Fenwick Estates: subrogation against a tenant who was never worth suing
Fenwick Estates Ltd owns a parade of six retail units and insures the block under a commercial property policy with a £5m limit and a £2,500 excess.
Unit 3 is let to Brew & Bean Ltd on a 15-year lease. Clause 8 requires the landlord to insure the building and the tenant to pay insurance rent. Clause 8.4 provides that 'the Landlord and the Tenant release each other from all liability for loss or damage to the extent that it is insured under the Landlord's policy, and the insurance proceeds shall be the Landlord's sole remedy'.
In February 2024 a fire destroyed the Unit 3 kitchen and caused smoke damage to two neighbouring units. The fire investigation attributes the cause to faulty wiring installed by the tenant's electrical contractor. Fenwick Estates claims £310,000 and the insurer pays in full, less the excess.
The insurer now writes to Brew & Bean demanding £310,000, saying it was never told about clause 8.4 and that the broker never obtained a copy of the lease. The broker confirms it did not ask for the lease and that the proposal asked only for the 'property address and construction'.
1. Can the insurer recover £310,000 from Brew & Bean by subrogation? Explain the principles you rely on.
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Subrogation is not a free-standing right of recovery. The insurer steps into the insured's shoes and can exercise only the rights the insured actually had at the date of the loss (Castellain v Preston). It takes those rights subject to the same defences, set-offs and contractual qualifications as the insured.
Here, the landlord's right of action against the tenant for the contractor's faulty wiring is qualified by clause 8.4. The parties released each other from liability to the extent the loss is insured and agreed that the insurance proceeds are the landlord's sole remedy. That is a standard risk-allocation mechanism: the landlord insures, the tenant pays insurance rent, and the cost of fire damage is spread through the rent rather than litigated unit by unit. Whether the clause operates as a release or as a covenant not to sue, its effect is to extinguish the right of action which subrogation would otherwise carry. If the landlord has no right, the insurer has nothing to step into.
There is a second, independent obstacle. Subrogation cannot be exercised against a person who is in substance a co-insured under the same policy (Simpson v Thomson). If the lease obliges the landlord to note the tenant's interest on the policy, the claim fails on that ground as well.
The insurer's ignorance of clause 8.4 does not create a right. Its remedy lies against the broker who placed the risk without seeing the lease, not against the tenant.
2. The insurer has already paid. Can it recover the money from Fenwick Estates on the basis that the lease was not disclosed, or that its rights were not preserved?
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There are two possible routes, and both are difficult.
Non-disclosure. The lease terms are arguably material: an insurer rating a multi-let retail parade wants to know whether subrogation potential exists, because that affects the net cost of risk. If the proposal had asked about leases or about waivers of subrogation and been answered inaccurately, the insurer may have a remedy under the Insurance Act 2015. But that remedy operates on a claim; it does not easily unwind a payment already made. Where an insurer has paid with knowledge of the relevant facts, or has waived the point, it cannot normally recover the money as paid under a mistake.
Breach of a preservation of rights condition. Many property wordings require the insured to preserve subrogation rights and to do nothing to prejudice them. If this policy contains such a term, the insurer can argue breach. The obstacles are that the lease predates the policy, so the landlord did nothing after inception to create the problem; the term may not be a condition precedent; and the insurer must show prejudice, which here would be the loss of a £310,000 recovery and would be substantial.
Practical view. The better target is the broker, for failing to obtain the lease or to ask about waivers. Internally, the underwriter should require a lease schedule and a signed subrogation-waiver declaration for every multi-let commercial property risk. Recovering a paid claim from one's own insured is a last resort and rarely succeeds.