Hancock Fabrics, Inc. v. Alterman Real Estate I, Inc., 302 Ga.App. 568, 692 S.E.2d 20 (Ga. App. 2010) concerned a suit by a tenant against the landlord for damages for property damage and business losses resulting from water leaks in the roof of the premises. The trial court granted the landlord’s motion for summary judgment and denied the tenant’s. The Georgia Court of Appeals in this opinion reversed that judgment. Its reasoning includes what, for me, is an educational discussion of subrogation clauses and gives some guidance to landlords on tightening up insurance provisions.

The lease required the landlord to maintain the roof in good condition and repair and to do “anything necessary to protect the interior against rain or weather”. The tenant asserted that the landlord had breached this covenant. The lease also contained a provision that the court labelled a “waiver of subrogation”. In it each party agreed to release the other from liability for any loss or damage caused by or resulting from “perils insured against under any insurance policies maintained by the parties hereto, regardless of the cause of such loss or damage even though it results from some act or negligence of a party hereto.” Although not required by the lease, the tenant carried property insurance. The insurance had an annual aggregate deductible of $750,000 and a $25,000 deductible for each individual loss. The tenant did not meet the annual deductible for the years for which it sought damages from the landlord and received no insurance payments on account of those damages. The landlord argued that the “waiver of subrogation” provision precluded the tenant’s claims. The tenant argued that the provision was inapplicable because the insurance company paid nothing on the claims. Thee trial court reasoned that the tenant’s insurance covered the risks at issue and that the waiver of subrogation therefore applied despite the lack of payment of insurance proceeds.

I welcome thoughts on this, but I think the Court mislabeled the provision at issue. The insurance company would be the party to waive subrogation, not the tenant. If the company had paid the tenant’s claim, it would have subrogated to the tenant’s claims against the landlord; hence the desire of a party to obtain a waiver of this right from the other party’s insurer, as many leases expressly require. I believe the provision is more properly called a mutual conditional release (i.e., I’ll release you if and to the extent I get insurance proceeds), an effect of may be to jeopardize an insurer’s right of subrogation in any event.

The Court of Appeals began its analysis by noting that waivers of subrogation in leases are enforceable to the extent of perils covered by insurance that is maintained although not required by the lease. Here, the tenant obtained property insurance but did not receive any insurance proceeds. The Court held that, absent payment of insurance proceeds, the tenant was not bound by the so-called waiver of subrogation provision; i.e., it did not release its claims against the landlord. The Court notes in its discussion that the landlord could have required the tenant to maintain property insurance as it did liability insurance. Following the logic of the case, such a requirement, from the landlord’s perspective, should specify maximum deductibles such that the tenant would be more likely to recover on its insurance policy, thereby bringing into play the release provision and protecting the landlord from liability.

The lesson of this case is for landlords: require tenants to maintain property insurance (including business interruption) with reasonable deductibles. The accompanying release provision should waive the right to assert any claim deriving from a risk covered by the insurance, including but not limited to claims the amount of which fall within the deductible. In effect, the insured party is self-insured to the extent of the deductible, and the lease should specify that the tenant assumes the risk of all of loss, without recourse to the landlord, to that extent. This is where the distinction between a waiver of subrogation and a release may come in. A waiver would come from the insurance company. Its enforceability would require consideration; e.g., the waiver assumes a right of subrogation, which the insurer acquires from the insured in consideration of payment of the claim. The insurer, though, pays nothing to the extent of the deductible, so the lender does not acquire the right of subrogation in regard to any loss falling within the deductible. The tenant may, independent of its agreement with the insurer, assume the risk of loss to the extent of the deductible and simply waive any claim the tenant may have against the landlord. The lease itself should provide the consideration for that agreement. The landlord is best protected by requiring that the tenant carry reasonable insurance coverages with specified, reasonable deductibles and by including a well-drafted release provision properly coordinated with the insurance requirements.

I invite thoughts from anyone who knows more about the insurance world than I.