Why Do I Want/Need A Waiver Of Subrogation?

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Two weeks ago, we cautioned against thinking that because we know the “general” law, we know the law in a particular jurisdiction. Yes, there is a lot of commonality on a broad level – if a tenant doesn’t pay the rent, it can lose its right to stay – but just what a landlord has to do (the needle it needs to thread) varies greatly from place to place. Today, we’ll give a more focused example in the context of explaining why the (misnamed) waiver of subrogation is important.

At the end of the day, who really pays the insurance premiums for the property – landlord or tenant? When a lease requires the tenant to pay or reimburse its landlord for insurance premiums, isn’t the tenant really paying the premiums? When the stated rent includes the then-existing amount of insurance premiums and the tenant pays only for increases beyond that “base” amount, isn’t the tenant really paying the premiums? Even when the stated rent is “all-in,” might it not be that the tenant is really paying the insurance premiums?

Why would that be important? That’s because an insurance company can’t sue its own insured to recover damages caused by its insured. For example, if you have collision coverage for your car and negligently smash your car into a tree, you will get an insurance check. Your insurance company can’t sue you as the one who caused the damage.

The same is true for an “intended beneficiary” of an insurance policy. In the roughest of ways, an intended beneficiary is a person or entity who is expected or should be expected to benefit from a third-party contract. Someone else’s insurance policy is such a contract. If you are an intended beneficiary of that contract, then you will have the right to enforce the contract. In the insurance context, the carrier can’t sue an intended beneficiary to recover what the carrier paid even if the intended beneficiary caused the covered damage.

How does one earn the “title” of “intended beneficiary”? One way is for the documents to say so directly or to say so in some other clear way. So, an “additional insured,” even though not the policy’s owner and even though not responsible for paying the premium, is intended to be benefited by the policy. Yes, you can write that a particular person or entity is an “intended beneficiary.” You can even write that a class of people, such as all of your tenants, are intended beneficiaries. In each case, the risk of loss caused by a negligent person or entity or class member will be shifted to the insurance company.

Are there other kinds of “beneficiaries” who get some “benefit” from a contract, but who aren’t “intended beneficiaries”? Yes, there is an “incidental beneficiary.” That’s a person or entity who stands to benefit but has no enforceable rights under the “third-party” contract. For example, at the end of the day, a worker gets paid because her or his employer gets revenue from its customers. If a major customer doesn’t pay the employer and the employer goes out of business or merely can’t make the payroll, the employer can sue the customer, but the employee can’t. Yes, the employer benefited from the contract between the employer and the customer, but the employee was only an “incidental,” not an “intended” beneficiary.

Now, back to the landlord-tenant-insurer scenario.

There is a case, one out of Oklahoma, called “Sutton.” It would appear that Sutton is followed by a majority of states (though that may not be correct – who’s counting?). States that follow Sutton hold that a tenant, qua tenant, is an intended beneficiary unless there is an explicit agreement to the contrary. Therefore, in those states, a landlord’s insurer can’t recover its loss from a negligent tenant who caused the insured damage. There are other states that are “anti-Sutton.” In those states, there is a presumption that a tenant is not an intended beneficiary under its landlord’s insurance policy, and the landlord’s carrier can sue the tenant. Lastly, some states look at each situation on a case-by-case basis. They examine the entire lease, using an approach sometimes resembling the use of a divining rod, to rule whether a tenant is a protected intended beneficiary or just incidentally benefitted by its landlord’s insurance. That, apparently, is the Florida approach, as can be seen by clicking HERE for the court decision that allows us to have written this sentence.

When a court applies the “case-by-case” approach, it looks at the “lease as a whole.” That shouldn’t be a new concept to long-time Ruminations readers. As to the lease involved with the Florida case, this is what the court found important and used as the basis for its conclusion:

A. Rent was not abated if the disabling damage was caused by the tenant.

B. The tenant was responsible for repairs and damage to the premises if caused by the tenant.

C. The landlord’s obligation to make repairs was eliminated if the need therefor was intentionally or negligently caused by the tenant.

D. A unilateral provision waived the landlord’s liability as well as the tenant’s right to make claims against its landlord (for damage to the tenant’s property).

E. Absent the landlord’s gross negligence or willful misconduct, the risk of loss to the premises or to the tenant’s property was shifted to the tenant.

F. The tenant agreed to indemnify and hold its landlord harmless of and from all damages arising from or out of any occurrence.

G. The tenant agreed to indemnify and hold its landlord harmless of and from all damages arising from or out of the tenant’s failure to maintain the premises.

H. The tenant was required to “maintain insurance to fully cover all of its own losses.”

I. The tenant waived its right to make claims against, or seek recovery from, its landlord or the landlord’s insurance carrier for anything the tenant could have covered with insurance.

J. The tenant was required to carry property insurance and liability insurance (including “contingent liability coverage”) and name its landlord as an additional insured on those policies.

The court also noted that the lease required the tenant to pay a share of the property’s operating expenses and those included insurance premiums. The tenant’s share was 70%. This provision was the basis for the tenant’s assertion that it was an intended beneficiary of those policies – basically, that it was the party paying the premium.

Well, it doesn’t take a genius for anyone to know what the Florida appellate court decision concluded – the landlord’s carrier could recover, from the tenant, what it paid to the landlord on account of the damages.

There was a strongly worded dissent, but it was a dissent. We think it stung the writer of the majority opinion because that writer addressed “the dissent’s contention that our case-by-case approach ‘runs afoul of the economic realities underlying these sorts of provisions in a lease…’”

The dissent impliedly acknowledged that the lease included all of those items listed above as A through J, but also advised us the lease also required “each party [to] first exhaust its own insurance coverage before making any claim against the other party.” In the view of the dissenting judge, this provision together with the one requiring the tenant to pay its share of the landlord’s insurance premiums (as well as the entire increase, if any, in premium related to the tenant’s own activities), meant that the landlord and tenant “plainly agreed to shift the risk of fire damage to an insurance company.” In addition, the dissenting judge understood the “modern reality” that requiring a tenant to pay for the landlord’s property insurance and also to insure against its own negligence “makes no economic sense from the perspective of either the landlord or the tenant: it increases the economic rent to the tenant with no corresponding benefit to the landlord.” What the dissenting judge did not point out is that the landlord’s insurance premium would have been exactly the same had there been no right of the landlord’s carrier to go after the tenant.

Now, we’ll use that word again: “Subrogation.” That’s the name of the right the insurance company had to recover from the tenant. If the landlord could make a claim against its tenant for the damage and the insurance company covered the landlord’s losses, then (in effect) the insurance company “bought” the landlord’s claim – stepped into the landlord’s shoes – and could sue the tenant to recover what it paid.

The key, as Ruminations has pointed out many times before, is that an insurance company can’t sue the tenant if its policy holding landlord can’t. That means that if the landlord waives its claims against its tenant and, consequently, can’t make a claim of its own, there is no claim that its insurance carrier can pursue. Moreover, the standard insurance policy includes, as part of its provisions, that a landlord-policyholder can waive claims against tenants without invalidating coverage. So, a lease that says that the parties waive claims against each other does not invalidate coverage. That’s why Ruminations writes that the term “waiver of subrogation” is a misnomer when it comes to a lease provision.

It is the insurance policy where the carrier waives its subrogation right. It isn’t the lease that waives an insurance company’s subrogation right. What the lease needs to do is waive claims. Secondarily, but importantly, a lease needs to require each party to have insurance policies that aren’t invalidated by such a waiver of claims. If a party fails to obtain such a party, then if its insurance carrier sues the other party on a subrogation claim, the sued party can make a claim against the carrier’s policyholder for breach of contract – failing to carry the required insurance.

[Big thanks to Greg Haney at Trenam Law in St. Petersburg, Florida for bringing this court decision to our attention.]

POSTSCRIPT: Two days ago, we received a copy of an Indiana appellate court’s decision on the same subject – whether a tenant is/was an intended beneficiary of its landlord’s insurance policy. Indiana also appears to follow the case-by-case approach. In the Indiana decision, the tenant prevailed and was found to be shielded from a suit by the landlord’s carrier. To see that decision, click: HERE.



  1. Stephen Anderson says

    If both parties to a lease waive claims for damages caused by the other, it may not/ should not be necessary but it still makes sense to me to require each party to require of its insurer the statement that it has no right of subrogation. That way everybody understands what the end result must be (since it is often the case that everybody does not understand).

  2. Elliot L. Warm, Esq. says

    I and others of my acquaintance have had this situation arise where our children have signed leases for apartment rentals, such as for a school term and sometimes based on the law of states other than New Jersey. There will typically be a clause, as to damage and destruction, that the tenant is responsible not only to continue to pay the rent but for all the damages arising from a casualty caused by the tenant’s negligence. Often, when there is more than one tenant, all will be held liable for any one tenant’s negligence (putting aside the rights one against the other), and sometimes parents are called on to be full guarantors. Worse yet, the landlords mostly are adamant about not agreeing to a provision for waiver of rights; they don’t even try to understand the concept and insist that the “form” lease be used. Taking this to its extreme, this means that I as a parent could be responsible for paying the entire cost of restoration of an apartment building if someone else’s kid, for example, carelessly (and presumably “negligently”) causes a fire by falling asleep with a space heater left on; and, of course, I cannot reasonably be expected to have insurance sufficient to cover the cost of the building destroyed. I think that a court would likely not allow for such a result, particularly in jurisdictions that are tenant-protective and seemingly enlightened, such as NJ, but I don’t know this for certain, and I would worry even more as to the result in other jurisdictions whose law, policies and practices are entirely out of my knowledge. I haven’t found much by way of law on this subject, but am limited in my resources to do so. Anyone’s thoughts will be greatly appreciated.

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