San Diego Business Lawyer Blog
A waiver of subrogation clause is one of the most important provisions in California commercial leasing. It’s beneficial to both the landlord and tenant, particularly when it comes to insurance issues. Yet this type of clause tends to be misunderstood and/or generally overlooked because landlords and tenants see the terms as too technical when compared to other commercial lease terms. However, it’s important to know what these clauses do and why they are important.
In general terms, when one party (typically an insurer) makes a payment on behalf of a second party (usually the insured), that first party becomes subrogated to the second party’s rights. Subrogation is just a technical legal term for “substitution,” or “stepping into the shoes” of another person. A waiver of subrogation clause prevents one party from “stepping into the shoes” of another party and filing a claim.
It’s a bit easier to understand how this works by looking at a couple of real-world examples. Let’s say a tenant leases commercial space from a landlord in a large, multi-unit space. Usually, both parties are required to have insurance. The tenant is required to obtain insurance for her personal property in the space she rents, and the landlord is required to obtain insurance for the entire building. Typically, the tenant will contribute a pro rata share toward the landlord’s premium under the terms of the lease agreement (as with a triple net lease – see “Understanding Your Lease – Common Area Expenses“). The following examples assume that the parties do not have a waiver of subrogation clause in their lease agreement:
- The tenant accidentally burns down the entire building
through an act of negligence. The landlord files a claim with its own
insurance company and is paid for the cost of replacement of the
building. Without a waiver of subrogation clause, the landlord’s
insurance company, which made a payment on behalf of its insured (the
landlord), can step into the shoes of the landlord (for whom it made a
payment) and can sue the tenant for negligently burning down the
building. If the landlord and tenant had included a waiver of
subrogation clause in their commercial lease agreement, the insurance
company wouldn’t be able to “step into the shoes” of the landlord to sue the tenant. In this way, the waiver of subrogation clause protects
tenants.
- The landlord accidentally burns the building
down through an act of negligence. The tenant files a claim with her
own insurance policy to cover the loss of her personal property. The
tenant’s insurance pays the tenant the full cost to replace her personal property that was destroyed in the fire. Now, without a waiver of
subrogation clause, the tenant’s insurance company, which made a payment on behalf of its insured (the tenant), can step into the shoes of the
tenant (for whom it made a payment) and can sue the landlord for
negligently burning down the tenant’s space and destroying her personal
property. If the landlord and tenant had included a waiver of
subrogation clause in their commercial lease agreement, the insurance
company wouldn’t be able to “step into the shoes” of the tenant to sue
the landlord. In this way, the waiver of subrogation clause protects
landlords.
In essence, the waiver of subrogation clause
increases the burden on the insurance companies in that they are unable
to file lawsuits against a negligent landlord or tenant to recoup losses from insurance payouts for loss or damage to commercial property. The insurance company cannot sue one party (the landlord or tenant) for the costs that it paid out to the other. As such, both landlords and
tenants benefit. If you have questions about this or any other
commercial lease matter, contact an experienced San Diego commercial lease lawyer for guidance.