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March 2010

Waiver of Subrogation Clauses In Commercial Leases: Enforceable Under California Law? Under All Circumstances? One California Court Weighs In

Fireman's Fund Insurance Co. v. Sizzler USA Real Property Inc.

Commercial leases in California often include a waiver of subrogation provision. The waiver is in effect an agreement between the parties to look to their respective insurance carriers in the event of a covered claim against either party. Such provisions are intended to avoid litigation between the landlord and tenant. For example, in the absence of a waiver, if a landlord's negligence causes damage to a leased premises, the tenant's insurer would pay the loss and then be subrogated to the tenant's rights against the landlord, allowing it to pursue a claim for indemnity against landlord. Waiver of subrogation provisions prevent these types of actions, theoretically serving the interests of both the landlord and the tenant.

Most California courts have in the past enforced waivers of subrogation. In Fireman's Fund Insurance Co. v. Sizzler USA Real Property Inc., the most recent case on this subject, the Second District Court of Appeal court upheld such a waiver between landlord and tenant and their respective insurers. The Court did so even though the tenant (and party seeking to enforce the waiver) had itself failed to secure sufficient insurance coverage as required by the lease.

Briefly, the facts of Fireman's Fund are as follows. A man was stabbed in the parking lot of Sky Sushi, a West Hollywood night club and a subtenant of Sizzler. After security guards employed by Sky Sushi escorted the man from the club, they watched as the man was attacked but did nothing to assist him. The victim filed suit for his injuries against the landlord Santa Monica Collection LLP ("SMC"), among other parties. Landlord SMC tendered the indemnification and defense of the claim to Sizzler's insurance carrier. However, Sizzler's policy provided only $750,000 coverage and only after a deductible of $250,000. As a result, Sizzler's insurance carrier declined to defend landlord SMC and landlord SMC turned the case over to its own insurance carrier Fireman's Fund. Fireman's Fund settled the case for $300,000, after incurring $84,000 in defense costs.

Upon resolution of the underlying litigation, Fireman's Fund sued Sizzler for breach of lease, claiming it was subrogated to landlord's rights against Sizzler. Fireman's Fund argued that the waiver of subrogation clause in their lease was unenforceable because Sizzler did not obtain $1 million of combined coverage – an obligation imposed upon Sizzler under the lease, which Fireman's Fund claimed to be a condition precedent to the operation of the subrogation waiver. In support of its position, Fireman's Fund relied on case law stating that agreements to waive subrogation are "necessarily premised on the procurement of insurance?".

The court rejected Fireman's Fund's argument, finding that there was indeed insurance coverage – landlord SMC's insurance – sufficient to trigger the operation of the waiver as the lease terms merely required coverage by "any party['s]" insurance policy. Accordingly, Sizzler's inadequate coverage did not preclude application of the waiver.

It should be noted that the Fireman's Fund decision has a somewhat novel set of facts and circumstances: a waiver provision referring to "any" insurance coverage, a lawsuit against the landlord though the injuries were primarily linked to the subtenant's conduct and a lack of adequate insurance by the tenant (and, also as it turns out, the subtenant.)

Decisions like Fireman's Fund can sometime prompt changes in the insurance industry. While both landlord and tenant seemed to benefit from this decision, the landlord's insurer was forced to pay for damages that - many would argue as a matter of public policy - should have been borne by the tenant's or subtenant's insurer. Accordingly, insurance companies may seek to structure their future policies to deny coverage in instances where the party seeking to enforce the waiver may only do so if the party claimant under the lease has secured insurance where the type and monetary extent of the coverage is sufficient under the requirements of the lease.

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