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West Virginia Supreme Court Clarifies Application of Landlords’ Homeowner’s Insurance Policy to Tenant’s Insurable Interest

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The West Virginia Supreme Court of Appeals (“WVSCA”) recently rejected a circuit court decision finding that a tenant is an “equitable insured” under his landlords’ homeowner’s policy, which had precluded the landlords’ insurer from pursuing a subrogation claim against the tenant for damages caused to the premises.  In rejecting this argument, the WVSCA clarified that a tenant, who is neither a named nor definitional insured under his or her landlords’ homeowner’s insurance policy, is not an insured by the mere fact that the tenant may have an insurable interest in the leased property.  Consequently, the insurer was permitted to proceed against the tenant with a subrogation claim for damages caused to the insured property.  This case provides important instructional guidance for insurers whose policies apply to properties used for rental purposes in West Virginia. 

Farmers & Mechanics Mutual Insurance Company v. Marlon Allen, Sr. No. 14-0967 (W.Va. October 14, 2015) arose out of a dispute following a grease fire involving the landlords’ (Shelly O’Connor and Michael O’Connor) property leased to a tenant (Marcus Allen) under a lease-to-own agreement.  Mr. Allen entered into the lease-to-own agreement with the property owners, whereby Mr. Allen agreed to pay them $625.00 per month for fourteen years, with $555.00 going toward the mortgage, insurance, and taxes and $70.00 going toward interest.  Ms. O’Connor purchased a homeowner’s insurance policy from Farmers & Mechanics Mutual Insurance Company (“F&M”), which did not name Mr. Allen as an insured or definitional insured, and Mr. Allen purchased a separate renter’s insurance policy from State Auto Insurance (“State Auto”). 

Tragically, on May 6, 2010, a grease fire ensued while Mr. Allen was cooking food on the stove.  The grease fire claimed Mr. Allen’s life, and the property sustained extensive damage.  Mr. Allen’s father (Marlon Allen, Sr.) filed a wrongful death claim against Mr. O’Connor, alleging negligent maintenance of the property.  F&M intervened and counterclaimed, asserting a subrogation claim against the Estate for the proceeds F&M paid to the O’Connors following the fire.  The Estate filed an answer to the counterclaim arguing that F&M was precluded from asserting the subrogation claim because Mr. Allen, as tenant, obtained an interest in the F&M policy due to a portion of each monthly payment he made being applied to “mortgage, insurance, and taxes.”  The circuit court concurred, concluding that Mr. Allen was an “equitable insured” because a portion of his rental payments were allocated to “insurance” pursuant to the lease-to-own agreement. 

The WVSCA reversed the circuit court’s decision, concluding that Mr. Allen was not an “insured” under the F&M homeowner’s policy.  The WVSCA premised its decision upon the clear language of the policy, which also did not define Mr. Allen as a definitional insured.  The WVSCA further rejected the circuit court’s reasoning, finding “this Court has never held that a person who is not a named or definitional insured of an insurance policy may be considered an ‘equitable insured.’”  The Court concluded that such a result would be unfair to F&M who did not purposefully enter into an insurance contract with Mr. Allen, and that the end result would be a windfall to Mr. Allen’s insurer, State Auto, which would avoid responsibility for damage caused to the subject property by Mr. Allen’s alleged negligence.  Consequently, the WVSCA concluded that F&M may properly maintain a subrogation action against Mr. Allen’s Estate for the amount paid to the O’Connors under the policy.   

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