Mutual Waiver and Waiver of Subrogation Provisions in Commercial Leases

The lease provision whereby such duplicate insurance coverages are avoided sets forth what is to ensue should there be damage to the property of either party caused by the other. It provides that if the loss is caused by any risk that would be covered by a standard policy of property insurance (as an example, and suggested for this purpose, a Special Form ' Causes of Loss Policy (CP10 30 06 95)), each party will look solely to its own property insurer for recovery and not to the other party. Each party bears the responsibility for actually placing the insurance on its property and the waiver applies whether or not the party actually does so.

Then, in order to complete the job, the common law right of subrogation, whereby the insurer that has paid the claim of its insured may step into the shoes of its insured and sue the wrongdoer “by way of subrogation,” must be waived by the respective insurers. That is accomplished by the waiver of subrogation.

Accordingly, the waiver provisions might read:

Notwithstanding any other provision of this Lease to the contrary, Landlord and Tenant each hereby release the other from any and all liability or responsibility to the other, or to any other party claiming through or under them by way of subrogation or otherwise, for any loss or damage to property caused by a casualty which is insurable under a Special Form ' Causes of Loss property insurance policy. The release specified in this Section is cumulative with any releases or exculpations which may be contained in other provisions of this Lease. Landlord and Tenant agree that all policies of insurance obtained by them pursuant to the terms of this Lease shall contain provisions or endorsements thereto waiving the insurer's right of subrogation with respect to claims against the other, and, unless the policies permit waiver of subrogation without notice to the insurer, each shall notify its insurance companies of the existence of the waiver and indemnity provisions set forth in this Lease.

Assuming that such waiver provisions are included in a lease, what other lease provisions must be brought into conformity with them? There are several, and they would include provisions governing subjects such as “Surrender of Premises”; “Casualty”; “Repairs”; and the standard “Landlord Disclaimers.” Often these standard provisions will expressly (and usually inadvertently) abrogate what the waivers are attempting to do, as was the case with the following provisions taken from actual leases, which also had the waivers:

SURRENDER: “Tenant shall quit and surrender the Premises broom clean and in good condition and repair.” [But what if there had been a fire? This provision should have excepted damage from casualty and condemnation as well as other damage to which the waivers apply.]

REPAIRS BY TENANT: “Tenant is required to make repairs to, and as necessary to replace, the Premises or the Shopping Center when repairs to the same are necessitated by any act or omission of Tenant or Tenant's agents, or the failure of Tenant to perform its obligations under this Lease.” [This provision directly contradicts the waivers.]

REPAIRS BY LANDLORD: “Landlord shall make necessary repair to the roof and structural repairs to the foundation, exterior walls and any interior load-bearing walls of the Premises. However, Landlord shall not be required to repair any damage caused by any act, omission or negligence of Tenant or Tenant's agents or invitees.” [This provision directly contradicts the waivers.]

TENANT'S PROPERTY: “All of the property of Tenant which during the Term may be on the Premises or elsewhere in the Building or on the Lot shall be at the sole risk and hazard of Tenant, and if the whole or any part thereof shall be destroyed or damaged by fire, water or otherwise, or by the leakage or bursting of water pipes, steam pipes or other pipes, by theft, or from any other cause, no part of said loss or damage is to be charged to or borne by Landlord unless due to the gross negligence of Landlord.” [Emphasis Supplied.] [By this provision, Landlord is worse off than if the provision had not been written because under the waivers, Landlord is not liable for damage to property regardless of gross negligence!]

These few examples serve to illustrate the importance of reviewing the entire lease for provisions that are inconsistent with the waivers and, most importantly, prefacing the waivers with the words “Notwithstanding any other provisions of this Lease to the contrary.”

If one is representing a tenant and the landlord refuses to agree to the waivers, what then? That would be a major problem, as the client has substantial liability exposure if the building is damaged as a result of its negligence. Might the property damage component of commercial general liability insurance cover that risk? It appears that the fire legal liability coverage under such a policy would cover that exposure, but the coverage afforded is in the amount of only $50,000 or $100,000. To increase the fire legal liability limit to the value of the building by adding coverage under the Legal Liability Coverage Form (CP 00 40 06 95) would result, not surprisingly, in a premium cost which would approximate the premium cost for property insurance on the building. Thus, for a tenant, there is no simple answer to the situation where a landlord refuses either to agree to a mutual waiver or to obtain from its insurer a waiver of subrogation.

It is in the best interests of commercial landlords and tenants for each not to have to insure the property of the other. This result may be achieved by a mutual waiver of claims against the other, accompanied by waivers of subrogation rights by their respective property insurers.

In commercial leases, the mutual waiver of claims for damage to property and its corollary, the waiver of subrogation by property insurers, continue to be the source of substantial confusion. Much of the confusion appears to spring from a lack of understanding of just what the waivers are intended to achieve and how they achieve it. The hypothetical below and the discussion that follows examine the rationale for these waivers, how they work and how certain other standard lease provisions should be brought into conformity with them.

Assume that Olga Owner leases her lakefront cabin for the month of July to Teri Tenant, and Teri brings along her quite valuable stamp collection on which she plans to work during vacation. Two significant things spring from these events. First, the occupant of the cabin during July will be someone other than the owner of the cabin and, second, there will be in the cabin valuable personal property that does not belong to the owner of the cabin. These facts create all kinds of issues (which is why we have leases), but two major liability questions emerge. They are: 1) Teri could incur liability to Olga if she negligently burns down Olga's cabin. Should Teri consider insuring the cabin? and 2) Olga could incur liability to Teri if there were negligently defective wiring in the cabin that causes a fire and destroys Teri's valuable stamp collection. Should Olga consider insuring the collection? The answers to these questions could be “yes” in each case (assuming that in these circumstances Olga and Teri each have an insurable interest in the other's property, which would probably be the case), but then consider the situation that would ensue. Olga, as the owner of the cabin, already carries property insurance covering fire and other casualties for the cabin, and, no doubt, Teri has scheduled the stamp collection for coverage under her homeowner's policy. Thus, if Teri were to insure the cabin against fire and other casualty and Olga were to insure Teri's stamp collection against those risks, the result would be duplicate coverages for the cabin and the stamp collection, with the only winners being the insurers. To make the case even clearer, assume that the cabin also has two separate wings, each of which will be leased in July to other tenants who also plan to bring along valuable personal property. Are we then to have four people insuring the cabin and Olga insuring the personal property of her three tenants? Furthermore, what if the “cabin” were the Empire State Building?

The two waivers are designed to prevent this kind of redundant coverage. The waivers do not address questions of fault, but rather the inefficiency and cost of duplicate insurance coverages. Thus, they apply even if the other party's conduct is considered grossly negligent or intentionally negligent. The conduct is neutral, as far as the landlord and tenant are concerned, benefiting both but favoring neither.

The lease provision whereby such duplicate insurance coverages are avoided sets forth what is to ensue should there be damage to the property of either party caused by the other. It provides that if the loss is caused by any risk that would be covered by a standard policy of property insurance (as an example, and suggested for this purpose, a Special Form ' Causes of Loss Policy (CP10 30 06 95)), each party will look solely to its own property insurer for recovery and not to the other party. Each party bears the responsibility for actually placing the insurance on its property and the waiver applies whether or not the party actually does so.

Then, in order to complete the job, the common law right of subrogation, whereby the insurer that has paid the claim of its insured may step into the shoes of its insured and sue the wrongdoer “by way of subrogation,” must be waived by the respective insurers. That is accomplished by the waiver of subrogation.

Accordingly, the waiver provisions might read:

Notwithstanding any other provision of this Lease to the contrary, Landlord and Tenant each hereby release the other from any and all liability or responsibility to the other, or to any other party claiming through or under them by way of subrogation or otherwise, for any loss or damage to property caused by a casualty which is insurable under a Special Form ' Causes of Loss property insurance policy. The release specified in this Section is cumulative with any releases or exculpations which may be contained in other provisions of this Lease. Landlord and Tenant agree that all policies of insurance obtained by them pursuant to the terms of this Lease shall contain provisions or endorsements thereto waiving the insurer's right of subrogation with respect to claims against the other, and, unless the policies permit waiver of subrogation without notice to the insurer, each shall notify its insurance companies of the existence of the waiver and indemnity provisions set forth in this Lease.

Assuming that such waiver provisions are included in a lease, what other lease provisions must be brought into conformity with them? There are several, and they would include provisions governing subjects such as “Surrender of Premises”; “Casualty”; “Repairs”; and the standard “Landlord Disclaimers.” Often these standard provisions will expressly (and usually inadvertently) abrogate what the waivers are attempting to do, as was the case with the following provisions taken from actual leases, which also had the waivers:

SURRENDER: “Tenant shall quit and surrender the Premises broom clean and in good condition and repair.” [But what if there had been a fire? This provision should have excepted damage from casualty and condemnation as well as other damage to which the waivers apply.]

REPAIRS BY TENANT: “Tenant is required to make repairs to, and as necessary to replace, the Premises or the Shopping Center when repairs to the same are necessitated by any act or omission of Tenant or Tenant's agents, or the failure of Tenant to perform its obligations under this Lease.” [This provision directly contradicts the waivers.]

REPAIRS BY LANDLORD: “Landlord shall make necessary repair to the roof and structural repairs to the foundation, exterior walls and any interior load-bearing walls of the Premises. However, Landlord shall not be required to repair any damage caused by any act, omission or negligence of Tenant or Tenant's agents or invitees.” [This provision directly contradicts the waivers.]

TENANT'S PROPERTY: “All of the property of Tenant which during the Term may be on the Premises or elsewhere in the Building or on the Lot shall be at the sole risk and hazard of Tenant, and if the whole or any part thereof shall be destroyed or damaged by fire, water or otherwise, or by the leakage or bursting of water pipes, steam pipes or other pipes, by theft, or from any other cause, no part of said loss or damage is to be charged to or borne by Landlord unless due to the gross negligence of Landlord.” [Emphasis Supplied.] [By this provision, Landlord is worse off than if the provision had not been written because under the waivers, Landlord is not liable for damage to property regardless of gross negligence!]

These few examples serve to illustrate the importance of reviewing the entire lease for provisions that are inconsistent with the waivers and, most importantly, prefacing the waivers with the words “Notwithstanding any other provisions of this Lease to the contrary.”

If one is representing a tenant and the landlord refuses to agree to the waivers, what then? That would be a major problem, as the client has substantial liability exposure if the building is damaged as a result of its negligence. Might the property damage component of commercial general liability insurance cover that risk? It appears that the fire legal liability coverage under such a policy would cover that exposure, but the coverage afforded is in the amount of only $50,000 or $100,000. To increase the fire legal liability limit to the value of the building by adding coverage under the Legal Liability Coverage Form (CP 00 40 06 95) would result, not surprisingly, in a premium cost which would approximate the premium cost for property insurance on the building. Thus, for a tenant, there is no simple answer to the situation where a landlord refuses either to agree to a mutual waiver or to obtain from its insurer a waiver of subrogation.

It is in the best interests of commercial landlords and tenants for each not to have to insure the property of the other. This result may be achieved by a mutual waiver of claims against the other, accompanied by waivers of subrogation rights by their respective property insurers.