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.

For more waiver of subrogation cases, click here or the waiver of subrogation label below.

Waiver-of-Subrogation Clause Not Waived By Not Being Asserted as Affirmative Defense

COMMERCIAL PROPERTY – WAIVER-OF-SUBROGATION CLAUSE – AFFIRMATIVE DEFENSES
State Farm Ins. Co. v. J.P. Spano Constr., Inc.
(2nd Dept., decided 10/21/2008)

A waiver-of-subrogation clause is placed in a contract to minimize lawsuits and claims among the contracting parties. The result is that the risk of loss is agreed among the parties to lie with their insurers, and the cost of the insurance coverage is contractually allocated among the parties as they may agree. The risk, once allocated to the insurers by the parties, is intended to stop there, without allowing the insurer to seek redress via subrogation claims in the event of a loss from the "at fault" party. See, Kaf-Kaf, Inc. v. Rodless Decorations, Inc., 90 NY2d 654 (1997). Most insurance policies allow an insured to waive its insurer's subrogation rights provided the waiver was executed before a loss.

A typical waiver-of-subrogation clause provides:

The owner and Contractor waive all rights against (1) each other and any of the subcontractors, sub-subcontractors, agent and employees, each of the other, and (2) the architect, architect's consultants, . . . for damage caused by fire or other perils to the extent covered by property insurance obtained pursuant to this contract.

In a landlord-tenant context, a typical waiver-of-subrogation clause reads:

Nothing contained hereinabove shall relieve Tenant from liability that may exist as a result of damage from fire or other casualty. Notwithstanding the foregoing, each party shall look first to any insurance in its favor before making any claim against the other party for recovery of 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, Landlord and Tenant each hereby releases and waives all right of recovery against the other or any one claiming through or under each of them by way of subrogation or otherwise.

Although the courts routinely uphold waiver-of-subrogation clauses to dismiss subrogation actions, for subrogating insurers there do exist a few ways around such clauses. State Farm must have thought it had such an argument in this case and brought a subrogation action against what the decision implies was the general contractor of State Farm's insureds.

Unfortunately for State Farm, the insureds had signed a contract with the defendant contractor in which they had waived subrogation for all claims "for damages caused by fire or other causes of loss to the extent covered by property insurance obtained". State Farm argued, though, that the defendants had failed to assert the waiver-of-subrogation clause as an affirmative defense in their answer. In rejecting this argument and upholding the lower court's award of summary judgment to the defendants based on the clause, the Second Department held:

Contrary to the plaintiff's contention, the defendants were not required to plead the waiver-of-subrogation clause as an affirmative defense. The plaintiff's complaint was based, in part, on the very contract in which the waiver-of-subrogation clause appeared; the plaintiff cannot claim to be surprised that the defendants would use it as a defense (see CPLR 3018[b]; Bello v Transit Auth. of N.Y. City, 12 AD3d 58, 61; Carlson v Travelers Ins. Co., 35 AD2d 351, 353-354).

For more waiver of subrogation cases, click here or the waiver of subrogation label below.

Fourth Department Coverage Decisions -- April 25, 2008

UM COVERAGE – VENUE OF ARBITRATION HEARING
Matter of the Arbitration Between Erie Ins. Co. and Malcolm
(4th Dept. decided 4/25/2008)
The venue of an uninsured motorists coverage arbitration may not be held more than 100 miles from the insured's residence.
In Matter of the Arbitration Between Erie Ins. Co. and Malcolm, the court granted the insurer's CPLR article 75 petition to change the venue of the insured UM arbitration from Kings County to Erie County. In originally granting the insured's request to change the venue from Erie County to Kings County, the AAA arbitrator violated that AAA's own rule that an arbitration hearing may not be held more than 100 miles from an insured's residence. The insured's listed residence was in West Seneca, Erie County.

SUBROGATION – WAIVER OF SUBROGATION
American Motorists Ins. Co. v. Louis Ciminelli Construction Co.
(4th Dept. decided 4/25/2008)
In American Motorists Ins. Co. v. Louis Ciminelli Construction Co., the court affirmed the lower court's granting of summary judgment to the general contractor and sprinkler system subcontractor based on the waiver of subrogation provision of the general contract. The court also rejected the subrogating insurer's contention that the waiver of subrogation provision does not apply to postconstruction losses.

CGL – COINSURANCE – ADDITIONAL INSURED – PRIORITY OF COVERAGE
B.F. Yenny Construction Co. v. OneBeacon Ins. Grp.
(4th Dept. decided 4/25/2008)
In B.F. Yenny Construction Co. v. OneBeacon Ins. Grp., the court ruled that the lower court erred in relying on construction subcontract language rather than the language of the two insurance policies to determine the priority of coverage between those policies. Pursuant to the "other insurance" and "method of sharing" provisions of those policies, both One Beacon (which insured the GC as an additional insured) and Selective (which insured the GC as a named insured) were found obligated to provide primary coverage and to share equally in the costs of the GC's defense and indemnification in the underlying action.

CGL – GARAGE LIABILITY POLICY – "YOUR CUSTOMERS" – WHO IS AN "INSURED"
Graphic Arts Mutual Ins. Co. v. Russell
(4th Dept. decided 4/25/2008)
In Graphic Arts Mutual Ins. Co. v. Russell, the court affirmed the lower court's ruling that Graphic Arts Mutual was obligated to defend and indemnify defendant who was test driving a vehicle owned by the plaintiff's car dealership insured. The Graphic Arts garage liability policy excluded by definition from coverage customers of the dealership who had liability insurance of at least mandatory minimum limits. The court rejected Graphic Arts Mutual's argument that the defendant was its named insured dealership's "customer", holding that the defendant, who had had no contact with the dealership and transacted no business with the dealership, could not be construed to fall within the "[y]our customers" language of the garage liability policy.