Illinois Supreme Court Finds Tenants not Covered by Landlord’s Insurance Policy

An insurer has no duty to defend the tenants of an insured property against a third-party negligence contribution claim, the Illinois Supreme Court ruled Monday.

In a unanimous decision, the state high court reversed the Third District Appellate Court and reinstated a decision by the Circuit Court. The court rejected the Appellate Court’s interpretation of a 1992 Supreme Court decision to mean that tenants are always “implied co-insureds” under their landlord’s property insurance policy.

Monroe and Dorothy Sheckler rented a residence in Pekin, Illinois from Ronald McIntosh. The lease agreement required McIntosh to provide property insurance for the premises only and stated that the Shecklers were responsible for any insurance for their possessions. An indemnification clause in the policy excluded McIntosh for liability for any damage occurring on the premises.

In August 2015, McIntosh hired a service technician to fix the gas stove at the residence. Wayne Workman inspected the stove and left the property to obtain a part he needed to make the repair. After he left, the Shecklers smelled gas. They sprayed deodorizer to mask the oder.

Monroe Sheckler turned on the stove, which ignited and sparked a fire that caused substantial property damage. McIntosh’s insurer, Auto-Owners Insurance Co., paid for the damage and lost rental income.

Auto-Owners filed a subrogation action against Workman in Tazewell County to recoup its costs. Workman, in turn, filed a third-party complaint against the Shecklers for negligent contribution. Eventually, a jury returned a verdict in favor Workman.

Before the verdict, the Shecklers asked Auto-Owners to defend and indemnify them. After the insurer refused, they filed a lawsuit asking for a declaratory judgment from the Tazwell County court that Auto-Owners has a duty to defend and indemnify them from the third-party contribution claim.

The trial court granted Auto-Owners’ motion for summary judgment, finding the insurer had not duty to defend the couple. The Shecklers appealed.

The Third District Appellate Court reversed the Circuit Court in a split decision. The court’s majority opinion found that a 1992 Supreme Court decision in Dix Mutual Insurance Co. v. LaFramboise had established that tenants are coinsured under their landlord’s property insurance policy.

The Supreme Court said the Dix decision was a subrogation action that does not apply to the Shecklers’ case because no “equitable principles” are at issue.

“Thus, this court’s holding in Dix is not relevant here where the issue is not one of subrogation but whether Auto-Owners owes a duty to defend or indemnify the Shecklers against Workman’s third-party contribution claim,” the opinion says.

The court noted that the insurance policy that Auto-Owners issued to McIntosh listed only McIntosh and his wife as the only named insureds.

“Accordingly, because the Shecklers are not covered insureds under the policy, they are not entitled to the coverage and protection afforded by the policy,” the court concluded.