We Can Waive Claims, Not Subrogation

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What’s an “evergreen”? An evergreen contract is one that automatically renews unless one party or the other affirmatively terminates it. An “evergreen” blogging topic is one that never dies; one that we can visit over and over. The topic of insurance waivers of subrogation is such an “evergreen.”

We just reviewed a March 22, 2017 decision from a United States District Court sitting in New Jersey. Let us tell you some things about it. It has a twist. [You can see it yourself by clicking: HERE.]

Allegedly “unsupervised, untrained, and unlicensed maintenance workers” employed by a residential landlord were accused of misusing (our euphemism) an acetylene torch and thereby setting a fire that destroyed tenants’ property. The tenants’ insurance company paid the losses and sued the landlord for recovery.
The landlord (almost certainly, the landlord’s own insurance company) responded that each tenant-insured had waived and released it from liability for such a fire. In fact, the relevant lease provision in each case (reproduced below) was, as the court explained, “an unconventional question-and-answer formatted provision about a variety of insurance options and requirements.” Here it is:

Am I required to purchase renter’s insurance?

Yes. You acknowledge that we have not purchased insurance coverage for your personal belongings or any personal property located in your Apartment or anywhere at the Community or for any personal liabilities that may be suffered or incurred by you or your family, guests, invitees or any other occupants or visitors to your Apartment. You waive and release us from all claims against us that you may have, now or in the future, with respect to any loss of or damage to personal property kept in the Community. You are not required to maintain insurance for your personal property, but it is available and we recommend that you maintain such insurance in an amount equal to the value of your personal property. During the term of this lease, you agree to purchase and maintain, at your sole cost and expense, a comprehensive personal liability policy or its equivalent, issued by a licensed insurance company that you select which provides limits of liability of at least $100,000 per occurrence. All policies shall waive rights of subrogation against the Owner and Manager. You agree to provide a copy of these insurance policies or certificates evidencing these insurance policies in form and content reasonably acceptable to us at the time you obtain the policies and on each annual renewal date for such insurance policies. You agree to maintain these insurance policies during the entire term of your residency at the Community, but you may choose any insurance company authorized or admitted to do business on the state where the Community is located.

Our thinking is that this drafting approach is a good attempt at plain English, not perfect, but in the ballpark. After all, insurance is complicated for experts and this was a residential lease.

Our first, and prime, observation is that the court always referred to the cited provision and the issue in front of it as being about the: “subrogation waiver.” Almost every court does so and our industry does so. Ruminations, however, is a maverick – not alone in that category – but, a maverick none the less.

There is no reason for the cited language or any agreement’s language to speak about a waiver of subrogation at all for a party’s insurance carrier right of subrogation to become worthless. A carrier loses its ability to recover from the “protected” wrongdoer when its policyholder waives or releases its own claim against that “wrongdoer.” Let’s understand that an insurance carrier’s right to recover is entirely derivative of its own insured’s right to recover. The right of subrogation “owned” by an insurance carrier comes only because, when it pays its own insured under that insured’s policy, it “buys” its insured’s claim. That’s what it means to have the right of subrogation – because you paid what the “wrongdoer” should have paid (might have been obligated to pay), you stand in the shoes of the policyholder to recover.

So, plain and simple, if the insured has no claim or has no right to pursue a claim, its insurance company has no greater right than its own insured has. That’s: zotch, nada, bubkas, diddly squat, nish, beans – and lots of other ways to say, “absolutely nothing.”

Here’s another way to think about this and to absorb this approach to understanding subrogation waivers. You don’t have to be insured in order to waive or release claims against someone else. So, such a release or waiver is independent of any right of subrogation an insurance carrier may have.

Another way to cognize what this is about is to think about this scenario. If an agreement requires a party to obtain a subrogation waiver from its insurance carrier but does not require that party to waive its claim in the first place, do you think the injured party loses its “own” claim against the “wrongdoing party”? Getting a “waiver of subrogation” does not protect the “wrongdoer” against the injured party’s claims. How the injured party “settles up” with its own insurance carrier is not the “wrongdoer’s” business.

The bottom lines are as follows. An insurance carrier only has the right to pursue its insured’s claim if the insured has a pursuable claim in the first place. Getting an insurance policy with a “subrogation waiver” does not release the insured’s claims.

So, why are waivers/releases and subrogation waivers linked in the first place? First, let’s clarify something else.

An insured has no right to waive its insurance carrier’s right of subrogation. It can make it worthless by releasing or waiving its own claim, but the carrier’s right of subrogation belongs to the carrier, not to its insured. So, let’s stop saying that the tenant or the landlord agrees to waive the “right of subrogation.” It isn’t theirs to waive.

What is going on is that, absent the insurance carrier’s agreement, if its insured gives up a claim, one upon which the carrier might be able to recover its insurance payment, the policy can be voided. That means if an insured, without its carrier’s agreement, gives up a claim, the carrier won’t have to pay its insured.

So, what it means to have or to get (or to whatever) a “waiver of subrogation” is to have an insurance policy that allows the insured to give away a possible claim against a wrongdoer and still have insurance coverage.

Is it possible to get a mean, old insurance company to agree that you can give away the carrier’s right of recovery? Surprisingly (to some), absolutely: “Yes.” Why would any carrier do it (and the words “any carrier” really means “all carriers”) do so? That’s easy. It’s already in the premium. Every insured’s premium has already been calculated with the possibility (and in real estate lease, the reality) that the carrier will have no claim upon which to recover.

How do we know this? Our answer is by way of example. Here is the standard enabling text from the overwhelmingly used policy of commercial property insurance, an almost ubiquitous form, one promulgated by Insurance Services Office, Inc. Start by reading its last line, a real bottom line.

I. TRANSFER OF RIGHTS OF RECOVERY AGAINST OTHERS TO US. 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 or Covered Income.

2. After a loss to your Covered Property or Covered Income only if, at time of loss, that party is one of the following:

a. Someone insured by this insurance;

b. A business firm:

(1) Owned or controlled by you; or

(2) That owns or controls you; or

c. Your tenant.

This will not restrict your insurance.

This (kind of) provision is what allows an insured to waive its rights against another party without restricting insurance coverage.

So, let’s stop saying that one party is waiving its rights of subrogation against the other party. That’s just plain wrong even if most of the judiciary writes otherwise. Let’s remember that in order to have one party rely on its own insurance coverage and not on your coverage, have that party waive or release its claims. In order for a waiving party to make sure that it hasn’t invalidated its own insurance coverage, it has to make sure its own policy allows it to waive or release those claims. The same goes for the released party. If you want the other party to have insurance in force, make sure the other party has a policy that allows the claims to be released.

What does all of this have to do with that United States District Court decision we mentioned many words ago? Mostly that we wish the judge would have led the way in getting the judiciary to separate the concept of a release of claims from that of a subrogation waiver.

So much for, “mostly.” As to another important lesson for residential landlords, here we go.

The court refused enforce the waiver of claims, the one that said: “You waive and release us from all claims against us that you may have, now or in the future, with respect to any loss of or damage to personal property kept in the Community.” It said that this “subrogation waiver” was unenforceable when it should have said that this “release of claims” was unenforceable, but the result would have been the same.

Why did it find the plain English provision might be unenforceable? Here’s the reason, but keep in mind this probably has little application in commercial transactions.

The court looked at four leases – “residential leases consisting of a standardized printed form.” What it called the “relevant subrogation provision” was, according to the court, “buried in an unconventional question-and-answer formatted lease provision about a variety of insurance options and requirements.” [All readers know where this is going.] It further characterized (what it called) the subrogation waiver as being “casually” included “deep in a long paragraph.”

So, that’s how the insurance company seeking recovery against the landlord got its way, actually got a chance to get its way. In the words of this federal court, “[g]iven the form leases and the buried waiver, [the insurance company] may be able to show that the contract constituted a contract of adhesion if it can show that the Insureds lacked a meaningful choice in the acceptance of the subrogation waiver.”

We won’t comment on the possibility of the lease being a “contract of adhesion.” We won’t comment on whether the insurance company really was surprised that its insureds’ leases had a waiver of claims in favor of the landlord. We will comment on this court reinforcing what we think is an erroneous understanding as to why the insurance company might not have had the right to pursue recovery against the landlord. Basically, as should be clear now, Ruminations doesn’t believe that the insurance carrier’s rights rest on whether these leases, or any leases, say anything about a waiver of subrogation. If an agreement says that the insured will not have a claim when it is damaged by the other contracting party, then its insurance carrier, even one that has not, itself, waived its right to stand in the shoes of its insured, has no claim to pursue. Very simply, if the insured has no claim, its insurance carrier has no claim.

An insured who waives claims might, absent the right to do so in its insurance policy, lose coverage by reason of “giving away” a claim, but agreeing to get its carrier to “waive subrogation” is not what eliminates the claim.

So, to sum up – contracting parties do not waive subrogation one against the other. Subrogation waivers are in the insurance policies, not in leases or other types of agreements.

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Comments

  1. Margaret Petersen says:

    Really helpful and clear post – thanks!

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