Waiver of Subrogation Provision in Lease Held to Preclude Claim Against Landlord and Management Company

COMMERCIAL PROPERTY – SUBROGATION – WAIVER OF SUBROGATION
American Motorists Ins. Co. v. Manhattan Emergency Door Corp.
(Sup. Ct., Kings Co., decided 1/26/2009)

American Motorists commenced this subrogation action to recover amounts paid to its insured, Advanced Fertility Services, P.C., for damages sustained as the result of a water leak/moisture condition occurring in office space leased by Advanced in a building owned by Yorkville Towers Housing Co. and managed by R.Y. Management Co., Inc., located at 1625 Third Avenue in New York, New York. Advanced, which had operated a fertility clinic in the leased space since 1985, was forced to suspend its business as the result of the water condition and associated mold problem, which was discovered on July 14, 2002. At the time, Advanced was insured under a “Kemper Premier Business Owners Special Policy” issued by American Motorists and procured by Advanced through the Keep Insurance Agency. As a result of the loss, American Motorists paid Advanced $459,000 for property damage, $944,000 for business interruption, and an “Extra Expense” of $30,00 for mold removal. In addition to this subrogation action, American Motorists also commenced a separate action against Keep in Westchester County Supreme Court for negligence and breach of contract claiming that Keep provided the subject policy to Advanced despite Advanced’s ineligibility for coverage. By order dated March 14,2008 in that case, the court granted American Motorists' motion for summary judgment against Keep on the issue of liability.

Yorkville and RY moved for summary judgment based on a waiver of subrogation provision in the lease between Advanced and Yorkville, which provided:

9. (a) If the demised premises or any part thereof shall be damaged by fire or other casualty, Tenant shall give immediate notice thereof to Owner and this lease shall continue in full force and effect except as hereinafter set forth. (b) If the demised premises are partially damaged or rendered partially unusable by fire or other casualty, the damages thereto shall be repaired by and at the expense of the Owner and the rent and other items of additional rent, until such repair shall be substantially completed, shall be apportioned from the day following the casualty according to the part of the premises which is usable. . .(d) If the demised premises are rendered wholly unusable or (whether or not the demised premises are damaged in whole or in part) if the building shall be so damaged that Owner shall decide to demolish it or to rebuild it, then, in any of such events, Owner may elect to terminate this lease by written notice to Tenant, given within 90 days after such fire or casualty, or 30 days after adjustment of the insurance claim for such fire or casualty, whichever is sooner, specifying a date for the expiration of the lease, which date shall not be more than 60 days after the giving of such notice, and upon the date specified in such notice the term of this lease shall expire as fully and completely as if such date were the date set forth above for the termination of this lease. . .(e) Nothing contained hereinabove shall relieve tenant from liability that may exist as a result of damage from fire or other casualty. Notwithstanding the foregoing, including Owner’s obligation to restore under subparagraph (b) above, each party shall look first to any insurance in its favor before making any claim against the other party for recovery for loss or damage resulting from fire or other casualty, and to the extent that such insurance is in force and collectible and to the extent permitted by law, Owner and tenant hereby releases and waives all right of recovery with respect to subparagraphs (b), (d), and (e) above, against the other or anyone claiming through or under each of them by way of subrogation or otherwise. The release and waiver herein referred to shall be deemed to include any loss or damage to the demised premises and/or to any personal property, equipment, trade fixtures, goods and merchandise located therein. The foregoing release and waiver shall be in force only if both releasors’ insurance policies contain a clause providing that such a release or waiver shall not invalidate the insurance.

The insurance policies issued to both Advanced and Yorkville each contained an identical subrogation provision:

If any person or organization to or for whom we make payment under this Coverage Part has rights to recover damages from another, those rights are transferred to us to the extent of our payment. That person or organization must do everything necessary to secure our rights and must do nothing after loss to impair them. But you may waive your rights against another party in writing:

1. Prior to a loss to your Covered Property[.]

This will not restrict your insurance.

In opposition to Yorkville's and RY's motion, American Motorist argued that the lease provides a waiver and release of recovery only “with respect to subparagraphs (b), (d), and (e)” of paragraph 9, which American Motorists contended related to damages incurred as the result of a loss "to the demised premises.” American Motorists asserted that it was not seeking to recover for a loss to the demised premises but rather for fixtures, personalty and business interruption. In rejecting that argument, Kings County Supreme Court Justice Martin Solomon ruled:

While the subparagraphs mentioned only refer to a loss to the “demised premises” the terms of paragraph 9 expressly state that the waiver and release “herein referred to shall be deemed to include any loss or damage to the demised premises and/or to any personal property, equipment, trade fixtures, goods and merchandise located therein.” Thus the waiver clearly applies to the losses suffered by Advanced.

American Motorists also argued that the subrogation provision did not apply to Yorkville’s property manager, RY, since the provision refers only to “Owner” and “Tenant.” Justice Soloman rejected that argument, as well, holding:

However, the lease’s provision regarding property loss and damage (paragraph 8), as well as the provision which confers a right of entry to the leased space to make repairs (paragraph 13) is expressly applicable to “Owner” and its “agents.” Therefore, a reading of the lease, as a whole, demonstrates that where issues involving the condition of the leased property or damages thereto are concerned, it was the intent of the parties that RY be deemed of equal status to the “Owner,” and the lease must be interpreted to afford equal protection under the subrogation clause to RY (see Insurance Co. of North America v Borsdorff Services, Inc., 225 AD2d 494 [ 19961; Pilsener Bottling Co. v Sunset Park Indus. Assocs., 201 AD2d 548 [1994]).

Finally, the court distinguished this matter from the facts in Continental Ins. Co. v 115-123 West 29th Street Owners Corp. (275 AD2d 604 [2000]), in which the waiver of subrogation clause in the lease at issue in that case required that the lessee's insurance policy "contain a waiver of subrogation provision against the Landlord". The Continental court interpreted the lease provision strictly according to its terms and determined that since the relevant insurance policy did not “contain a waiver of subrogation against the Landlord,” but rather simply authorized the insured to waive its rights against another in writing, the release set forth in the lease was ineffective by its own terms. In distinguishing that lease provision from the one between Advanced and Yorkville, Justice Soloman noted:

The lease relevant to the matter at bar contains no such limitation, but provides that the “release and waiver shall be in force only if both releasors’ insurance policies contain a clause providing that such a release or waiver shall not invalidate the insurance.” Both insurance policies at issue contain a clause that waiver of subrogation “will not restrict” each party’s insurance, which this court interprets to mean that the insurance will not be invalidated by waiver of subrogation.

In light of the court's holding that the waiver of subrogation clause of the lease precluded American Motorists' subrogation action against Yorkville and RY, the court did not reach as academic those defendants' alternative argument that the American Motorists would be made whole by its judgment against the producing agent, Keep.

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