§ 25.04 Coinsurance

• Jurisdiction: United States
• Publication year: 2022

§ 25.04 Coinsurance

There are two common applications of the term "coinsurance." Both of these applications result in insurance protection and recoveries, but from quite different approaches.

[1]—Express Coinsurance

In the first application, expressly stated coinsurance requirements in the policy act to limit the amount that an insured can recover for an underinsured property. Property policies will contain a coinsurance limit on recovery in order to force an insured to keep its policy limits at or near the full value of the insured property. The property owner who fails to maintain its coverage at or near the current property value will be penalized in an amount proportionate to the underinsured value of the property.

The effect of a coinsurance penalty is illustrated as follows:

Example 1:¹

($ Loss x Amount of Insurance Carried) / [Amount of Insurance Required x (Coinsurance Factor)] = $ Recovery
Hypothetical: An insured landlord owns a building with a replacement cost value of $2,500,000, but elects to insure the building under a policy with a $1,500,000 limit and an 80% coinsurance requirement. A fire occurs with a $700,000 loss. The landlord would recover $525,000 subject to its policy deductibles.

($700,000 x $1,500,000) / [$2,500,000 x (80%)] = $525,000

If a policy contains an "agreed amount" endorsement provision, however, such a provision would eliminate the need for coinsurance requirements. These endorsements are more important in instances where a landlord is dependent upon the tenant's insuring the full value of an office building in a triple net arrangement than in multi-tenant situations where the landlord will be maintaining its own insurance coverage.

[2]—Implied Coinsurance

[a]—In General

The second application of the term "coinsurance" should properly be referred to as "implied coinsurance" to distinguish it from the coinsurance discussed above. Implied coinsurance coverage of both landlord and tenant occurs when a court determines upon its examination of facts and circumstances, that the actions or words of one party to a lease (usually the landlord) or the requirements imposed upon the other party (usually the tenant) resulted in the second party's inclusion under the first party's insurance policy. Stated more simply, if at the time a lease was negotiated, a landlord made representations to the tenant that reasonably led the tenant to believe it would be covered under the landlord's insurance policy or imposed certain financial conditions upon the tenant so that the tenant was effectively paying for all or part of the landlord's insurance coverage, the tenant may prevail on a claim that it was entitled to reimbursement for losses covered by the landlord's policy under the doctrine of coinsurance. This is the so-called Goldman effect.

In General Mills v. Goldman,² one of the employees of the tenant negligently set off a destructive industrial plant fire. The owner's insurance carrier paid him the value of the land and building and then, as subrogee, intervened in the owner's suit against his tenant, General Mills. While the Eighth Circuit found that a lease provision relieved the tenant of the obligation to deliver or yield back the premises "in good condition" at the end of the term if the premises were destroyed by fire, it stretched its reasoning to bar the subrogation action by the landlord's insurer.³ In ruling for the tenant, the Goldman court stated:

"It is very clear that in light of all the provisions of the lease, the circumstances of its execution and the understanding about fire insurance coverage to which the lease was related that by the provision that on termination of the lease the tenant would return the property in good condition 'loss by fire . . . excepted' the parties meant a loss by fire such as is always meant when men are talking about or figure on the risk of it in business dealings—i.e., 'the loss by fire'—which always is insured against in ordinary course and against which the landlords intended here and did take out insurance in an amount greater than the owner's investment."⁴

The lease in Goldman required the tenant, General Mills, to return the premises in good condition (loss by fire and ordinary wear excepted) and barred the tenant from doing anything that might lead to an increase in insurance premiums. However, the lease did not specifically require the tenant to obtain fire insurance. The Goldman court found that it was the parties' understanding at the time the lease was negotiated that the landlord would assume responsibility for obtaining insurance and that the landlord had indeed insured the premises and had recovered under the policy.⁵ In other words, the court held that the tenant was a coinsured under the landlord's policy.

Initially, Goldman opened the gates for insurers to bring actions for recovery of fire damage cases caused by negligent tenants. A series of cases followed Goldman in which insurers were able to recover against tenants on the basis of a subrogation action.⁶ Negligent tenants, and even third parties who sold potentially dangerous materials to tenants, were all targets of these insureds' actions.⁷

Landlords have not been spared either. In Western Fire Insurance Co. v. Milner Hotels, Inc.,⁸ the tenant's insurer recovered against a landlord-hotel operator for damage to the tenant's restaurant in the hotel from a fire started in the hotel. Other cases following the Western Fire Insurance case have had similar results.

Goldman's rationale of finding a party as a coinsured under the other's policy has been followed by many jurisdictions. Many of these cases have involved leases that expressly required the landlord to furnish insurance for the premises. Some of these cases have protected the negligent tenant even without the expressed requirement that the landlord secure fire insurance.

A number of cases have followed the holding in Rizzuto v. Morris,⁹ in which the court reasoned that (1) it would be an unfair hardship to require a tenant to insure against its own negligence when it is paying, through its rent, for the fire insurance that covers the premises in favor of the landlord; (2) insurance...