Effective Waivers of Subrogation
Mar 06, 2003
How carefully do you examine the waivers of subrogation and other insurance clauses in your major tenant leases? Do you assume that the large corporate chains will be so fully insured that there is nothing to worry about? A recent decision from the Supreme Court of New York reminds us of the need for care in reviewing these provisions.
The Gap, Inc. and Rite Aid Corp. (Tenants) leased space from "Owners." A fire in another tenantís space caused smoke damage to both Tenantsí premises, resulting in property and business interruption losses. Gap's losses were covered by insurance, but the policy had a $1 million deductible. Rite Aid's insurance covered only property damage, and Rite Aid had over $500,000 in business interruption losses. Both leases contained waivers of subrogation. Gap's waiver of subrogation clause stated that each party waived all claims against the other for loss or damage caused by any risk insured against or required to be insured against under the lease. Rite Aid's clause stated that each party waived all right of recovery against the other to the extent that fire or other casualty insurance was in force.
Both Tenants brought claims against Owners, asserting that the waivers of subrogation did not bar claims against Owners for deductibles or uninsured losses. The Court ruled for the Tenants because claims to recover insurance deductibles or uninsured losses are not waived in a subrogation clause covering only "risks insured against" or losses covered by "insurance in force." Gapís deductible was an "uninsured segment of loss [that] falls outside the ambit of 'risk insured against' for purposes of inclusion in the waiver of subrogation clause." And since Rite Aid had no coverage for business interruption the waiver of subrogation was not applicable to those losses.
The lessons from this case (which would be decided the same way in California) are clear:
- A properly drafted waiver of subrogation will cover any and all losses that are insured against or that could have been insured against.
- Waivers of subrogation must expressly include deductible amounts.
- If the tenant is permitted to self-insure for all or part of any type of loss the waiver must also apply to that which is self-insured.
- Leases should require tenants to insure, or self-insure, against business interruption.
Written by: Michael Carbone
Michael Carbone has been in the private practice of law since 1967 and has an extensive background in business litigation. He is a real estate attorney practicing in San Francisco, who represents owners of commercial property. If you have any questions or comments please reply to: firstname.lastname@example.org or 415.357.1622. You can also check out his website at http://www.mygoodoffices.com/.
The information contained in this article is not intended to constitute legal advise with regard to any particular matter.