The right of subrogation is the right to pursue someone else's claim as if it were your own. For example, if a landlord's building burns down due to the negligence of a tenant, without a waiver of the right of subrogation, the insurance company could pay the landlord for the value of the building, and then sue the tenant to recover the amount it paid to the landlord. The insurance company is subrogated to the landlord's claim, meaning it may pursue the landlord's claim against the tenant. The tenant is not protected by the landlord's insurance policy and the tenant's own insurance may be inadequate to cover the loss to the building. The tenant will end up having to pay the insurance company out of pocket for the loss.
This scenario could also arise with the landlord at fault and the tenant as the injured party. For example, a landlord's negligence which starts a fire in the common area could result in the destruction of a tenant's expensive computer equipment. The landlord would have the same problem of having to pay the tenant's insurance company for the loss if there is no waiver of subrogation.
However, leases frequently contain a waiver of subrogation provision, which limits this right to pursue someone else's claim. A typical waiver of subrogation provides that if either the landlord or tenant suffers loss or damage which is caused by the other, but which is covered by the injured party's insurance,
1) the injured party waives any claim it might have against the other to the extent that it is compensated by an insurer, and
2) each party agrees to obtain from its insurer a provision acknowledging this waiver and agreeing that the insurance carrier will not be subrogated to the rights of the injured party to the extent that these rights have been waived.
Thus, the waiver actually deals with the subrogation claim and also the basic liability between the parties.
For example:
"8.6 Waiver of Subrogation. Without affecting any other rights or remedies, Lessee and Lessor each hereby release and relieve the other, and waive their entire right to recover damages against the other, for loss of or damage to its property arising out of or incident to the perils required to be insured against herein. The effect of such releases and waivers is not limited by the amount of insurance carried or required, or by any deductibles applicable hereto. The Parties agree to have their respective property damage insurance carriers waive any right to subrogation that such companies may have against Lessor or Lessee, as the case may be, so long as the insurance is not invalidated thereby." (from AIREA Lease form)
In the example above, a waiver of subrogation provision would mean the insurance company would not be able to subrogate to the landlord's claim and sue the tenant. Likewise, the injured landlord would not be able to sue the tenant to recover damages for a loss that is insured by the landlord's insurance company.
The waiver is in effect so long as it does not violate any of the terms of the insurance policy. If the policy does not permit a waiver and a waiver is included in the lease, the policyholder may be in danger of losing its insurance coverage.
Neil Taxy, Esq. is the author of this post and may be contacted at ntaxy@lpslaw.com Mr. Taxy counsels a variety of business clients in real estate transactions, commercial and residential.
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