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Court Rules Scope of Subrogation Waiver Clause is Limited

Article

In-Sites

January 14, 2002

The facts in T-Bowl Lanes, Inc. v. Lawrence J. Berman, M.D. (N.J. App. Div. A-6068-99T3), decided June 28, 2001, are simple. Plaintiff/tenant bowling alley was forced to temporarily close due to the “danger of a ceiling collapse resulting from missing tiles and large cracks in the trusses of the ceiling area”. Plaintiff/tenant was insured against business interruption losses, and Plaintiff/tenant’s insurance company paid its claim.

The insurance company then sought recovery by way of subrogation against Defendant/landlord. The Defendant/landlord defended on the strength of the following lease provision:

The Tenant waives all rights of recovery against the Landlord or Landlord’s agents, employees or other representatives, for any loss, damages or injury of any nature whatsoever to property or persons for which tenant is insured. The Tenant shall obtain from the Tenant’s insurance carriers and will deliver to the Landlord, waivers of the subrogation rights under the respective policies.

 All parties agreed that this provision would create a defense, if applicable. Plaintiff, however, argued that a payment for losses due to business interruption is not a “loss, damages or injury of any nature whatsoever to property” (emphasis added). Defendant landlord moved for summary judgment on the grounds that the provision precluded the subrogation claim. The motion was denied. A consent judgment was entered in favor of the Plaintiff/tenant, preserving the landlord’s right to appeal the denial of summary judgment.

The Appellate Court first reviewed Mayfair Fabrics v. Henley, 97 N.J. Super. 116 (Law Division 1967), aff’d o.b. 103 N.J. Super. 161 (App. Div. 1968). The landlord’s obligation for the tenant’s out-of-pocket property losses and lost profits was in dispute. The lease in Mayfair Fabrics provided that:

[I]n no event shall the landlord be responsible or liable for loss or damage to the tenant’s property by fire explosion or otherwise. (emphasis added).

 Id. at 119.

Based on that language, the Court in Mayfair Fabrics held:

It is therefore clear that, although the words “damage to property” may in some contexts be deemed to refer only to direct damage to property, and the terms “property insurance” and “fire insurance” may in certain circumstances refer only to insurance against direct damage, those terms are not necessarily so restricted in meaning. The exculpatory clause in favor of the landlords is broad enough, without doing violence to its terms, to relieve them of liability for indirect as well as direct damage to the tenant’s property.

Id. at 129-30.

It would appear from this precedent that the Defendant/landlord should prevail. However, after reviewing this case the Court makes no attempt to distinguish it, and simply continues in its analysis. The Court declares “there appears to be an ambiguity, or lack of a specific statement, as to whether business interruption was contemplated within the meaning of [the relevant] paragraph”. The Court then notes the rule that “there can be no indemnification for indemnitee’s liability unless clearly provided”. Again, one would think that if the obligation for indemnification has to be clearly provided, the ambiguity [as per the Court’s determination that an ambiguity exists] in the provision would lead to the conclusion that no indemnification existed. However, notwithstanding the holding in Mayfair Fabrics and notwithstanding the ambiguity in the relevant lease provision, the Court concludes the landlord cannot be relieved of liability on a summary judgment motion “because the waiver provision did not clearly exclude this type of loss attributable to defendant’s failure to maintain the property”.

Although the case is tortured, and arguably wrongly decided, the message is clear. Make sure clauses of this nature do not inadvertently exclude claims involving business interruption and lost profits by seemingly broad references to “property” damage.