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Terminating insurers have no more rights than the insured



Following a hailstorm that hit a shopping mall in Colorado Springs where defendant Dillon Companies, LLC (“King Soopers”) operates a store, the owner of that shopping area, H. Plaza, LLC (“Plaza”) had inspected the roofs of his property and finally contracted about getting the roof replaced. Plaza then sought coverage for the roof from its insurance provider, plaintiff Zurich American Insurance Co. (“Zurich”). Zurich, acts as Zurich American Insurance Co., as a subrogee to H. Plaza, LLC v. Dillon Companies, LLC, dba King Soopers, Civil Action No. 20-cv-2183-RM-MEH, United States District Court, D. Colorado (March 30, 2022) sued the tenant to recover the sums paid by Zurich to replace a ceiling based on King Sooper’s obligations under the lease with H. Plaza , LLC.

BACKGROUND

King Soopers is a tenant in the Plaza property where it has run a store for almost 20 years. King Soopers and Plaza entered into a detailed 20-year lease in 2002 that defined both the landlord’s and the tenant’s responsibilities for maintenance and insurance coverage, among other things.

In June 2018, a hailstorm hit Colorado Springs. King Soopers had the roof of his building inspected and concluded that there was no significant damage that would need to be replaced. Plaza decided, however, without King Soopers’ knowledge, that the roof needed to be replaced. King Soopers first discovered that Plaza would replace the roof in November 2019, when employees noticed workers on the roof. At that time, King contacted Soopers Plaza for further information and found out that the job was already 75% complete. King Soopers explicitly asked about its financial responsibility for the new roof and Plaza informed them that “Tenants will not be billed for this, it is covered by insurance money from the hail damage.” King Soopers was never told that the lease required it to pay for the replacement of the roof.

In the end, Zurich paid for the roof replacements for the Plaza property. The portion of the payment attributable to King Sooper’s ceiling was $ 902,613.

Zurich sued King Soopers over allegations of breach of contract.

SUBROGATION

By paying a debt that rightfully belongs to another, the subroge has created an unexpected case for the debtor. Subrogation allows the subrogee to pursue that amount against the rightful debtor, eliminating any unfair transfer of responsibility for the debt. A subrogated insurer has no greater rights than the insured, because one cannot by subrogation acquire what another, whose rights he or she claims, did not have.

BREACH OF AGREEMENT

As a plaintiff, Zurich must bear the burden of proof for a prima facie case. The performance element in a breach of contract measure means significant performance.

Significant performance occurs when, although the terms of the contract have been deviated from in trivial details that do not significantly impair the benefit that the other party would receive from a literal performance, the defendant has received substantially the benefit he expected.

APPLICATION

Zurich must prove that:

  • there was a contract between King Soopers and Plaza,
  • King Soopers failed to fulfill its obligation under the contract,
  • Zurich and / or Plaza acted or were motivated not to act, and
  • Zurich suffered injuries as a result.

The first and fourth parts are undisputed here – the parties agree that the lease is a contract between King Soopers and Plaza, and they do not dispute that Zurich paid for the roof which, if there was a crime, constitutes damages. However, the parties strongly disagree as to whether Zurich can show that the second and third parts are fulfilled in this case. Both of these factors concern the interpretation of the agreement, a legal issue which the Court is well placed to address without providing further evidence.

When interpreting an agreement, the court strives to give effect to the intentions of the parties. In this case, the parties strongly disagree as to whether the lease required King Soopers to pay for the new roof – it is common ground that King Soopers did not.

King Soopers claims that it was justified to notify any breach under the “Default” provisions of the lease, and it claims that it never received such notice.

The lease provided that the Landlord “will not exercise any right or indemnity provided for in this lease or permitted by law (including delivery of a claim for payment or possession or notice of termination under the law on forced entry and detention) due to The tenant’s negligence, unless the landlord must first have notified the tenant in writing of this, and the tenant within a period of twenty (20) days thereafter must have failed to pay the amount or amounts due, if the negligence consists in failure to pay money, or, if the negligence consists of something other than failure to pay money, The tenant must, within thirty (30) days thereafter, have failed to commence the correction of the omission or thereafter fail to actively and diligently and in good faith proceed with and continue the correction of the omission until it is completely corrected. “(My italics)

Although the notice does not need to take any specific form, such provisions are intended to give the alleged infringement an opportunity to investigate the claim and possibly remedy the infringement.

ZURICH’S ARGUMENT IS CIRCULAR AND ABSURD

The Court was not convinced by Zurich’s argument that if this reading of the lease was correct, it would also have had the right to be notified of its breach, ie. it was not notified of its failure to notify. This argument is clearly circular and absurd, but it also fails for one simple reason.

King Soopers did not seek to indemnify under the contract or law in order to maintain Zurich / Plaza’s obligation to provide it with notice and time to remedy. It did not allege that Plaza in any way failed in the lease by failing to notify it. Instead, it simply claims that the failure to notify it prevents Zurich from pursuing a remedy against King Soopers.

The court concluded that Zurich had not provided any facts that would allow a reasonable jury to conclude that it fulfilled its obligation under the lease to notify King Soopers of its negligence. Since Zurich has failed to do so, King Soopers is entitled to a summary judgment in its favor.

Each insurance claim requires a thorough investigation by the insurer in order to provide the compensation promised by the insurance and to protect the insurer’s right to pursue a subrogation claim. In this case, if Zurich’s damage personnel had read the lease before the roof was replaced, it would have required the owner to have notified King Soopers of his obligation. It did not and in fact the landlord informed King Soopers that it would not invoice King Soopers for the roof (a waiver of subrogation which was not discussed by the court). Zurich’s failure to protect its rights under the insurance contract, the pursuit of King Soopers in court, and claiming a theory of communication that the court concluded was circular and absurd, was a waste of time and money.


(c) 2022 Barry Zalma & ClaimSchool, Inc.

Barry Zalma, Esq., CFE, now limits his internship to the position of insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as a lawyer for insurance coverage and claims management and more than 54 years in the insurance industry. He is available at http://www.zalma.com and zalma@zalma.com.

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