Effective Waivers of Subrogation

How carefully do you examine the waivers of subrogation and other insurance clauses in your major tenant leases? Do you assume that the large corporate chains will be so fully insured that there is nothing to worry about? A recent decision from the Supreme Court of New York reminds us of the need for care in reviewing these provisions.

The Gap, Inc. and Rite Aid Corp. (Tenants) leased space from "Owners." A fire in another tenant’s space caused smoke damage to both Tenants’ premises, resulting in property and business interruption losses. Gap's losses were covered by insurance, but the policy had a $1 million deductible. Rite Aid's insurance covered only property damage, and Rite Aid had over $500,000 in business interruption losses. Both leases contained waivers of subrogation. Gap's waiver of subrogation clause stated that each party waived all claims against the other for loss or damage caused by any risk insured against or required to be insured against under the lease. Rite Aid's clause stated that each party waived all right of recovery against the other to the extent that fire or other casualty insurance was in force.

Both Tenants brought claims against Owners, asserting that the waivers of subrogation did not bar claims against Owners for deductibles or uninsured losses. The Court ruled for the Tenants because claims to recover insurance deductibles or uninsured losses are not waived in a subrogation clause covering only "risks insured against" or losses covered by "insurance in force." Gap’s deductible was an "uninsured segment of loss [that] falls outside the ambit of 'risk insured against' for purposes of inclusion in the waiver of subrogation clause." And since Rite Aid had no coverage for business interruption the waiver of subrogation was not applicable to those losses.

The lessons from this case (which would be decided the same way in California) are clear:

• A properly drafted waiver of subrogation will cover any and all losses that are insured against or that could have been insured against.
• Waivers of subrogation must expressly include deductible amounts.
• If the tenant is permitted to self-insure for all or part of any type of loss the waiver must also apply to that which is self-insured.
• Leases should require tenants to insure, or self-insure, against business interruption.