September 14, 2018
Author: Erik Piazza
Organization: PHELPS DUNBAR LLP
INSURANCE AND SUBROGATION ISSUES
Purpose of a Waiver of Subrogation: A typical insurer can sue any responsible party for its faults on behalf of its insured. This right of subrogation may cause problems among the Landlord and Tenant; therefore, the Lease should include a waiver of subrogation and right of recovery among Landlord and Tenant. Landlord and Tenant should also agree to have their insurers waive any rights that they may have against Landlord, Tenant and the insurance required to be carried by each of them. This waiver of subrogation prevents the Landlord and Tenant’s insurance company from attempting to collect from the Landlord or Tenant’s policy rather than the paying from its own policy (when both policies afford coverage for the same item and the paying insured wants another insurer to reimburse it for amounts paid). With the waiver of subrogation, each party relies on its own insurer and a Tenant is not forced to defend a potential claim to replace the building due to its negligence.
Waiver of Claims. Many leases confuse a waiver of claims with a waiver of subrogation. Subrogation means one party succeeding to the rights of another party with respect to a claim against a third party. In the case of a lease, it typically means one party causes damage to the other party’s property, the insurance reimburses the party whose property was damaged, and the insurance company then inherits the claim against the party who caused the damage. The insurer can then sue the party that caused the damage under the theory of subrogation. If there is a complete waiver of claims among Landlord and Tenant, the waiver of subrogation may play little or no role (Landlord and Tenant have already waived the claim that the insurance company wants to pursue). However, if the waiver of claims is not properly drafted, the Landlord and Tenant could still pursue claims against each other for the loss.
Note that claims by the Landlord and Tenant against each other should be treated differently from third party claims and Landlord and Tenant should waive any claims against the other for damage to their respective properties. The reason is that Landlord and Tenant are each expected to carry insurance on their respective properties and if it is damaged they should look to their own insurance. Without the waivers, Landlord and Tenant would each need to carry insurance on the other’s property and double insure. The only exception is in a triple net lease when the Tenant carries all of the property insurance and agrees to reconstruct the building in the event of a casualty. In such case, the Tenant has agreed to carry the risk for the building and if the insurance is inadequate, the burden should fall on the Tenant. The waiver should only apply to Landlord’s and Tenant’s property, and not the property of third parties. The waiver should not apply to injury to persons.
You should be sure that the waiver includes the claims Landlord or Tenant may have against the other’s members, officers, employees, agents and contractors for damage to their properties. Landlords and Tenants are typically entities and can only act trough their members, officers, employees, agents and contractors. Holding the members, officers, employees, agents and contractors liable would defeat the purpose of the waiver.
Even if such parties intentionally cause damage to the property of Landlord or Tenant, the waiver should still apply to Landlord and Tenant.
Certain waiver of subrogation clauses also state that they are only effective to the extent that the insurance proceeds are actually collected. You should avoid such a clause because it puts both parties at risk with respect to the other party’s insurance. Under this theory, if the Landlord let his property insurance lapse and the Tenant negligently burned down the building, the Tenant would be liable to replace the building.
Some Landlords and Tenants choose to make the waiver apply only after the insurance deductible is paid by the negligent party. This is acceptable but is a business risk depending on the size of the deductible.
Mutual Release; Subrogation. Landlord and Tenant, on behalf of itself and on behalf of anyone claiming under or through it by way of subrogation or otherwise, waives all rights and causes of action against the other party and the officers, employees, agents, servants, contractors or invitees of the other party, for damage to or destruction of real or personal property to the extent caused by any peril normally covered under “All Risk” policies of insurance issued in the geographic area in which the Property is located (whether or not such party actually carries such insurance policies), or by any peril actually covered under the property insurance maintained by such party. This waiver will be complete and total, even if such loss or damage may have been caused by the negligence of Landlord or Tenant, its officers, employees, agents, servants or invitees and will not be affected or limited by the amount of insurance proceeds available to the waiving party, regardless of the reason for such deficiency in proceeds. Landlord and Tenant shall cause their respective insurers to issue appropriate waiver of subrogation rights endorsements and shall provide the other with evidence of the same.