Great Northern Ins. Co. v. Interior Constr. Corp., 7 N.Y.3d 412 (2006)
An indemnification clause in a commercial lease, coupled with an insurance procurement provision, obligates the tenant to indemnify the landlord for its share of liability, and such a lease provision does not violate General Obligations Law § 5-321.
Summary
This case concerns the enforceability of an indemnification provision in a commercial lease where the lease also contains an insurance procurement clause. A tenant, Depository Trust, hired a contractor to renovate its leased premises. The contractor’s work on a sprinkler system caused a flood, damaging another tenant’s property. That tenant’s insurer, Great Northern, sued the landlord, New Water, and Depository. New Water cross-claimed against Depository for indemnification based on the lease. The New York Court of Appeals held that the indemnification clause, coupled with the insurance procurement provision, was enforceable, obligating Depository to indemnify New Water for its share of liability, and that this arrangement did not violate General Obligations Law § 5-321, because the parties allocated the risk of loss to third parties through insurance.
Facts
New Water Street Corp. leased space to Depository Trust & Clearing Corp. The lease included a clause where Depository would indemnify New Water against claims arising from the premises, specifically covering accidents unless solely caused by New Water’s negligence. The lease also required Depository to maintain liability insurance naming New Water as an additional insured. Depository hired Interior Construction Corp. to renovate the premises, and Interior subcontracted with TM & M Mechanical Corp. During the renovation, a flood occurred due to improper draining of sprinkler pipes, damaging the premises of Neuberger & Berman, a tenant below.
Procedural History
Great Northern Insurance, Neuberger’s insurer, sued New Water, Depository, and Interior to recover for the damages paid to Neuberger. New Water filed a cross-claim against Depository for contractual indemnification. The subrogation action settled, except for New Water’s indemnification claim against Depository. The parties stipulated that a jury would have allocated 90% of the liability to New Water and 10% to Interior. Supreme Court denied New Water’s motion for summary judgment on its indemnification claim. The Appellate Division initially affirmed, then reversed on reargument, granting New Water’s motion. Depository appealed to the New York Court of Appeals.
Issue(s)
1. Whether the indemnification clause in the lease unmistakably requires Depository to indemnify New Water under the circumstances of this case.
2. Whether the lease provision is unenforceable under General Obligations Law § 5-321 because it obligates the tenant to indemnify the landlord for the landlord’s own negligence.
Holding
1. Yes, because the broadly drawn provision unambiguously evinced an intent that Depository indemnify New Water for the latter’s own negligence, provided New Water was not 100% negligent.
2. No, because, consistent with Hogeland v Sibley, Lindsay & Curr Co., General Obligations Law § 5-321 does not prohibit indemnity where the parties are allocating the risk of liability to third parties between themselves, essentially through the employment of insurance.
Court’s Reasoning
The Court of Appeals stated that contracts are construed to provide indemnity for a party’s own negligence only where the contractual language demonstrates an “unmistakable intent” to indemnify. The Court found that subsection (C) of the indemnification clause, requiring Depository to indemnify New Water for “any” accident unless caused solely by New Water’s negligence, unambiguously evinced such intent. The parties’ stipulation that New Water was 90% at fault meant New Water was not solely liable, triggering the indemnification obligation.
Regarding General Obligations Law § 5-321, the Court relied on Hogeland v. Sibley, Lindsay & Curr Co., emphasizing that the statute primarily targets exculpatory clauses where lessors avoid direct liability. The Court reasoned that in this case, the parties were allocating risk through insurance. The Court emphasized, quoting Hogeland, “[The landlord] is not exempting itself from liability to the victim for its own negligence. Rather, the parties are allocating the risk of liability to third parties between themselves, essentially through the employment of insurance. Courts do not, as a general matter, look unfavorably on agreements which, by requiring parties to carry insurance, afford protection to the public.” Because the lease included both an indemnification provision and an insurance procurement requirement, the Court found the indemnification enforceable, reasoning that Depository’s insurer would bear the ultimate responsibility, which was the parties’ intention. The Court declined to overrule Hogeland, citing stare decisis and the reliance of commercial parties on that precedent.