§ 25.05 Subrogation and Waivers of Subrogation

• Jurisdiction: United States
• Publication year: 2022

§ 25.05 Subrogation and Waivers of Subrogation¹

Subrogation is a relatively static area in commercial leasing. The few cases on point address the issues of (1) whether the parties have effectively waived subrogation in trying to block an insurer of a casualty victim from proceeding in a subrogation claim against the defending party; (2) the clarity of the terms and the waiver of subrogation; and (3) whether other clauses in the lease can be construed in effect to bring about either a waiver of subrogation or a co-insurance situation.

[1]—Principles of Subrogation Law

Subrogation is the substitution of a party in place of a lawful claimant with regard to a demand, claim or right.² It is a derivative right and, as such, the party in whose favor subrogation is exercised (the subrogee) succeeds to the creditor's rights (the subrogor) in relation to the debt.³ Subrogation is an equitable doctrine. A subrogated party stands in the shoes of a creditor and has no greater rights than those that the creditor initially had. The subrogated party is also subject to all defenses that a third-party tortfeasor might assert against a creditor. Under general equitable rules, when one person is substituted for another then that person is subrogated or succeeds to all of the other's rights as a creditor. The debtor is then obligated to pay the debt to the person to whom the creditor's rights have been subrogated.⁴

Only after its early applications in debtor-creditor law and surety law, were subrogation principles applied to insurance law with the injured insured party standing in the shoes of the original creditor and the insurance company being the party to whom the insured's rights were assigned. The rules with respect to subrogation and work of subrogation are fairly well-settled. Generally an insurance company will be able to bring a subrogation action against the party causing the injury or damage unless the parties have completely and clearly waived the subrogation rights of their insurers.

Two New Jersey cases at the turn of the century established the principle that if the insurance company settled for less than the full amount of the alleged liability, subrogation rights were not barred by a settlement with a tortfeasor.⁵ These cases also established the principle that when an insurance company failed to recognize a waiver, an insurer was not prevented from proceeding against a tortfeasor even though subrogation had been waived in the contract.⁶

[2]—Waivers of Subrogation

Waivers of subrogation are generally recognized. They must, however, be clear and the insurance company given adequate notice of this contractual waiver. Protecting against a subsequent subrogation action is too important to be left later to judicial interpretation. The office lease should clearly cover wavier of an insurer's subrogation rights. Since insurers contemplate the parties waiving subrogation, this waiver is already reflected in the expected risks to be encountered by the insurer and encompassed in its premiums. With waivers of subrogation being generally accepted practice in commercial transactions, risk taking by landlord and tenant becomes more predictable; risk-shifting that otherwise would have eventually gone to the negligent party is ultimately absorbed by the insured's carrier. Waiver of subrogation has considerable benefits for the insurance companies as well. They need only to calculate the expected probability of their own insured's losses and the additional cost of the losses they might incur in subrogation claims against their insureds.

Most fire policies contain an endorsement that allows the insured to waive in advance its rights to recover against third parties for losses to its insured property. Such an endorsement means that the landlord's right to recover for its tenant's fault will rest with the landlord. Presumably, the landlord has required the tenant to obtain a fire policy with a similar endorsement so that any rights the tenant might have to recover from the landlord stay with the tenant.

This alternative, however, does not prevent the insurer from asserting any right it might have to recover its losses from a tortfeasor. A better approach would be to pass responsibility over to the insurer. This can be done by both obtaining an endorsement from the insurance company to waive its recovery rights and by inserting a clause in the lease to this effect. The following is an example of such a clause:

Example 2:

To the extent not prohibited by or violative of any policy of fire or extended coverage insurance issued to Landlord or

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