Subrogation, Assignments And Loan Receipts In Georgia Property Insurance: An Update

At paragraph IV.  Minefields, subparagraph C. Waiver of Claims Based on the Insured’s Contract With the Tortfeasor, the Spring 1995 article dealt with the potential for barring subrogation damages based on waivers appearing, or legally implied, in leases, construction contracts, and the like.  The seminal case in this area isTuxedo Plumbing & Heating Co. v. Lie-Nielson, Inc., wherein a covenant by one party to a construction contract to obtain insurance was held to imply that both parties were to be insured, that both parties had further impliedly agreed to look to insurance to cover any damages inflicted by either, and that the subrogated insurer(s) of either were barred from pursuing subrogation claims against the other party.[2]  The article dealt with specific waivers of subrogation as well as implied ones.

Thereafter, in Southern Trust Ins. Co. v. Center Developers, Inc., a full-bench review fractured the Georgia Court of Appeals.[3]  In Southern Trust, the Court dealt with a shopping center fire which had damaged nine insured tenant premises.  Seven subrogated insurers, by name, and two tenants filed negligence actions against the property management company, a sign company, and an electrical contractor.[4]  Each of the nine leases contained one of three clauses dealing with insurance carried or to be carried, purporting to waive actions for damages between landlord and tenant.  The trial court found all actions to be waived, and all nine cases were consolidated on appeal.

The Court of Appeals dealt separately with all three lease clauses, to differing results.  The first clause waived subrogation “for loss or damage . . . arising from any cause insured against the . . . fire insurance policy . . . carried by such waiving party”.  This language was attacked as an impermissible release of one in advance from the consequences of his own negligence under O.C.G.A. § 13-8-2(b), since the lease did not require the carrying of insurance.[5]  Without that requirement, argued the insurers, there was no intent to shift the risk to the insurer, leaving the attempt at waiver subject to O.C.G.A. § 13-8-2(b), supra. 

The court noted that the 1994 case Glazer v. Crescent Wall Coverings clearly established that no specific requirement to carry insurance was necessary to give effect to such a waiver arising from a loss actually covered, which “by the terms do not apply in the absence of insurance.”[6]  The suing parties affected by this lease were therefore barred by the waiver clause. 

The second lease clause dealt only with uninsured losses to one of the tenants who was party to the lease.  This clause expressly waived “the rights of either against the other” as to damage or destruction by “fire or any other cause recoverable by insurance maintained by either,” and required the landlord to maintain fire insurance as to improvements, naming the tenant as an insured.

The Court of Appeals held that “a waiver of subrogation analysis is not germane to the claims for allegedly uninsured losses . . .”  This is consonant with Southern Railway v. Malone Freight Lines, which held that a subrogated insurer’s entitlement to payment was limited to funds actually paid under its obligation to its insured.[7]  Southern Trust now holds that only those rights are waived in a contract waiver.

The third lease clause waived any and all subrogation by the tenant against the landlord as a result of “any insurance procured by Tenant as herein required.”  However, the trouble for the landlord, here, was that all it had required in the lease was the obtaining of liability insurance.  The Court of Appeals reversed the trial court’s finding of a waiver in this instance, because liability insurance indemnifies only against “non-contractual legal liability” of third parties, and accordingly, could not encompass a mutual exculpation of each other by the landlord and tenant through a contract.  Accordingly, subrogation was waived.

The lessons from this case underscore the point made in the original article to the effect that “an additional layer of complexity” in this area of the law lies in contracts the insured may have entered into with the tortfeasor.  It also underscores that it behooves the defendant which is sued for property damage, and which has such a contact with its plaintiff, to investigate its opportunities to determine if the suit is rooted in subrogation.  Such is obvious, of course, if it is brought in the insurer’s name.  However, the “plaintiff” may actually be an insurer operating in its insured’s name pursuant to a loan receipt, and if so, the defendant may have a significant opportunity to bar a substantial part or all of the plaintiff’s action.  Finally, the case is a message to those drafting or approving the formats of leases, construction contracts and the like, to be sure that the purported waiver of subrogation is properly drawn to bring about its intended effects.