Experience Matters: Words Have Meanings (And An Insurance Pointer)

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Last week, we wrote about the need for competence when it comes to crafting deal documents such as a lease. Among the over 400 Ruminations prior blog postings are more than a dozen dealing with insurance. This week, we get to combine the two subjects thanks to a December 5, 2018 unpublished ruling from a New Jersey appeals court resolving an insurance dispute. The facts are mundane, but provide a roadmap for us today.

A tenant’s employee “injured himself using a freight elevator inside the leased premises.” He sued the landlord for negligence. [The workers compensation law barred him from suing his employer, the tenant.] Relying on the lease’s indemnification provision, the landlord claimed back against the tenant. It also demanded that the tenant’s insurer honor the landlord’s status as an additional insured under the tenant’s liability policy. As will be seen, the appellate court made the landlord unhappy. To understand why we’ll start with the lease’s indemnification clause. It read as follows:

Tenant agrees to indemnify and save Landlord . . . harmless from and against any and all claims arising during the terms of this Lease for damages or injuries to goods, wares, merchandise and property and/or for any personal injury or loss of life in, upon or about the Demised Premises, the appurtenances thereof, and any sidewalks adjoining the Demised Premises, except such claims as may be the result of the negligence of Landlord, its agents, employees or contractors, or the failure of Landlord to perform any of its obligations hereunder.

The employee alleged that the landlord had been negligent and such negligence was the cause of his injuries. Resting on that narrow allegation, the tenant argued that it had no obligation to indemnify its landlord because that was exactly the kind of claim that the indemnification provision’s exception covered. New Jersey (and, certainly, many other jurisdictions) has a “bright-line rule” requiring “explicit language to enforce an indemnity provision that purports to include an indemnitee’s own negligence.” This lease’s provision did “not express the parties’ intention that [the tenant] indemnify [its landlord] for [the landlord’s] negligence “in unequivocal terms. … Rather, the lease specifically excluded any such obligation.”

That’s pretty simple. After all, the parties negotiated the “carve-out.” Did they know, or did the person who wrote the lease know, that this would also affect the tenant’s insurance obligation? We don’t know, though we guess not.

It appears that the landlord may not have been concerned about the “carve-out” because, after all, the lease called for the tenant to add it as an additional insured on the tenant’s liability insurance policy. Here’s how the lease handled that requirement:

Tenant agrees to provide . . . a comprehensive policy of liability insurance protecting Landlord . . . against any liability [underlying ours] whatsoever, occasioned by any occurrence on or about the Demised Premises or any appurtenances thereto with limits of liability hereunder of not less than the amount of THREE MILLION AND 0/100 ($3,000,000.00) DOLLARS combined single limit coverage on a per occurrence basis and in the amount of FIVE HUNDRED THOUSAND AND 00/100 ($500,000.00) DOLLARS in respect of property damages. Such policy is to be written by good and solvent insurance companies satisfactory to Landlord.

The tenant’s liability insurance policy automatically included landlords as an additional insured and the insurer accepted the burden of providing such insurance to the landlord, but only if the tenant was contractually obligated to cover its landlord. Here, the lease imposed that obligation. The “rub” was that, under the tenant’s liability insurance policy, the tenant’s insurer only had to provide excess coverage to the landlord. What that means is that the tenant’s insurer’s wallet stays closed until the landlord’s own insurance coverage is exhausted. Further, the landlord needed to look to its own insurance carrier for the defense.

There were two reasons put forth by the court for this result. The first had to do with the use of the word we underlined: “liability.” We can’t state the issue any better than did the court. So, here’s what it wrote:

The lease does not require [the tenant] to obtain additional insurance for [its landlord] as to all claims, only as to all liability. It is well-settled that “claim” and “liability” are not synonyms. A claim is “[t]he assertion of an existing right,” but liability is “[t]he quality, state, or condition of being legally obligated or accountable; legal responsibility to another or to society, enforceable by civil remedy or criminal punishment.” Black’s Law Dictionary (10th ed. 2014).

So, until the landlord was adjudicated to be “liable,” the tenant’s insurance policy (and the landlord’s status as an additional insured) weren’t even implicated. Before an adjudication of liability, all that the landlord faced was a “claim.”

Knowledgeable lease writers know the difference between “claim” and “liability.” Those who don’t would be well advised to look closely at any unsigned documents, whether for any deal in progress or in the language of a “form.”

The other reason had to do with how insurance policies play nicely together (or not) when more than one is required to answer to the same situation. In this case, the tenant’s insurance policy’s additional insured endorsement said the following:

D. Other Insurance

The insurance provided by this endorsement applies only to coverages and limits of insurance required by written agreement, but in no event exceeds either the scope of coverage or the limits of insurance available within this policy.

This insurance shall be excess over any other insurance available to the additional insured whether such insurance is on an excess, contingent or primary basis, unless you are obligated under a written agreement to provide liability insurance for that additional insured on any other basis. In that event, this policy will apply solely on the basis required by such written agreement.

What did the landlord’s own policy say, you ask? That’s easy; here is the relevant text from its “Other Insurance Condition”:

This insurance is excess over:

(2) Any other primary insurance available to you covering liability for damages arising out of the premises or operations, or products or completed operations, for which you have been added as an additional insured by attachment of an endorsement.

(3) Any other primary insurance available to you that covers liability for damages arising out of the premises or operations, or products or completed operations, for which another party has agreed under contract to indemnify you or hold you harmless.

So, in essence, each policy (tenant’s and landlord’s) said that the other policy “goes first” and that until the “other” policy limit is exhausted: “Don’t call us.” Over the years we have struggled to offer a simple explanation of what happens when two insurance policies each say that the other goes first. We’ve looked for how others have explained the outcome. All to no avail. That is, until we read this court’s decision. Try this explanation on for size, courtesy of the New Jersey court:

Where two carriers have responsibility for a claim, the other-insurance clause of each policy must be examined to determine whether there exists language which may govern the contribution each party should make. … When the two policies each have an other-insurance clause, which states that it is excess to another policy, “the provisions are ‘mutually repugnant,’ and are disregarded.” … But, “the general rule in New Jersey [is] that where an excess clause and a pro rata clause appear in concurrently effective policies, the pro rata clause is disregarded and full effect is given to the excess clause, making the pro rata clause the primary insurance.”

Now to the nitty-gritty. Look at what the landlord’s policy said. [We’ve omitted “(1)” because it dealt with property insurance and property damage, something not in play here.] As to (2) and (3), in order for the landlord’s policy to be “excess,” the tenant would have been required to provide “primary” insurance to the landlord by way of the landlord being an additional insured. What the person who wrote this lease omitted was: exactly that. The tenant had no contractual obligation to make the additional insured’s coverage: “primary.” Consequently, the coverage afforded to the landlord as an additional insured was “excess” only. Had the landlord’s policy effectively been for excess coverage, then the court would have tossed out the “excess” language from both policies, thus making the tenant’s policy “primary” as to the landlord’s coverage. It is very, very likely that whoever wrote the lease had no idea how a landlord’s policy interacts with its tenant’s policy

Will it really make a difference to the landlord? Many times, we’ve written: “No.” But, nonetheless, there remains an “opposing” view, one that believes the landlord (or, in the case of tenants, the tenant) is better off having the other party’s insurance company bear the loss. We won’t “reprise” that discussion today. Instead, we’ll just point out that the landlord wanted its tenant’s insurance company to bear any loss, and that’s not how it turned out.

Why? It’s all in the words used or not used. ‘Nuf said.

[We aren’t going to do an analysis of how a policy’s contractual liability provision would also have been inapplicable. And, we’re not going to press the point that when it comes to insurance provisions, consultation with a knowledgeable insurance consultant, agent or broker is highly, highly recommended. We just want to leave today’s posting where ends: Experience matters.]

For those readers desiring to read the unpublished decision for themselves, that can be done by clicking: HERE.

 

 

 

 

 

 

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Comments

  1. I know your mantra is “Say what you mean, mean what you say,” but does it really matter here? Wasn’t this just a fight between the two insurance companies? And I assume the tenant was paying, at least in part, for the landlord’s insurance?

    • We are on the same page when it comes to these issues. Many disagree. The main retort is that claims against the landlord’s insurance will raise the premiums and the higher premiums will make the property less attractive to prospective tenants who are comparing leasable locations. We think that is hogwash, but this is a common landlord belief. So, assuming that this landlord subscribed to that belief and wanted its lease to shift the claim to the tenant’s carrier, whoever drafted the lease failed to satisfy that landlord’s desire.

  2. Ira, thanks for yet another thought-provoking article. On the subject of “claims” v. “liabilities”, is the following summation essentially correct? If not, what is the relevance of the distinction?

    The indemnity and exculpation clauses will dictate where liabilities will exist. The insurance clauses will dictate where coverage exists. If a party is indemnified against claims but the other party is only required to insure against liabilities (and their coverage, indeed, only addresses liabilities), then there is no coverage against claims unless and until they become liabilities. (I.e., the indemnitor will eat the costs of indemnifying the indemnitee unless and until the claimant/plaintiff prevails and the indemnitee is adjudicated to be “liable”.)

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