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Mutual Waiver and Waiver of Subrogation Provisions in Commercial Leases

By Myles Hannan

In commercial leases, the mutual waiver of claims for damage to property and its corollary, the waiver of subrogation by property insurers, continue to be the source of substantial confusion. Much of the confusion appears to spring from a lack of understanding of just what the waivers are intended to achieve and how they achieve it. The hypothetical below and the discussion that follows examine the rationale for these waivers, how they work and how certain other standard lease provisions should be brought into conformity with them.

Assume that Olga Owner leases her lakefront cabin for the month of July to Teri Tenant, and Teri brings along her quite valuable stamp collection on which she plans to work during vacation. Two significant things spring from these events. First, the occupant of the cabin during July will be someone other than the owner of the cabin and, second, there will be in the cabin valuable personal property that does not belong to the owner of the cabin. These facts create all kinds of issues (which is why we have leases), but two major liability questions emerge. They are: 1) Teri could incur liability to Olga if she negligently burns down Olga's cabin. Should Teri consider insuring the cabin? and 2) Olga could incur liability to Teri if there were negligently defective wiring in the cabin that causes a fire and destroys Teri's valuable stamp collection. Should Olga consider insuring the collection? The answers to these questions could be “yes” in each case (assuming that in these circumstances Olga and Teri each have an insurable interest in the other's property, which would probably be the case), but then consider the situation that would ensue. Olga, as the owner of the cabin, already carries property insurance covering fire and other casualties for the cabin, and, no doubt, Teri has scheduled the stamp collection for coverage under her homeowner's policy. Thus, if Teri were to insure the cabin against fire and other casualty and Olga were to insure Teri's stamp collection against those risks, the result would be duplicate coverages for the cabin and the stamp collection, with the only winners being the insurers. To make the case even clearer, assume that the cabin also has two separate wings, each of which will be leased in July to other tenants who also plan to bring along valuable personal property. Are we then to have four people insuring the cabin and Olga insuring the personal property of her three tenants? Furthermore, what if the “cabin” were the Empire State Building?

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