Many large companies employ liability releases to protect themselves against subrogation lawsuits. They are able to do so because of their knowledge of this exposure and because they engage the help of attorneys and insurance brokers.
COVERAGE CONCERNS
Small businesses can profit from advice
By Roy C. McCormick
Many large companies employ liability releases to protect themselves against subrogation lawsuits. They are able to do so because of their knowledge of this exposure and because they engage the help of attorneys and insurance brokers.
Unfortunately, although small businesses are vulnerable, many are not familiar with subrogation and thus have not sought protection against its consequences. Fortunately, their insurance providers and counselors can initiate a remedy. The relationship between a building owner (lessor) and a retail store (lessee) clearly illustrates the situation and what can be done.
Several small retail stores leased space in a modest-sized building. The building was insured against a variety of perils, including fire. Each of the tenants carried property insurance on its business personal property. A large section of the building and the contents of one of the stores were badly damaged by fire. The store's insurer and the building's insurer indemnified their respective insureds.
The store's insurer determined that the extensive damage resulted from the building owner's failure to properly maintain the sprinkler system. Exercising its subrogation rights, the insurer sued the owner to recover the amount it had paid to its insured. The authority to do this was spelled out in the insurance policy. A comparable provision was included in the policy applicable to the building and could be the basis for a lawsuit against the lessee if that insurer had alleged negligence by the lessee as the cause of the fire.
The authority for subrogation by an insurer is found in ISO's Commercial Property Conditions Form CP 00 90. A similar provision is incorporated, with language variation but similar intent, in AAIS commercial property forms and comparable coverage written by various insurers.
Section I of the ISO form, Transfer Of The Rights Of Recovery Against Others To The Insurer, explains the subrogation procedure. Should any insured or other party have rights of recovery against another, those rights are transferred to the insurer when the insurer makes payment. Those transferred rights extend to the amount of the payment made by the insurer. The party receiving insurance payment and transferring rights must do everything necessary to secure and protect the rights of the insurer and must not impair those rights after a loss has occurred.
The business community, insurers and the courts recognize and endorse a significant exception. Unique common interests in a building owner and retail store occupancy relationship (and others) encourage cooperative efforts to assure the success and financial stability of each party. A mutual release from liability for damage to insured property of each supports that cooperation.
The authority for an insured to waive its rights against another party is included at the end of the subrogation provision in all of the forms reviewed--subject to the conditions that it must be done in writing and that it must be done prior to loss.
Provisions in many companies' forms--ISO's CP 00 90 for example--go a step further in allowing release after a loss only for a party that is also covered by the policy, is owned or controlled by the insured, or is a tenant of the insured. The tenant exception attests to the importance that landlords attach to ongoing relationships with their valued tenants.
Although it is most often incorporated in a lease, a release may be the subject of a related document. A mutual release between landlord and tenant provides that the lessor and lessee waive all rights against each other for damages caused by fire or other perils to the extent covered by property insurance. Sometimes included, although it is not essential, is a statement that clarifies that the waiver is effective even though a party would have a duty of indemnification.
Insurance companies recognized both a mutual release and one beneficial to only one party as legitimate business and legal practices. Accordingly, the pertinent policy provisions were widely adopted.
For several reasons, the provision for release of a tenant after a loss is not a solid substitute for a mutual release (running both ways) in advance of a loss. An insured lessor might not want to release a presumably liable lessee after the occurrence, or might be persuaded not to do so.
The insurer could then exercise its basic subrogation rights. The release after loss option runs in only one direction. A mutual release in advance of loss will also protect the lessor building owner against subrogation by the lessee tenant's insurer.
A series of decisions by higher courts affirms the validity and effectiveness of properly drafted release agreements. The courts have stressed that an insurer, having paid its insured, has no subrogation rights beyond the rights of its insured. Subrogation against another party by the insurer is barred by an effective release of that party by the insured.
Release for loss beyond that for property loss has received judicial endorsement. The Court of Appeals of New York rendered a pertinent decision on October 16, 1997. (Details are found in North Eastern Reporter 2d 1330.) The waiver was not limited to damaged property but was extended to the landlord's claim for loss of rent and the tenant's claim for business interruption losses. The mutual release was designed to bar subrogation by insurance companies that had issued policies to both parties.
This subject is an important one to discuss with a new client. Ask whether or not a mutually beneficial release is in effect. If there is uncertainty, it would be wise to review the pertinent part of the lease. If the findings are negative, discuss the matter with the insured's attorney. Your client will not soon forget that service. *
The author
Roy C. McCormick is consulting editor of the Policy, Form & Manual Analysis Service (PF&M) published by Rough Notes.