Procurement of Insurance Necessary Before Invoking Waiver of Subrogation

On September 24, 2002, a worker was removing duct work in a former Burger King location in a Bronx strip mall.  A torch he was using allegedly came into contact with grease that had accumulated in duct work and started a fire.  The fire spread to surrounding businesses, including a Duane Reade store.  KK&J owned the buildings that housed both the Burger King and the Duane Reade store.  St. Paul insured Duane Reade and, after payment, subrogated against the franchisee of the Burger King and KK&J.  Duane Reade had a lease with KK&J which provided that each party waived “any and all” rights of recovery against the other for loss, injury or damage covered by its insurance, notwithstanding that the loss was caused by the other’s negligence.

The Court found that this “waiver of subrogation” language was enforceable. [1]  The Court further found that such waivers can also bar claims for gross negligence. St. Paul argued the clause should be construed narrowly and would only be enforceable if a fire had occurred at the Duane Reade location (not the Burger King location).  The Court rejected this argument, finding that the work that was done at the nearby Burger King which resulted in a fire was within the scope of the waiver clause.  However, the Court found there remained a “question of fact” which could only be decided at trial.  A waiver of subrogation is “necessarily premised on the procurement of insurance by the parties.”  To get out of the case on a motion, KK&J had to prove that it had procured liability insurance.  Since KK&J failed to submit proof to the Court that it had had such insurance in place at the time of the fire, the Court reversed the trial court and reinstated St. Paul’s case against KK&J.  

The Court also allowed the case to go forward against the owner of the Burger King franchise.  In this regard, the Court agreed that St. Paul had adequately stated a subrogation claim, in alleging that the franchisee was “negligent in permitting grease to accumulate in the duct work and in failing to clean out the grease, knowing that the duct work would be removed when the Burger King ceased to operate.”

Bottom Line:  In cases where your insured has entered into a contract containing a waiver of subrogation (i.e., landlord-tenant leases), be sure to request that the other party produce evidence that it had liability coverage in place (correctly naming the other party as an insured) during the relevant time period.  This one appellate court found that procurement of liability insurance is “necessary to the enforcement of the waiver clause.”

[1]  Footlocker, Inc. v. KK&J, et al., 1st Dept. January 19, 2010