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WAIVER OF SUBROGATION
A waiver of subrogation, a common provision in commercial leases, bars an insurer for one party to the lease from suing the other party when that party may be responsible for a loss. A recent New Jersey Appellate Division decision again addressed the issue and firmly upheld the long-standing validity of the clause.
The decision is unpublished and hence not of binding effect, but it does lay out the law and New Jersey's strong adherence to the principle that parties to a contract can waive their insurers' right to subrogation prior to the happening of a loss.
Indeed, the waiver of subrogation trumps other clauses regarding liability. The case is Federal Insurance Company et al. v. Hartz Mountain Associaties et al. and was decided on December 12, 2013.
In that case, the commercial lease between landlord and tenant contained three separate provisions that are usual to such leases: (1) a release of the landlord from liability; (2) an indemnification and hold harmless agreement; and (3) a waiver of subrogation. These clauses seek to define the arrangement between the parties and envision the parties obtaining and maintaining proper insurance. Briefly stated, they provide as follows:
1. A release of the landlord exonerates the landlord from liability. The terms of the release vary and can exclude every cause or create exceptions to the release for the landlord's own negligence or gross negligence. This is a point of negotiation between the parties, as the landlord will want as broad an exoneration as possible. The tenant must insure itself accordingly. Landlords almost never release tenants from liability.
2. An indemnification and hold harmless agreement protects the indemnitee (usually the landlord) against claims by third persons injured at the premises, imposing the obligation of defense and payment on the indemnitor (tenant). As in the subject case, the agreement may not extend to the consequences of the indemnitee's own negligence.
3. A waiver of subrogation bars the insurance carrier for one party from seeking reimbursement from the other party to the lease. It can be mutual, with each party agreeing to seek recovery only from its own insurer. The clauses generally speak in terms of securing the waiver prior to any loss. The standard commercial insurance policy contains a provision allowing the insured to waive the insurer's subrogation rights prior to a loss pursuant to the terms of a written lease, thereby eliminating the need for any specific request.
In Federal v. Hartz Mountain, the tenant sublet the premises subject to the terms of the original lease. Thereafter a fire caused over $400,000 damage to the premises and the subtenant's subrogating insurer sought to impose liability on the landlord allegedly because the fire was caused by an exploding light bulb. The subtenant also sought recovery of its $10,000 deductible.
The insurer opposed the landlord's summary judgment motion, contending that an exclusion from the indemnification and hold harmless agreement for the consequences of the landlord's own negligence created an ambiguity. The courts at both the trial and appellate levels made short shrift of the argument in the face of the waiver of subrogation and the release of the landlord. The courts found that Federal was barred by the waiver of subrogation, which has been recognized in New Jersey since at least 1968 (Mayfair Fabrics v. Henley, 97 N.J. Super. 116 (Law Div. 1967), aff'd sub nom. Natell v. Henley, 103 N.J. Super. 161 (App. Div. 1968). The subtenant was barred by the release of the landlord's liability contained in the original lease. The court found the exclusion in the indemnification and hold harmless agreement to be inapplicable since it covered only liability to a third party.
Courts have analyzed the waiver of subrogation as a means for the parties to a lease to allocate the cost of insurance. In reality, the benefit of the waiver is to avoid the parties' subsequent involvement in a lawsuit, and to make definite the extent to which each party may expect to obtain recovery in the event of a loss. Despite the long-standing judicial enforcement of waivers of subrogation, not all liability insurers actually seek out the lease and use the clause to bar a subrogation suit. Mind- boggling, but true!
The point for the public adjuster to realize is that your insured's recovery should come exclusively from its own carrier and no one should hold out the prospect of additional recovery from a tortfeasor as an inducement to take less from an insurer. Note also that N.J.A.C. 11:2-17.8(d) would prohibit the insurer from taking such a position. As part of your initial work, we suggest that you should obtain and review the declarations pages of the policy to determine if the other party to the lease is a named insured. If so, subrogation would not be possible. Similarly, if your insured is a named insured on the other party's policy, your insured would be insulated from a subrogation suit.
If your insured does not obtain the full measure of its loss from its own insurer, you need to review the lease to determine if further action against the other party is possible. You may wish to refer your insured to counsel for assistance in interpreting the lease and also in exploring claims against other potentially responsible parties.
As always, if you encounter difficulties in any of these situations, please feel free to contact us by telephone at 973-538-4100 or by email at tmaloney@thomasmaloneylaw.com. We are here to help! | 
