Whose Loss Is It? Insurable Interest, Additional-Insured Tenders, and a Subrogation Demand After a Tenant-Caused Fire
Marisol Vega owns a 24,000-square-foot warehouse in Fort Wayne and leases the east half to Keystone Fabrication on a five-year lease. Section 14 requires Keystone to carry $2 million in CGL limits naming Marisol as an additional insured, to insure its own equipment and inventory, and to have both parties waive all rights of recovery against the other for property damage to the extent insured, with each party causing its property insurer to waive subrogation. Marisol's commercial property policy has a $5,000 deductible and the standard subrogation condition. In June a Keystone employee's careless hot-work ignites a fire that destroys $600,000 of Marisol's building and $150,000 of Keystone's equipment. Marisol's carrier pays $595,000 and then sends Keystone a subrogation demand. Keystone tenders the demand to its CGL carrier, which has also received Marisol's additional-insured tender.
1. Identify the insurable interest each party held at the moment of the fire, and explain why Marisol cannot recover her full loss twice - once from her property insurer and once from Keystone.
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Marisol (owner). She owns the building and bears the economic loss, so she has an insurable interest measured by the value of the property. Without that interest the policy would be a wager.
Keystone (tenant). Its interest is narrower: its own equipment and inventory, any leasehold improvements it paid for, and - because Section 14 makes it responsible for damage it causes - its potential legal liability for the building. That liability interest is what its CGL is designed to insure. It gives Keystone no claim to Marisol's equity in the building.
Why there is no double recovery. Property insurance is a contract of indemnity: it restores the insured to her pre-loss position and no better.
- If the property carrier pays first, the subrogation condition transfers Keystone's obligation to the carrier; anything Marisol later collects from Keystone belongs to the carrier.
- If Marisol collects from Keystone first, the policy pays only the unpaid balance.
- $595,000 from the policy plus $600,000 from Keystone would be a $595,000 windfall on a $600,000 loss - the precise result indemnity and subrogation exist to prevent.
The practical cap on Marisol's total recovery is her actual loss; the only live question is which pocket funds it.
2. Keystone's CGL carrier refuses Marisol's additional-insured tender, saying her own property policy should pay. Evaluate that denial.
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The denial is correct as to Marisol's own building, though the stated reasoning is sloppy.
What CGL coverage actually promises. The insuring agreement pays sums the insured becomes legally obligated to pay as damages because of bodily injury or property damage to which the policy applies. Two elements fail here:
- No legal obligation. Marisol has not been sued and owes no damages. Her building damage is her own first-party loss - she cannot be legally obligated to pay herself.
- No third-party property damage. Coverage is for damage to property of others. Damage to the insured's own property is outside the insuring agreement, and the care-custody-control exclusion removes the leased premises from Keystone's coverage anyway.
What additional-insured status does buy. It gives Marisol the same protection Keystone has for her liability arising out of Keystone's operations - for example, if the mall's other tenants sued Marisol as landlord over the fire. It is not first-party property insurance and does not replace her commercial property policy.
The carrier should say that, not 'your own policy should pay.' Note also that Keystone's own $150,000 equipment loss is self-insured under its property policy and is not a CGL item.
3. Can Marisol's carrier recover the $595,000 from Keystone? Explain how Section 14 and the policy condition interact, and what would change if the lease contained no waiver.
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Subrogation is derivative. The carrier takes only the rights Marisol had; it acquires no greater claim than she held and is subject to every defense Keystone could raise against her.
Effect of Section 14. The lease is a mutual waiver of recovery for insured property damage and obliges each party to cause its insurer to waive subrogation. If that obligation was performed (the property policy carries a waiver-of-subrogation endorsement, or the standard condition permitting the insured to waive in writing before a loss), Marisol gave up her claim against Keystone before the fire. Her carrier has nothing to step into, and the demand should be withdrawn. Keystone's carrier's reciprocal waiver protects Marisol - it is not a defense to Marisol's carrier's demand, which shows why the mutuality matters.
If there were no waiver. The carrier could subrogate against Keystone as the negligent third party. Coverage on Keystone's side would then be a separate fight (care-custody-control, the 'your work' exclusions, and whether the damage was to the particular part of the property being worked on), and the claim would still be limited to Marisol's actual loss and reduced by any comparative fault. The waiver converted a contested recovery into no recovery - which is exactly why it is priced into the lease.