Exclusively from Foa & Son
Speaking of contracts, and leases in particular, there is another important provision that should always be included in a lease, but which is often overlooked.
Simple scenario: you rent space in a building. The landlord buys insurance on the building, while you insure your stock, contents and other property in the building. A fire starts, damaging both the building and your contents.
Both insurance companies (yours and the landlords) accept the claim, investigate, and cut checks in payment to their respective policyholders. The landlord repairs the building, you replace your contents, and life goes on.
Then you get a letter from the landlord’s insurance company. It turns out their investigation revealed that the fire started when one of your employees was smoking in the men’s room and threw a butt into the trash can, which ignited. They say it was your fault the fire started, and they want to be reimbursed for the money they paid for the landlord’s claim.
You turn this over to your insurance company and think nothing more about it until you get another letter, from them. They politely decline to pay the landlord’s insurance company for you because 1) the building was not insured on your property policy (you already knew that) and 2) they direct your attention to a part of your general liability policy that says that the policy will not pay for property damage to “Property you own, rent, or occupy…”. That, of course describes your leased space, including the men’s room where the fire started. You are left holding the bag.
What the landlord’s insurance company is doing is exercising their right of subrogation. Subrogation is the assignment to an insurer after payment of a loss of the rights of the insured to recover the amount of the loss from the party legally liable for it. In other words, while the landlord could have sued you for the damage to his building he chose instead to file a claim and be paid by his own insurance company. The right to sue didn’t go away, though, it was simply transferred to the insurance company who paid the claim, who then exercised it.
How could you avoid this unpleasant situation? There is insurance to cover this, but the best answer in this case does not involve buying more insurance. If your lease was properly written it would include a mutual waiver of subrogation. With this you and the landlord would both agree in advance to waive, or give up, subrogation rights for yourself and your insurance company in the event of a property loss like this. What that means is that each insurance company pays their respective claim to their policyholder, and closes their file.
Normally insurance companies will write provisions in their policies prohibiting policyholders from doing anything that will compromise any rights the insurance company might have. Most property policies make an exception to that rule in the case of subrogation rights as described here, as long as you waive them in a document like a lease, as here, and do it before the loss occurs. For those policies that might not have this provision, underwriters will normally add it at little or (usually) no cost.
A well written lease will always contain a mutual waiver of subrogation clause somewhere, and you should always try to have that included. It’s a benefit to both landlord and tenant and there should be no resistance to it on either side.
There is one thing that’s worse than not having a mutual waiver of subrogation in your lease; that would be having a one way waiver, in the other party’s favor. With that he, or his insurance company, can sue you, but you, or your insurance company, can’t sue him if the loss was his fault. That’s the worst of all worlds for you and yet, surprisingly, we still see it from time to time.
If you look at your lease and it’s lacking the mutual waiver there is an insurance solution we can help you with, but your first effort should be to get the lease modified with a waiver of subrogation. Only if that fails would you need to consider an insurance solution.