Antisubrogation Rule Bars Subrogation Claim Against Subtenant

COMMERCIAL PROPERTY – FIRE LOSS – SUBROGATION – ANTISUBROGATION RULE
Utica Mut. Ins. Co. v. Jan's Euro Motors, Inc.
(Sup. Ct., Suffolk Co., decided 7/18/2008)

Interesting case. Perhaps one of first impression in New York.

Commack Auto Collision subleased space to Jan's Euro Motors within a building that Commack leased on Jericho Turnpike in Commack, New York. A rider to the sublease required Commack, the overtenant landlord, to maintain fire and hazard insurance coverage with extended coverage on the premises, and that the undertenant (Jan’s) was to pay its pro rata cost of this insurance as additional rent. In particular, that rider required Jan’s to pay $75.00 per month as an additional rent “representing its pro rata share of the fire insurance premium for the building[.]”

On April 6, 2003, a fire caused damage to the building and its contents. Utica Mutual paid $343,402.74 in fire damages and commenced this subrogation action as subrogor of Commack against Jan's and its owner, alleging that Jan's negligence caused the fire. Jan's moved to dismiss the complaint based on its argument that because it made pro rata payments under the sublease for fire insurance and Commack was required to maintain the insurance on Jan’s behalf, the antisubrogation rule barred Utica's subrogation claim against it.

Utica, of course, argued that the policy listed only Commack, and not Jan's, as an insured. Suffolk County Supreme Court Justice Peter Fox Cohalan prefaced his decision by noting that "[t]he issues to be determined in this motion are whether Jan’s is an 'insured' under the facts of this case, and whether or not subrogation is precluded against Jan’s by Utica." The court also noted that "[n]o case on point has been found on the very issue presented in this action", before holding:

In the instant action, the sublease agreement required the overtenant landlord (Commack) to maintain fire and hazard insurance coverage with extended coverage of the Premises, and the undertenant (Jan’s) paid its pro rata cost of this insurance as additional rent. It is clear that the intent of the parties was that Commack was to obtain insurance on behalf of Jan’s. In support of this motion, Utica submitted the report of its investigation into the April 6, 2003 fire, which contained the results of the interview with Jim Young (hereinafter Young), the owner of Commack. Young stated that Jan’s lease called for the premium payment on the Traveler’s Group policy insuring the overall building. Based upon the foregoing, although not individually named on the policy, Jan’s is deemed to have been an insured under the policy at issue in that it paid its pro rata share of the premiums and it is undisputed that the loss occurred on the premises at 2153 Jericho Turnpike, Commack, New York, where Jan’s was doing business. Although Commack did not separately name Jan’s in the policy as an insured, it did specifically list the address of the premises to be covered by the policy obtained by Commack, including that section of the building occupied by Jan’s.

With respect to the antisubrogation rule, the court ruled:

In that the sublease agreement is clear on its face that Commack was procuring insurance on the premises being sublet by Jan’s, and that money for the insurance premium was collected on a pro rata basis by Commack who failed to specifically name Jan’s on the policy, it would appear that a conflict would arise if Commack tried to make a claim against Jan’s for the damage which Utica claims was caused by Jan’s alleged negligence. Commack does not claim any out of pocket expenses as a result of the property damage, and therefore has no indemnification claim either in its own right against Jan as indemnification does not arise until the indemnitee has actually sustained a loss (See, Bay Ridge Air Rights v State of New York, 44 NY2d 49, 404 NYS2d 73 [1978]). The Court finds that the language of the sublease agreement shows that Jan’s was intended to benefit from the insurance being procured by Commack who failed to add Jan’s to the policy as an additional insured. Thus Utica is attempting to benefit from its insured’s failure to name Jan’s as an insured on the policy when Jan’s was paying the premium for its pro rata share. Had Jan’s been named on the Utica policy, there would be no issue as to Utica being precluded by the antisubrogation rule.

* * * * *

Based upon the foregoing, the Court finds that Commack, as subrogor, was required to provide the insurance on behalf of Jan’s which paid its pro rata share of insurance premiums, and that Utica stands in the shoes of its insured, Commack, and is therefore barred by the antisubrogation rule from asserting a subrogation claim against Jan’s as Jan’s was indirectly insured by Utica who insured the entire premises.

The decision's reference to a "Travelers Group policy" makes it sound like Travelers insured the building, for which Jan's made monthly pro rata payments, and Utica Mutual insured the business personal property within. It is unclear whether Jan's additional rent for pro rata insurance costs was for the building owner's policy with Travelers, or for Commack's policy with Utica Mutual. Nonethess, it is remarkable that the court deemed Jan's to be an "insured" under Commack's policy with Utica Mutual, protected by the antisubrogation rule, simply because it contributed to the property's fire insurance costs. Instead of arguing that it was an "insured" under Utica's policy, perhaps Jan's should have defended the subrogation action by arguing that Commack's breach of its promise to procure insurance for Jan's effectively barred Utica's subrogation action. Not quite the antisubrogation rule, but the same outcome. With over $300,000 at stake, Utica Mutual will probably appeal this decision, and we'll get to see what the Second Department thinks.