Insurance Subrogration Waivers: Potential Trap for Landlords

January 26, 2009

In a caution to landlords about the importance of ensuring their tenants' compliance with insurance provisions in lease documents, a court recently held, in Fireman's Fund Insurance Company v. Sizzler USA Real Property, Inc., that a commercial lease's subrogation waiver provision barred the landlord's insurance company's subrogation claim against the subtenant, even though the subtenant failed to comply with the insurance requirements set forth in the lease. A patron of the subtenant, which operated a night club, was attacked in the parking lot after first being threatened within the club. The patron sued the landlord, among others, which sought defense and indemnity from the subtenant pursuant to the lease. The subtenant directed the landlord to its insurer. The subtenant's insurer pointed out that the landlord had not been named an additional insured on the policy (as required under the lease). Moreover, the subject policy, rather than having $1,000,000 policy limits, had a self-insured retention of $250,000, with policy limits of only $750,000. The subtenant's insurer would only defend the landlord after its defense and settlement costs exceeded $250,000.

The landlord's insurance company proceeded to defend the landlord and settle the lawsuit, and then brought the subrogation claim against the subtenant for the $380,000 in settlement proceeds and defense costs it had incurred in resolving the patron's claims. The court ruled against the landlord's insurer, noting that the lease language waived subrogation claims as to matters covered by "any" insurance policies. Since the claim was ultimately covered by landlord's policy, the subrogation waiver applied. Also, the lease language did not clearly make maintenance of the appropriate insurance a condition to waiving subrogation.

Accordingly, the court enforced the subrogation waiver in the lease, denying the landlord's insurance company's claims against the subtenant.

The lesson: Landlords need to regularly audit their tenants and subtenants insurance coverage, demanding the provision of insurance certificates. Otherwise, they face the prospect of claims brought against their policies which should be defended by their tenants' insurers. (Fireman's Fund Insurance Company v. Sizzler USA Real Property, Inc. (2008 D.A.R. 18539).)