenant could require the landlord to obtain a subrogation waiver in favour of a contractor. Not doing so could affect the way in which the contractor prices the work, as expensive additional contractor’s insurance will be needed. There is usually an additional premium for the waiver which the tenant would be expected to pay, but it should be substantially less than the cost of the additional insurance.

Some tenants also ask the landlord to insure the fit-out itself, which can be slightly cheaper than insuring it themselves. Many landlords are comfortable doing this (as long as they are given an accurate reinstatement value). Although there can be a debate over whether the landlord has an “insurable interest” in the tenant’s fit-out, most insurers seem quite happy to cover it.