Boston Market Corporation v. Hack

2007 WL 2349989 (N.J. Super. App. Div. 2007) (Unpublished)
  • Opinion Date: August 20, 2007

LEASES; INSURANCE; DEDUCTIBLES — Where a lease does not specify any particular insurance deductible amount, a court may look at a tenant’s creditworthiness and other factors bearing upon the risk of loss or damage to which its landlord might be realistically exposed, and decide whether an insurance policy with the proper coverage limits is still satisfactory under the lease even if it has a high deductible amount.

A retail lease required the tenant to maintain certain property and liability insurance. The property insurance was to be written for not less than the full insurable value of the leased premises. Liability insurance coverage limits were specified within the lease. Notably, the lease made no reference to permissible deductible amounts and generally did “not expressly prohibit insurance with a high deductible amount.”

The tenant, a national restaurant chain, carried a property insurance deductible of up to $1,000,000. The liability insurance policy was a blanket policy that covered all of the tenant’s stores, and all of the stores of its much larger parent company. “Although there was a deductible the policy provided first-dollar coverage, pursuant to which [the carrier] would pay the claims fully on a first-dollar basis; [the tenant] would then reimburse [the insurance company] up to the deductible amount.” Consequently, under the tenant’s liability insurance policies, the landlord was “unaffected by the size of the deductible.” By agreement between the tenant and its insurance company, the tenant issued a substantial letter of credit in favor of the insurance company to secure the tenant’s deductible obligation to its insurance company.

Even though there was no loss at the property, the landlord sought to evict the tenant based upon the landlord’s contention that the high deductibles under the tenant’s insurance coverage “constituted self-insurance or no insurance at all.” Both the lower court and the Appellate Division disagreed, finding that the tenant’s insurance structure satisfied the requirements of the lease.

During the course of the dispute between the tenant and its landlord, the tenant first offered the indemnification agreement and then offered to obtain retroactive insurance coverage. This was an attempt to placate the landlord. In testimony before the lower court, the landlord’s insurance consultant opined that an attempt by the tenant “to reduce the property insurance deductible from one million dollars to $25,000 by way of an indemnification agreement did not in fact reduce the deductible on the policy. However, he agreed that, if in fact the policy deductible was reduced to $25,000, then [the tenant] would be in compliance with the lease.” Notably, the landlord, himself, disagreed with his own expert and “maintained that no deductible was allowed under the terms of the lease.” In addition, the landlord was concerned that the tenant’s “original million-dollar deductible was higher than any potential loss [he] would sustain if the property were totally destroyed, effectively making [him] relying on [his tenant] for repayment.”

As to the tenant’s revisions to its insurance coverage, the landlord argued that “a tenant may not avoid termination of [its] lease by retroactively curing the breach.” In that regard, the Court disagreed, pointing out that “the asserted breach [was] purely technical” and that “there was no material breach of the lease.” Further, according to the Court, the tenant always had acceptable insurance coverage. It characterized the tenant’s attempts to satisfy the landlord as being made “in apparent good faith, to accommodate the landlord’s stated concern by lowering the deductible.” To the Court, “under such totality of the circumstances, there was no material breach and no grounds for [the Court] to reverse the trial court’s determination that [the tenant] had insurance within the meaning of the lease.”

The Court, in reaching its conclusion that the tenant’s coverage satisfied the lease’s requirements, relied on a number of general legal principals and its sense as to whether the insurance program used by the tenant violated the reasonable expectations of the parties at the time that the lease was signed. It endorsed the lower court’s approach when the lower court considered the tenant’s “creditworthiness, post-termination efforts to cure the [alleged] breach, [the landlord’s] failure to purchase insurance itself and seek reimbursement from [its tenant] for its costs, and [the landlord’s] motivation in terminating the lease.” As to each of those factors, the Court believed that the lower court properly considered them when determining whether the landlord was observing the “implied covenant of good faith and fair dealing, which exists in every contract.” It pointed out that, under New Jersey law, when a party exercises a contract right, such as the right to terminate a lease, that party “breaches the duty of good faith and fair dealing if [it] exercises its discretionary authority arbitrarily, unreasonably, or capriciously, with the objective of preventing the other party from receiving its reasonably expected fruits under the contract.” Here, the lower court observed “with justification, that ‘the real motivation [was] to escape from a lease that [was] economically disadvantageous to [the] landlord and becoming more so over the years.’” Further, the Court relied on the doctrine that “[l]anguage in a contract that may result in a forfeiture of one party’s interest should be strictly construed.”

According to the Court, “[t]he obvious purpose of the insurance provisions of the lease in this case [was] to require the tenant to obtain insurance naming the landlord as an additional insured to protect the landlord by eliminating or reducing the risk of financial loss to the landlord during the term of the lease.” In that regard, it gave “deference” to the “feel” of the lower court when the lower court “thoughtfully analyzed [the tenant’s] deductible of up to one million dollars and found, nevertheless, that the insurance program that included such large deductible was ‘not in and of itself violative of the lease provisions respecting insurance.’” The lower court looked at the tenant’s creditworthiness and other factors bearing upon the risk of a loss or damage to which the landlord might be realistically exposed as a result of the insurance program utilized by [the tenant].”

In conclusion, it agreed with the lower court’s conclusion that “the insurance dispute was, at worse, technical and that it did not relate to a material breach that would justify termination of the lease.”