California commercial leases and rental agreements often contain a waiver of subrogation clause. While important, it is often misunderstood or overlooked, even though at its best it benefits both the landlord and the tenant. Parties negotiating leases will want to consult with an experienced Sacramento and El Dorado leasing attorney.
Generally speaking, one who makes payment on another’s behalf payment becomes entitled to be subrogated to the other’s rights. If I have agreed to insure your house, and I paid to repair fire damage to the house, I am subrogated to your rights to recover from anyone who was liable for the fire. That means I can sue them for damages. The waiver of subrogation prevents this. In commercial leases, the clause refers mostly to insurance.
How does it work?
In most leases, the lessor is required to maintain insurance for the building. The lessee contributes their share towards the premium payment as part of the rental agreement or common expenses. The lessee/tenant is required to have insurance for their personal property and leasehold improvements.
Example 1: The tenant accidently causes a fire that burns the building down. The landlord makes a claim against their insurance policy, and is paid. Ordinarily, the insurance company now steps into the shoes of the landlord (is subrogated to the landlord’s rights) and has the right to sue the tenant for damages cause by the tenant’s negligence. A waiver of subrogation by the landlord prevents the insurance company from going after the tenant.
Example 2: The lessor accidently burns the building down. The lessee makes a claim to its insurance company for the lost personal property. The insurer pays off the lessee, and now has a right to go after the landlord. The tenant’s waiver of subrogation prevents this.
A mutual waiver of subrogation clause takes care of these concerns.
Two Typical Provisions Limited to Insurance:
1. Landlord and Tenant agree to cause the insurance companies issuing their respective property (first party) insurance to waive any subrogation rights that those companies may have against Tenant or Landlord, respectively, as long as the insurance is not invalidated by the waiver.
2. The parties agree to have their respective property damage insurance carriers waive any right to subrogation that such companies may have against Lessor or Lessee, as the case may be, so long as the insurance is not invalidated thereby.
The parties may agree, and the lease provide, for even broader waivers of subrogation that goes into the parties claims against each other. In such a case, the landlord and tenant would be relying ONLY on the insurance coverage to make them whole in the event of loss, and waive direct claims they have against each other.
An example is:
“Landlord and Tenant each hereby waive any and all rights of recovery against the other or against the officers, employees, agents and representatives of the other, on account of loss or damage occasioned to such waiving party or its property or the property of others under its control, to the extent that such loss or damage is insured against under any fire and extended coverage insurance policy which either may have in force at the time of such loss or damage.”
Waivers of subrogation may also be applied to liability insurance policies- I have only discussed property insurance above. The choice of breadth of the waiver is something the parties have to determine themselves, and negotiate for their best position. For absolute safety, each party should confirm, by reviewing the other’s policy, that the waivers are included. All told, waiver of subrogation is an important and beneficial provision that is often overlooked.