Waiver of Subrogation – How it Helps Mitigate Risk in Commercial Leases

In Real Estate by Coolidge Wall

Oftentimes, a commercial lease (as well as other real estate contracts) will contain a “Waiver of Subrogation,” but few landlords, tenants and other parties realize the importance of such provision and how a waiver of subrogation can help manage and allocate potential risk.

Subrogation is “[t]he principle under which an insurer that has paid a loss under an insurance policy is entitled to all the rights and remedies belonging to the insured against a third party with respect to any loss covered by the policy.”[1] In other words, if one party suffers a loss, and such loss is covered by insurance, the insurer covering such loss can “step into the shoes” of the party suffering the loss and make a claim against a third party to recover the amount paid by the insurer for the loss. In a commercial lease setting, this situation could play out as follows: The tenant would be carrying property insurance and the property would suffer damage. The damage would be covered by tenant’s property insurance, but tenant’s insurer would then “step into the shoes” of the tenant and attempt to recover the cost of the damage from the landlord, regardless of whether the landlord was at fault or responsible for the loss. The landlord would then have to defend itself against the insurance company and show the landlord was not at fault for the loss. In this scenario, the landlord may be subject to long, expensive and complex litigation with the tenant’s insurance company, even though the landlord may not be at fault.

The scenario described above could be avoided if a waiver of subrogation was provided for in the lease. If a waiver of subrogation was included, then tenant’s insurer would not be permitted to “step into the shoes” of the tenant and bring an action against to recover against the landlord. This is because the tenant had “waived” its right to have the insurer be subrogated to the tenant’s rights and remedies, which is permittable. Additionally, as is often negotiated in a waiver of subrogation, the tenant would have waived all rights of recovery against the landlord for any loss which is covered by insurance. The waiver of subrogation would not only protect the landlord from the unexpected costs of potential litigation, but would also make it clear which party (and which party’s insurer) is responsible for specific damage suffered during the lease. This provides both landlord and tenant with a clear picture of potential risk associated with insurable losses.

For the reasons stated above, it is evident why a waiver of subrogation is necessary for any commercial lease. It is important for both landlords and tenants to review their insurance policies to be sure a waiver of subrogation is permitted. If not, then the parties should negotiate with their insurance providers to be sure they are entitled to such right. Without such waiver, each party could potentially be at risk for more than was initially negotiated.

If you have any questions about a waiver of subrogation, do not hesitate to contact an attorney who can provide additional information and guidance on such issues

[1] Black’s Law Dictionary 1564 (9th ed. 2009).