New York Subrogation Actions Involving Landlords And Tenants
September, 2004
There have been a few recently reported subrogation decisions, wherein the subrogor was a tenant or landlord. This article will briefly highlight the pertinent portions of those reported decisions.
The most recent case is St. Paul Fire & Marine Ins. Co. v. Rivkin, 2004 WL 2166306 (2d Cir. 9/23/04). St. Paul’s insured was a commercial tenant. During the New Year’s holiday, according to St. Paul, the defendants failed to provide heat to St. Paul’s insured’s leased space within the commercial building. St. Paul indemnified its insured for the resulting damages and then commenced a subrogation action.
St. Paul conceded that the negligence claim against the defendants was barred by a subrogation waiver provision (the basis for St. Paul taking this position is not described in the reported decision). Defendants moved for summary judgment on the breach of contract and quiet enjoyment claims, which motion was granted. On appeal, St. Paul asserted that the breach of contract and quiet enjoyment claims were valid and independent from the negligence claim.
The Second Circuit noted that “waiver of subrogation provisions generally do not preclude claims based on breach of contract. However, if a contract claim is essentially a negligence claim in disguise, it is barred by a waiver of subrogation.” St. Paul, at 1 (citations omitted). If a contract claim is asserted to avoid a subrogation waiver provision and it is not a disguised negligence claim, in order to survive, the contract claim must have merit as a breach of contract claim. Id. at 2 (citation omitted).
The Court noted that the breach of contract and quiet enjoyment claims, as well as the damages, “arise out of the identical acts that are the basis for St. Paul’s precluded negligence claim.” Id. at 2. Notwithstanding, the Court concluded that even if those claims were not disguised negligence claims, they were “meritless.” Id. The Court observed that the Lease only required Defendants to supply heat to St. Paul’s insured’s leased space when heat was supplied to the entire building; if heat was not supplied to the entire building, as in this dispute, Defendants had no duty to supply such heat to St. Paul’s insured. The Court concluded that Defendants owed no duty to St. Paul’s insured, and thus Defendants are not liable for breach of the Lease. Further, since St. Paul failed to produce “evidence of an actual or constructive eviction through an ouster or abandonment of the premises,” there was no viable claim for breach of the covenant of quiet enjoyment. Id. (citation omitted). Therefore, the Second Circuit affirmed the trial court’s dismissal of the complaint.
In State Farm Fire & Casualty Company v. Firmstone, 9 A.D.3d 812, 780 N.Y.S.2d 820 (3d Dep’t 2004), State Farm insured the owner of an apartment. A fire ensued within the apartment, State Farm paid its insured for the property damage and it commenced a subrogation action against the tenant (two parents and their daughter). State Farm conceded that there was no viable negligence claim against Defendants (the basis for State Farm taking this position is not described in the reported decision). Defendants moved for summary judgment which was granted. State Farm appealed.
State Farm asserted that although there was no negligence claim against Defendants, there was a viable breach of contract claim, “the parents’ obligation as tenants to preserve and repair the leased premises.” State Farm, at 822. The Court agreed with State Farm that although there was no written lease in effect at the time of the fire, “the terms of the prior lease continued because defendants remained on the premises.” Id. (citations omitted).
The Court stated that “the ‘general rule is that acceptance of rent with knowledge of conduct violative of the lease constitutes a waiver by the landlord of the default even if the lease contains a nonwaiver provision.’” Id. (citations omitted). Since State Farm’s insured not only accepted rent from Defendants after the fire but also entered into a new lease with Defendants, “without making any provision regarding the fire damage,” the Court concluded that State Farm’s insured waived any claim for breach of contract against Defendants. Therefore, the Appellate Court held that the trial court “properly granted summary judgment dismissing the complaint.” Id.
The final case addressed in this article is Utica Mutual Insurance Company v. Watertown Industrial Center Local Development Corporation, 9 A.D.3d 836, 781 N.Y.S.2d 392 (4th Dep’t 2004). Utica’s insured leased space from Defendant. A fire ensued within the Premises and after paying its insured, Utica commenced a subrogation action against Defendant for turning-off and/or disabling the sprinkler system. Defendant moved for summary judgment alleging that the antisubrogation rule prohibited the litigation. Pursuant to the Lease, Defendant was to be named an additional named insured on Utica’s policy. Defendant also moved for summary judgment seeking a declaration that Utica was obligated to defend and indemnify it for the subrogation action, since it was an additional insured on Utica’s policy.
Defendant was “an additional insured ‘only with respect to liability arising out of the ownership, maintenance or use of that part of the premises leased to [Utica’s insured].’” Utica, at 393. The Court noted that the policy specifically excluded coverage “for property damage to property owned by [Utica’s insured] or in its care, custody or control.” Id. The Court concluded that Utica’s subrogation claim was for property damage to its insured’s property, thus, the subrogation claim was “excluded from coverage, and plaintiff’s action therefore is not barred by the antisubrogation rule.” Id. (citation omitted). Therefore, the Court held that Utica’s subrogation claim can proceed against Defendant and Defendant is not entitled to defense and/or indemnity from Utica. Id.
Learning Point:
Before conceding that negligence is not applicable to a subrogation case involving a landlord and/or tenant, it is imperative to consider whether the facts of the case clearly establish a breach of contract and/or covenant of quiet enjoyment claim. Additionally, consider whether your insured’s post-loss activity (i.e., accepting rent and/or entering into a new lease with a tenant, without reserving recovery rights for the loss allegedly caused by the tenant) has served to waive your rights of subrogation and thus breached your Policy and/or Subrogation Receipt. This is one of the many reasons why it is imperative to have a subrogation counsel involved as soon as possible after a loss. Finally, just because your adversary claims that the antisubrogation rule applies and you note that the adversary is an additional named insured, do not be so quick to let the adversary walk free. A detailed analysis of the policy language and facts of the controversy may result in a conclusion that the antisubrogation rule does not apply. •
Back to New York CM Report of Recent Decisions (2004v3) 2004 Volume 3 Table of Contents
