In Fireman’s Fund Insurance Co. v. Sizzler USA Real Property, Inc., (— Cal.Rptr.3d —, Cal.App. 2 Dist., Dec. 18, 2008), a California Court of Appeal considered whether a subrogation waiver in the leases between an insured and a third party barred the subrogation claim of an insurance company. The Court of Appeal concluded that the subrogation waiver in the leases did bar the insurance company’s subrogation claim.
Santa Monica Collection LLP (“SMC”) owns a shopping center located in West Hollywood, California. Sizzler USA Real Property (“Sizzler”) leases two units within SMC’s shopping center. The leases between SMC and Sizzler provide that Sizzler will maintain liability insurance covering up to $1 million in damages. The leases also have a “Release and Waiver of Subrogation” provision which operates to release each party from collection by the other party’s insurance company for contribution or total payment of a claim in the event liability arises.
In August 1993, Sizzler subleased its premises to a nightclub known as Sky Sushi. In September 2002, a patron at Sky Sushi was attacked and stabbed on the premises. The patron brought a lawsuit on account of his injuries against SMC. After SMC unsuccessfully sought indemnification and defense from Sizzler, SMC turned the case over to Fireman’s Fund Insurance (“Fireman’s”), its own liability insurer. Fireman’s defended SMC and settled the suit for $300,000 with $84,101 spent on defense costs. Fireman’s then brought a claim for subrogation in an effort to make Sizzler, or its insurance company, bear the financial burden of the lawsuit.
At trial, Fireman’s argued that the waiver of subrogation provision in the leases did not bar its claim because Sizzler failed to maintain sufficient liability insurance as required under the leases. Fireman’s also argued that Sizzler violated the leases in two other material ways which gave rise to the lawsuit brought against SMC, and therefore Sizzler should indemnify SMC for the case. Specifically, Fireman’s argued that Sizzler, through Sky Sushi, operated a business on the premises without necessary permits and in violation of nuisance laws, both violations under the leases. Fireman’s argued that these failures to perform excused the subrogation waiver provision. The trial court ruled in favor of Sizzler and found that the waiver of subrogation provisions were valid.
Fireman’s central argument was that Sizzler’s failure to obtain the full amount of liability insurance provided under the lease agreement precluded enforcement of the subrogation waiver. Fireman’s relied on a decision by another court where the waiver of subrogation provisions were deemed inapplicable because a tenant failed to maintain sufficient insurance among other things. The Court of Appeal distinguished the case relied upon by Fireman’s by pointing out that the waiver between SMC and Sizzler was not premised on Sizzler’s procurement of full insurance.
Fireman’s argued that the waiver of subrogation provisions could not take effect until sufficient insurance was provided by Sizzler. The court explained that the insurance policy provided by Fireman’s for SMC was sufficient to make the waiver provision effective. In addition, Fireman’s argued that the nature of Sizzler’s liability insurance policy was not sufficient to provide $1 million in coverage, and therefore adequate consideration was not provided to make the waiver subrogation provisions effective. The court rejected this argument, stating that the consideration for the leases and waiver of subrogation provisions was not limited to insurance policies, but was comprised of the mutual promises of the parties as a whole.
Fireman’s also argued that applying the waiver of subrogation provisions of the lease agreements defeats the intent and expectations of the parties that Sizzler would be responsible and indemnify SMC for Sky Sushi’s nuisance and the consequences of its nuisance. In addition, Fireman’s said that Sky Sushi’s failure to operate with the necessary permits further requires Sizzler’s indemnification of SMC. The court disagreed and explained that the permit requirements of the lease between SMC and Sizzler only applied between the two parties and not for subsequent subtenants. Moreover, the court said that the nuisance provisions concerned the physical condition of the premises and not the “dynamic operation by a subtenant.” Finally, the Court of Appeal explained that subrogation provisions apply to liability covered by insurance whereas indemnity provisions cover an allocation of liability not covered by insurance.
In conclusion, the Court of Appeal determined that an enforcement of the subrogation waiver provisions followed the intentions of the parties and therefore Fireman’s was not entitled to money from Sizzler or its insurer.
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