Insurance and Subrogation for Buildings and Owners
Boards are generally not obligated by a co-op or condominium's operative documents to purchase liability or casualty insurance covering those portions of the building which are owned by the entity. However, prudent boards should do so, as well as require that apartment owners obtain liability insurance to cover damage to the building or other apartments emanating from the owner's apartment, which may require an amendment to the co-op's proprietary lease or the condominium's bylaws. When apartment alterations are performed, as a board condition for consent the owner is typically required to indemnify the entity and obtain insurance from its contractors to protect the building and other apartments from damage that may result from the alteration work.
One of the complex insurance issues faced by boards and managers is whether a so-called "waiver of subrogation" provision should be required by the building's proprietary lease or bylaws and in insurance policies. This column explains subrogation and the waiver of subrogation and discusses policy considerations in determining whether a waiver of subrogation is appropriate in co-op and condominium shared housing communities. This column also analyzes case law regarding enforceability of a subrogation waiver and makes recommendations to boards, their counsel and managers regarding such waivers.
Subrogation is a "fairness" doctrine—it allows an insurance carrier which has paid money and thereby incurred a loss on an insured claim to seek reimbursement from a third party whose wrongful conduct or negligence makes it legally responsible for the loss.1 Essentially, subrogation places the insurance carrier in the same position as the party who suffered the damage so that it can recover from the responsible party.2 For example, if an apartment suffers water damage from a bathtub overflow in the apartment above, and the damage is repaired by the affected apartment owner's insurance carrier that carrier, has the equitable right to recover its loss—the cost of repair—from the upstairs apartment owner who is legally responsible for the loss. Frequently, the legally responsible owner has purchased liability insurance, so that in reality the casualty insurance carrier for the damaged apartment seeks recovery from the liability insurance carrier for the owner of the apartment above.
Where a board requires all apartment owners to purchase liability insurance, this would be the outcome in our example above, absent a waiver of subrogation provision in the proprietary lease or bylaws. Similarly, where a building is damaged by an apartment alteration, if the damage is repaired by the building's insurance carrier, that carrier can recover its loss from the apartment owner or its contractor—but in reality, generally from their insurance carriers.
The public policy rationale for the subrogation doctrine is that it ensures that the responsible party is held accountable for its actions and that the damaged/insured party, having been paid by the insurer, cannot obtain a duplicate recovery from the legally responsible party, thus preventing unjust enrichment.3 While subrogation is thus beneficial to insurance carriers, as between neighboring apartment owners or between an apartment owner and the co-op or condominium, subrogation may not necessarily be desirable. When an insurer asserts a subrogation claim in the name of its insured apartment owner against a neighbor or the co-op or condominium entity, the resulting lawsuit can be protracted and embroil the board and neighbors within the residential community in contentious litigation, cost and expense.
Board and management resources are diverted to addressing the lawsuit—meetings with counsel, depositions, document production and trial preparation and attendance, absorb time and effort perhaps better used for the benefit of the community as a whole. Instead, perhaps requiring that apartment owners and buildings obtain a waiver of subrogation rights—at least where and to the extent that insurance is available to pay a loss—is more beneficial and appropriate in the shared housing community setting of co-ops and condominiums.
Waiver of Subrogation
The parties to an insurance contract may waive the right of subrogation—so that a damaged apartment owner's insurance carrier who paid for repairs cannot recover from a legally responsible owner or the co-op or condominium—and such waivers are generally valid and enforceable.4 Further, an insurer's subrogation rights can be waived in advance of any loss in a contract between the insured and a third party—including in a proprietary lease or alteration agreement between an apartment owner and a co-op or by the bylaws of a condominium.
A subrogation waiver will be given effect when it clearly applies to the claims based on which subrogation is sought. In Jaylynn v. Star Supermarkets,5 under a lease which provided that the lessee would not be liable for damages resulting from fire or casualty and lessor must cause its insurers to waive their subrogation rights against lessee, the lessor's insurer who paid the loss could not maintain a subrogation action against the lessee for alleged negligence in causing a fire. Although the exculpatory lease provision did not use the word "negligence," the Supreme Court, Monroe County, rejected the argument that the doctrine against permitting a party to exculpate itself from its own negligence rendered the subrogation waiver void as against public policy, holding that where the intent of the clause is clearly and unequivocally exculpatory, public policy does not bar its enforcement. Thus, while the insurer that paid the loss stands in its insured's place, it has no greater rights. The insured having waived subrogation rights, the insurer is bound by the insured's waiver.
However, a subrogation waiver clause will not be enforced beyond its plain meaning. In Viacom International v. Midtown Realty,6 a fire damaged the leased premises and tenant's leasehold improvements and personal property. Its insurers reimbursed the tenant for personal property losses. The lease allegedly contractually obligated the building owner to restore and repair tenant's improvements and contained a subrogation clause which provided, in part, that as to damage from fire or other casualty, to the extent insurance is in force and collectible, the landlord and tenant waived all recovery and subrogation rights against one another. The tenant sued its landlord for breach of the lease obligation to restore and repair tenant's improvements and tenant's insurers sued the landlord on their subrogation claim, based on their payment for damage to tenant's personal property. The landlord argued that the subrogation clause precluded both claims and sought dismissal.
As to the tenant's breach of lease claim, the First Department held that the subrogation clause applied only to torts and not to contractual liability, finding no equitably compelling subrogation principle to support a waiver of contract-based claims, and sustained the tenant's claim. However, the court did enforce the subrogation waiver as to the tenant's insurers' subrogation claim against the landlord for monies paid for the tenant's personal property losses, rejecting the argument that alleged gross negligence in maintaining the fire alarm system vitiated the subrogation waiver.
Interpretation of subrogation waivers is further illustrated by P&L Property v. Massaro Detroit Diesel Allison,7 where the Fourth Department held that a building owner's insurer could maintain a subrogation action against a tenant for negligently damaging the premises under a lease provision stating that each party waived any claim for loss or damage caused by the other's negligence, which waiver would not be effective against an insurer which did not authorize it. Although the insurance policy at issue authorized the owner to release others with respect to moveable property on the premises, it did not expressly authorize a release of others for damages to the premises themselves.