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Kramer v. Fokis, Inc.

A-5833-05T5 (N.J. Super. App. Div. 2007) (Unpublished)

LEASES; SUBROGATION; WAIVER — Where a lease provides for a mutual waiver of subrogation, an insurance company has no right of subrogation because the purpose of such a mutual waiver is to make the insurer bear the risk of loss, regardless of fault, as well as to prevent a potential windfall to the insurer.

An insurer brought suit against a tenant for losses arising out of a fire on the leased premises. The tenant’s lease required the tenant to obtain and maintain business owners’ coverage. The lease also had a mutual waiver of subrogation provision. The owner maintained a property insurance policy. That policy had a provision transferring the owner’s rights of recovery against the tenant to the insurer. It also permitted the owner to enter into leases with a waiver of subrogation.

After the fire, the owner settled its fire loss claim with its insurance carrier. The insurer then sued the tenant for negligence, gross negligence, and breach of contract. The lower court granted the tenant’s motion to dismiss by reason of the waiver of subrogation in the lease.

The Court first construed the lease, in context, to see if the insurer had the right to pursue an action against the tenant. It noted that the purpose behind a mutual waiver of subrogation is to make the insurer bear the risk of the loss, regardless of fault, as well as to prevent a potential windfall to the insurer. Then, the Court looked to the lease’s plain language. It found that the lease provided for mutual releases and waivers from the landlord and the tenant of their respective rights of recovery against each other for certain losses to the property, including losses from fire damage. The insurer asserted that this lease clause provided for the mutual waiver only in cases of ordinary negligence. The Court disagreed, holding that such a reading would be inconsistent with the general provision for mutual waivers. Therefore, there were no exceptions to the waivers of rights of recovery for property damage arising from fire damage.

The Court noted that even though the owner subrogated the claims to its insurer, the claims here had been waived and the insurer was bound by the waiver. Therefore, the Court affirmed the lower court’s decision to dismiss.

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