In a leased hall, a machine belonging to the tenant company catches fire, the fire spreads to the roof structure, and the building burns out. The landlord breathes a sigh of relief: the building is insured, the insurer pays. Six months later the tenant receives a letter – not from the landlord, but from the landlord's insurer – demanding reimbursement of the loss it has paid. This is recourse, also known as subrogation, and as a broker I see that most tenant companies do not know about it until they receive such a letter. This article is about why this claim is legitimate, what its size depends on, and the two tools – tenant's liability insurance and a suitable clause in the lease – with which a tenant company can manage it.
- Under Section 6:468(1) of the Ptk., the insurer that has paid for the loss acquires the insured's rights against the person liable for it – so the landlord's buildings insurer can recover from the tenant what it was obliged to pay under its contract.
- As a contractual partner, the tenant is strictly liable: under Section 6:333(2) of the Ptk. for all loss resulting from use contrary to the intended purpose or to the contract, and exoneration under Section 6:142 is available only for an unforeseeable cause outside its control.
- General liability insurance typically excludes damage to leased property; that is what separate tenant's liability insurance is for, and the other tool is a lease clause waiving recourse and settling the insurance – both differ from insurer to insurer and from contract to contract.
Why can the landlord's insurer turn against the tenant?
Under Section 6:468(1) of the Hungarian Civil Code (Ptk.), if the insurer has paid for the loss, it acquires the rights that the insured had against the person liable for the loss – unless the person who caused the loss is a relative living in the same household as the insured. The insurer thus steps into the landlord's shoes: what the landlord could have claimed from the tenant, the insurer now claims. A published decision of the Kúria (Hungary's Supreme Court) (Gfv.VI.30.304/2024/8.) also clarified that this claim covers payments the insurer was obliged to make under the contract: what the insurer paid voluntarily for an excluded risk cannot be passed on to the person who caused the loss. The landlord's insurer is therefore not “taking revenge” but exercising a right granted by law, and for business reasons it will do so if the tenant's liability can be established – the size of the loss and the tenant's ability to pay decide how worthwhile it is. For an SME, this amount arrives independently of its own property insurance: the tenant's property insurance pays for its own machinery and stock, while damage caused to the landlord's building is not its own loss but loss caused to someone else – this is the dividing line of the own loss versus loss caused to others article, applied to leases.
The tenant's liability: breach of contract, with strict exoneration
The tenant is not an unrelated third party but a contractual partner, and this makes its liability stricter. Under Section 6:333(2) of the Ptk., the tenant is liable for all loss resulting from use contrary to the intended purpose or to the contract; the general rule of liability for breach of contract, Section 6:142, provides that the party in breach is exempt only if it proves that the breach was caused by a circumstance outside its control that was unforeseeable at the time the contract was concluded, and that it could not be expected to avoid that circumstance or to prevent the loss. According to a study summarising the case law of the Kúria, the tenant's scope for exoneration is narrow where the loss arises from use contrary to the intended purpose – the example was a leased lifting platform blown over by the wind (still under the old Civil Code), where the tenant could have been exempted only if it had proven that the loss was caused by a sudden wind of unforeseeable force and that no cause attributable to its own conduct contributed. A machine that catches fire, incorrectly connected equipment, flammable material stored in a prohibited place, the negligence of the tenant's employee typically fall within the tenant's sphere of control. This means that recourse often depends not on whether the tenant was negligent, but on whether the loss arises from its operations – although the legal basis and exoneration are assessed on the individual facts and the wording of the lease.
What does the tenant's general liability insurance cover – and what not?
Many tenant companies believe that their existing operational liability insurance covers this situation. Hungarian general liability conditions, however, typically exclude damage to property that is leased, borrowed, or taken over for use or safekeeping – and a leased building is exactly that. This is what tenant's liability insurance is for, which can be taken out as a stand-alone add-on or as a clause: under the special conditions of one Hungarian insurer, the insured event is the arising of an obligation to pay compensation for damage caused unlawfully by the insured, as a tenant of real estate, in the property it leases – on the basis of statutory liability, and thus not limited to fire, explosion or water damage. The same conditions exclude, among other things, wear and tear, deterioration and soiling; the fixtures and fittings and glazing of the leased premises; warranty claims; unauthorised alterations; damage caused by a subtenant; construction and installation work; damage caused by forklifts and lifting equipment; contractual penalties and fines. The limit should be aligned with the value of the leased part of the building, not with the rent, and liability assumed in the lease over and above the statutory rules – for example, excluding exoneration, or a contractual penalty – is typically not covered by liability insurance. The details differ from insurer to insurer; the own or leased property article describes the property side, this article the liability side.
The lease: the other half of preventing recourse
Apart from insurance, the lease can also settle the question, and according to the case law of the Kúria, the parties' contractual stipulations take precedence over the general rules. Three elements deserve attention. The first is that the contract should state who insures the building, against which risks, and whether the insurance premium is built into the rent – I went into this in detail in the landlord and tenant article. The second is a clause waiving recourse: the landlord – and, at its request, its insurer by means of a clause – may waive the claim for reimbursement against the tenant for insured losses, typically except for intentional and grossly negligent damage; insurers grant such clauses on an individual assessment basis, and they may come with conditions or a premium. The third is that the lease should not make the tenant assume liability that its insurance does not cover – the tenant's insurer does not pay for sentences of the “for all loss, without exoneration” type, but the tenant has signed them. In the case of a business site in a residential or office building, the same logic applies with respect to the condominium's insurer as well.
What should the tenant company do?
Ask for the essentials of the landlord's buildings insurance – what it covers and for what amount – and check the exclusion concerning leased property in your own liability insurance. If you have no tenant's liability cover, ask for an offer with a limit aligned to the reinstatement value of the leased part of the building; if you do have it, check the limit and the deductible against the actual risk. Take the insurance and liability clauses of the lease to a lawyer at the next amendment, and ask about the possibility of a clause waiving recourse. If the insurer's recourse letter has already arrived, do not ignore it, and do not acknowledge it without thinking either: the legal basis of liability, the amount of the loss and the amount actually paid by the insurer are all points to examine, and in such a case notifying the tenant's own liability insurer is mandatory – the liability insurer examines the legal basis and covers the compensation in accordance with its conditions. In this matter the broker does not represent the client and does not negotiate with the other insurer; acting on the client's behalf, I help where I can with reviewing your own cover and with the notification, while legal representation is a lawyer's job.
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Sources
- Hungarian Civil Code (Ptk.) – Act V of 2013, Section 6:468 (the insurer's claim for reimbursement), Section 6:333 (the tenant's right of use and liability), Section 6:142 (liability for loss caused by breach of contract)
- Kúria (Hungary's Supreme Court) Gfv.VI.30.304/2024/8. – published decision: the insurer's claim for reimbursement under Ptk. Section 6:468 applies only to payments made as required by the contract
- Miklós Boronkay: Damage claims arising from leases in the case law of the Kúria (Kártérítési és Biztosítási Jog, 2021/1)
- UNIQA Tenant's Liability Insurance Special Contract Conditions (H 4963/2024) – insured event, exclusions
