In the Spotlight: Mutual Subrogation Waiver Benefits Landlord and Tenant

A very important lease provision, particularly from the tenant's perspective, is an effective subrogation waiver. The subrogation waiver essentially provides that in the event of a casualty that is caused by the negligence of one party to a lease, the negligent party is nonetheless not liable for the resulting damage to the extent that the damage is either covered by applicable insurance proceeds or to the extent it would have been covered by insurance proceeds had the other party to the lease maintained the insurance as required under the lease. Subrogation waivers provide, in effect, that both parties to the lease benefit from the casualty insurance maintained by either party. This concept is especially fair to the tenant in net lease situations where the tenant pays its pro rata share of the landlord's casualty insurance. Landlords also benefit from a mutual subrogation waiver to the extent that the tenant's leasehold improvements, fixtures, and personal property are damaged or destroyed due to the landlord's negligence.

Because subrogation provisions are often not part of a landlord's form lease, the savvy tenant must negotiate for the addition of such a provision. Many insurance carriers will, at first, demur when asked to provide a subrogation waiver and the requesting party frequently must be persistent in order to obtain one. This is the principal reason that landlords generally object to the insertion of a subrogation waiver in favor of a tenant. It is also critically important for the lease to provide that the party that waives its carrier's right of subrogation against the other party be required to maintain an agreed-upon level and type of casualty insurance coverage. If the lease does not require such coverage, the waiver will most likely be ineffective and the party that purportedly benefits from a waiver may face catastrophic liability in the event of a significant casualty.

A very important lease provision, particularly from the tenant's perspective, is an effective subrogation waiver. The subrogation waiver essentially provides that in the event of a casualty that is caused by the negligence of one party to a lease, the negligent party is nonetheless not liable for the resulting damage to the extent that the damage is either covered by applicable insurance proceeds or to the extent it would have been covered by insurance proceeds had the other party to the lease maintained the insurance as required under the lease. Subrogation waivers provide, in effect, that both parties to the lease benefit from the casualty insurance maintained by either party. This concept is especially fair to the tenant in net lease situations where the tenant pays its pro rata share of the landlord's casualty insurance. Landlords also benefit from a mutual subrogation waiver to the extent that the tenant's leasehold improvements, fixtures, and personal property are damaged or destroyed due to the landlord's negligence.

Because subrogation provisions are often not part of a landlord's form lease, the savvy tenant must negotiate for the addition of such a provision. Many insurance carriers will, at first, demur when asked to provide a subrogation waiver and the requesting party frequently must be persistent in order to obtain one. This is the principal reason that landlords generally object to the insertion of a subrogation waiver in favor of a tenant. It is also critically important for the lease to provide that the party that waives its carrier's right of subrogation against the other party be required to maintain an agreed-upon level and type of casualty insurance coverage. If the lease does not require such coverage, the waiver will most likely be ineffective and the party that purportedly benefits from a waiver may face catastrophic liability in the event of a significant casualty.