Judge Dismisses Subrogation Lawsuit Against Sprinkler and Alarm Companies

Loehmann’s is the anchor store in a strip mall in Brooklyn.  A restaurant owned and operated by AGG was next door to Loehmann’s.   On November 21, 1999, fire broke out at AGG. The strip mall had a sprinkler system, but it did not activate.  The fire spread to Loehmann’s and caused extensive damage and loss of business.  Travelers paid Loehmann’s over $1.1 million under its policy.  A post-fire inspection revealed that a valve in AGG’s part of the sprinkler system had been turned off.  That valve had been covered by a drop ceiling and, therefore, was not visible.  Travelers brought a subrogation action naming: (a) the manager of the strip mall; (b) AGG; (c) the company (“Chief Fire”) that was supposed to inspect AGG’s sprinkler system; and (d) the company (“High Rise”) that was supposed to monitor valves and other aspects of the sprinkler system through an electronic alarm system.  The owner of the strip mall was originally named in the complaint but was dropped by plaintiff due to “waiver of subrogation” language contained in Loehmann’s lease.

Chief Fire and High Rise moved to dismiss the complaint.  They argued their contract was with the owner of the building, not with Traveler’s insured, Loehmann’s.  Travelers argued they were a “third-party beneficiary of the contract,” but a federal judge did not agree and granted the motions to dismiss.  [1]   The judge noted the general rule that a contractual obligation normally benefits only the parties to the contract, and not others.  There are three exceptions to this rule, where the court will allow someone who is not a party to a contract to sue in tort for damages suffered.  One of these exceptions is where the plaintiff “detrimentally relie[d] on the continued performance of the contracting party’s duty.”  The court noted that someone closed the valve prior to 2002 and it was concealed behind a dropped ceiling and found it significant that neither Chief Fire nor High Rise “actually closed the sprinkler valve or blocked access to it; their alleged failure to discover the problem did not create or increase its danger.”   The court distinguished another case where a building owner required a tenant to retain a company to inspect a sprinkler system, but the company their tenant retained allegedly did a poor job performing the inspections.  In that case, the building owner relied upon the tenant and required (in the lease) that the tenant retaining someone to do the inspections.   Because of this reliance, the building owner did not retain someone to inspect the system.  Thus, the building owner was allowed to sue its tenant’s contractor because the building owner had detrimentally relied on the tenant-sprinkler inspector contract.   However, Loehmann’s was a mere tenant and did not have a contract stating that someone else was responsible for making sure inspections were done.

The court did not find, under these facts, any basis to apply any of the exclusions to the general rule that a “third party” cannot sue in tort because a contractor breached its contract with another party. The court dismissed the contractors but allowed the case to go forward against AGG (and, presumably, the building manager).

Bottom Line:   Where a contractor of another party “launches a force or instrument of harm,” then you can sue them.  For example, if your insured is a tenant and his landlord hires a contractor/roofing who accidentally ignites the roof and the fire damages your insured’s contents, you probably have a good subrogation case.  However, where a contractor of another party fails to do something (i.e., fails to inspect a sprinkler system), you have a tougher case.   Of course, each case is unique and has to be investigated and evaluated.

[1] Travelers a/s/o Loehmann’s v. AGG Creperie, et al., 2014 U.S.Dist.LEXIS 124579 (September  5, 2014).

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