Table of Contents 

Coverage Concerns

Liability release

Protecting businesses with mutual interests

By Roy C. McCormick

Commercial property insurance usually includes provisions that permit an agreement by the insured with another business or entity that has the effect of barring subrogation against the other party by the insurer. Subrogation occurs when, following payment of loss to its insured’s property, an insurer seeks recovery from a source that it deems liable for that loss.

Policy language varies, but the effect is similar. Insurance Services Office (ISO) Standard Property Policy Coverage Form CP 0099 is representative. Coverage Condition 10, Transfer Of The Rights Of Recovery Against Others To The Insurer, establishes the rights of the insurer and those of the insured under the condition.

If an insured has rights of recovery against another party, those rights are transferred to the insurer when the insurer indemnifies the insured for its loss. The transferred rights extend to the amount of the payment made by the insurer. After receiving insurance payment and transferring rights, an insured 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 insured, however, may waive the rights against a specified party subject to the following conditions:
• It must be done in writing.
• It must be done prior to the loss.
• It may be done by the insured after a loss only for a party that is also covered by the policy, is owned or controlled by the insured, owns or controls the insured, or is a tenant of the insured.

Many commercial relationships will benefit by release from property damage liability because exposures can arise from a building owner (lessor) and a retail store occupant (lessee) relationship. A mutual release—or one beneficial to only one party—is recognized by insurance companies as a legitimate business and legal practice.

The common interests of a building owner and retail store occupant require cooperation in order to assure the success and financial stability of each. A mutual release from liability for damage to insured property of each is a major contribution to that stability.

The waiver language is most often included in a lease, but it also can be the subject of a related document. The language varies but has the same intent. It 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.

The insurance agent or broker must make certain that his or her insured is covered for all perils for which a release applies. The release should be drafted by the attorney for one of the parties and should be reviewed by the attorney for the other. Teamwork between insurance counselors and attorneys is a necessary element.

A series of decisions by higher courts affirms the validity and effectiveness of properly drafted release agreements. They stress that an insurer, having paid its insured, has no subrogation rights beyond those of its insured. Subrogation against another party by the insurer is barred by an effective release of that party by the insured.

A decision by the Court of Appeals of New York is pertinent because it points up the scope of waiver of subrogation agreements. Both a building landlord and a tenant who occupied two floors carried individual, well-designed insurance for their property and operations and included provisions in their lease agreement mutually releasing each from liability for loss or damage arising from fire or other peril. The waiver was not limited to the rented property but extended to: the landlord’s claim for loss of rent; the tenant’s claim for personal property damage; the tenant’s claim for business interruption losses.

A fire of unknown origin severely damaged the building and the lessee’s personal property. The building owner’s insurer paid its insured’s claims for building damage and loss of rents; the tenant’s insurer paid its insured’s claims for loss of personal property and business interruption. Alleging negligence, the building insurer sued the tenant to recover its payments. The tenant’s insurer sued the building owner to recover its payments alleging negligent building maintenance, including failure to maintain the sprinkler system.

The high court found that both insurers, in their policy conditions, permitted the insureds to waive their right of subrogation. It also concluded that the waiver in the lease was sufficiently broad to apply to all losses paid by the insurers. Details of the case, Kaf-Kaf, Inc., v. Rodess Decorations, Inc; Court of Appeals New York; October 16, 1997, may be found in 687 North Eastern Reporter 2d 1330. Numerous other court cases affirm the validity and importance of waiver of subrogation. Agents or brokers should discuss this subject with their new clients and ask whether or not a mutually beneficial release is contained in the lease. If the client is uncertain, the matter should be brought to the attention of the insured’s attorney.

In addition to the building owner/retail store occupancy relationship, other situations also would benefit by release from liability agreements, including: office occupancies; manufacturing and construction company occupancies; adjoining buildings and their tenant occupancies. These relationships would profit from mutual releases.

One-way releases are often negotiated, including those required by major companies as a condition of their tenant occupancy in a shopping mall. The building owner must make certain that its insurance covers any occurrence to which the release applies.

There is not a requirement that an insurer must be notified prior to loss that a release has been executed. On the other hand, insurers recognize and sanction the procedure. *

The author
Roy C. McCormick is a contributing editor with The Rough Notes Company.

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