Court of Appeals Enforces Indemnification Provision Requiring Tenant To Indemnify Landlord For Landlord's Own Negligence
December, 2006
General Obligations Law (“G.O.L”) §5-321 renders any lease provision, which seeks to exempt the landlord from liability for damages caused by its own negligence, void as against public policy and wholly unenforceable. However, in Great Northern Insurance Company v. Interior Construction Corp. 7 N.Y.3d 412 (2006), New York’s highest court, the Court of Appeals held that when coupled with an insurance procurement provision, an indemnification agreement in a lease which required the tenant to indemnify the landlord for the landlord’s negligence did not violate G.O.L §5-321. Id. at 415.
The underlying case involved a flood caused by a sprinkler pipe failure within space leased by Depository Trust & Clearing Corporation (“Depository”). Id. at 416. As a result of the pipe failure, Neuberger Berman LLC (“Insured”) sustained water damage to its leased space located one floor below Depository’s leasehold. Id. at 416. Great Northern Insurance Company (“Plaintiff”) made payment to Insured and subrogated against the building owner, New Water Street Corporation (“New Water”), Depository and Depository’s contractor, Interior Construction Corp. (“Interior”). Id. at 416. Prior to trial, the matter was settled for $200,000.00. Id. at 416. As part of the settlement, the parties stipulated that had the case been tried by a jury, 90% of liability would have been allocated to New Water and 10% to Interior. Id. at 416. Thereafter, all claims and cross-claims against the parties were resolved, with the exception of New Water’s indemnification claim against Depository. Id. at 416.
In its indemnification claim, New Water alleged that under its lease with Depository, Depository was obligated to indemnify New Water for damages arising from “any accident, injury or damage whatsoever (unless caused solely by the landlord’s negligence) occurring in, at or upon the Premises.” Id. at 415-416. Therefore, since the parties had stipulated that New Water was only 90% liable for the incident, New Water contended that Depository was obligated to reimburse it for its share of the settlement paid to Plaintiff. Moreover, since the lease also obligated Depository to maintain a general liability insurance policy naming New Water as an additional insured, the lease provision did not violate any statute, but merely sought to allocate the risk of liability to a third-party insurer. Depository, relying on the express language of G.O.L §5-321, contended that the text of the lease provision was void as against public policy because it sought to exempt New Water for its own negligence.
In reaching its decision, the Court relied on Hogeland v. Sibley, Lindsey & Curr Co., 42 N.Y.2d 153 (1977), which involved an action for personal injuries. The jury in Hogeland found the landlord and tenant jointly liable to the plaintiff. Id. at 418. The Court in Hogeland reasoned that G.O.L §5-321 was directed primarily to exculpatory clauses in leases whereby lessors are excused from direct liability for otherwise valid claims which might be brought against them by others. Id. at 160. Thus, the Court in Hogeland concluded that the indemnification provision did not violate the statute when coupled with an insurance procurement provision.
Like Hogeland, the landlord and tenant in the instant case freely entered into an agreement which allowed the landlord to be indemnified and also sought to allocate the risk of liability to third-party insurers. Thus, the Court of Appeals held that this indemnification provision did not run afoul of G.O.L §5-321 because New Water did not seek to exculpate itself from liability, but rather sought to allocate the risk of liability through the use of insurance. Id. at 420.
Learning Point:
New York courts continue to favor agreements which allocate the risk of liability through the use of insurance because they serve to protect innocent third-parties against insolvent defendants. Thus, when an insurance procurement provision is coupled with an indemnification provision, the policy goal of G.O.L §5-321 is not disturbed because the public at large is still protected. Even though the plain language of G.O.L §5-321 seems to dictate the opposite result, New York courts will be less concerned with the risk allocation between liable parties when they have allocated risk though the use of insurance.
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