The First Circuit reversed the District Court's holding that the insurer's subrogation rights were waived based on a clause in the condominium's bylaws. Pacific Indemnity Co. v. Deming, 2016 U.S. App. LEXIS 12374 (1st Cir. July 5, 2016).
Deming rented a unit in the condominium under a lease with the unit's owners. He fell asleep after turning on the bathtub faucets. The water from the bathtub overflowed and leaked into the condominium units below, causing considerable damage. Pacific, which insured Deming's unit, paid $351,159.09 to the unit's owners as a result of the damage.
Pacific sued to recover the amount it paid to the owners. Pacific pled that under its policy and by operation of law, it was subrogated to the owners' rights against Deming for the damages. Deming filed a motion for summary judgment, arguing that the waiver of subrogation contained in Pacific's policy was enforceable and prohibited Pacific's claim. Deming relied upon the bylaws, which provided that each unit owner would carry insurance at its own expense and that all such policies would contain waivers of subrogation. Deming argued that by agreeing to the requirements of the condominium association, Pacific's insured purchased a policy that permitted waiving the right of subrogation.
In its cross motion for summary judgment, Pacific argued that as a tenant, Deming could not establish there was a contractual impediment to Pacific's pursuit of a subrogation claim. The policy language, which provided that the insured "may waive any rights of recovery from another person for a covered loss in writing before the loss occurs," was not self-effectuating, but rather authorized insureds to enter into separate agreements which waived subrogation against particular persons. Deming was not such a person who received a pre-loss waiver.
The district court granted Deming's motion and denied Pacific's cross-motion. The court determined that the bylaws required unit owners to obtain an insurance policy that "shall" contain a waiver of subrogation and concluded that the provision applied to tenants.
The First Circuit reversed. Nothing in the record suggested that the owners actually waived their insured's subrogation rights. The bylaws required unit owners to procure insurance that contained waivers of subrogation. Pacific's policy stated that an insured could waive any rights of recovery from another person for a covered loss in writing before the loss occurred. But nothing in these documents amounted to an actual waiver of subrogation. Pacific's policy merely gave the insured the option to waiver rights of recovery, but could not be read as a waiver of subrogation. The only way to read the bylaws as constituting a waiver of subrogation was to read the requirement to purchase insurance with a waiver of subrogation as itself being a waiver of subrogation. This reading, however, was contrary to the plain text, and was rejected by the court.
Therefore, Pacific was not subject to a waiver of subrogation and could pursue its claims against Deming.
