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The Illinois Supreme Court Finds Equitable Subrogation Principles Do Not Apply to Third-Party Contribution Claims for Negligence Against Tenants

The Illinois Supreme Court unanimously held an insurer has no duty to defend or indemnify a tenant of an insured property against a third-party contribution claim where the tenant is not a covered insured under the policy.

In a 7-0 decision, the Illinois Supreme Court unanimously reversed the Third District Appellate Court’s holding that an insurer has a duty to defend or indemnify tenants against third-party contribution claims. Sheckler v. Auto-Owners Ins. Co., 2022 IL 128012, ¶ 47.

The facts of Sheckler v. Auto-Owners involve an insurance coverage dispute following a fire that occurred at a rental property located in Pekin, Illinois. There, Monroe and Dorothy Sheckler entered into a lease agreement for an apartment owned by Ronald McIntosh. Id. at ¶ 4. McIntosh maintained an insurance policy with Auto-Owners for the apartment, which included first-party dwelling and third-party landlord liability coverage. Id. at ¶ 5.

The first-party dwelling provision covered the apartment premises for fire damage. Id. The third-party landlord liability provision covered claims brought by third parties that the insured “becomes legally obligated to pay as damages because of or arising out of bodily injury or property damage.” Id. The third-party landlord liability provision further provided a duty to defend clause for any claim or suit for damages covered by the policy. Id. The provision, however, excluded from coverage “property damage to property occupied or used by an insured or rented to or in the care of, any insured.” Id. The policy declarations listed McIntosh and his wife as the only named insureds. Id.

In August 2015, the Shecklers notified McIntosh that the apartment’s gas stove was not working properly. Id. at ¶ 8. McIntosh hired a technician to inspect the stove and make repairs. Id. When the technician left the apartment to obtain stove parts, the Shecklers attempted to mask the gas odors by spraying Febreze over the stove range. Id. When the Shecklers turned the stove on shortly thereafter, the stove ignited, resulting in a fire that caused substantial property damage. Id. As a result, McIntosh submitted a claim and Auto-Owners paid McIntosh for the damages incurred due to the fire. Id.

Auto-Owners subsequently filed a subrogation action against the technician, who then filed a third-party complaint for contribution against the Shecklers. Id. at ¶ 10. In response, the Shecklers filed an independent declaratory judgment action against Auto-Owners, McIntosh, and the technician. Id. at ¶ 11. They asserted that Auto-Owners had a duty to defend and indemnify them against the technician’s third-party contribution claim under the policy. Id. The parties then filed cross-motions for summary judgment. Id. at ¶ 12. Specifically, the Shecklers relied on the Supreme Court’s decision in Dix Mut. Ins. Co. v. LaFramboise, 149 Ill. 2d 314, 323, 173 Ill. Dec. 648, 597 N.E.2d 622 (1992) in support of their argument that Auto-Owners had a duty to defend. Id. The circuit court disagreed and ruled that Auto-Owners did not owe a duty to defend. The Shecklers appealed. Id. at ¶ 13.

On appeal, the Third District reversed the circuit court’s judgment. Id. at ¶ 15. The court determined that the Shecklers were implied coinsureds under the policy based on equitable subrogation principles. Id. Specifically, the court reasoned that since the Shecklers’ rent payments ultimately accounted for the insurance premiums paid by McIntosh, said payments served as a form of reimbursement. Id. Based on these facts and Dix, the court found that Auto-Owners had a duty to defend. Id. at ¶¶ 15-18. Auto-Owners appealed.

The question presented to the Supreme Court concerned whether Auto-Owners owed a duty to defend or indemnify the Shecklers against the technician’s third-party contribution claim. Id. at ¶ 31. The Court determined that the holding of Dix was irrelevant. Id. at ¶¶ 39-40. Specifically, the Court found that Dix concerned a subrogation action based on equitable principles whereas the third-party claim against the Shecklers did not. Id. at ¶ 39. In so doing, the Court notably agreed with Presiding Justice McDade's dissenting opinion in Dix, wherein he asserted that Dix did not provide “a general rule that whenever tenants pay rent and their landlords insure the leased premises that the tenants are automatically coinsureds under the insurance policy as a matter of law.” Id. at ¶ 20. Accordingly, the Court held Auto-Owners owed no duty to defend or indemnify the Shecklers. Id. at ¶ 47.

The Court’s holding effectively limits the application of Dix in landlord/tenant claims. It is therefore incumbent upon insurers to carefully account for the specific facts and policy language of the claim before it. Particularly, whether a third-party contribution claim asserted against a tenant arises out of equitable subrogation principles or negligence.