Inchaustegui v. 666 5th Avenue Ltd. Partnership, 96 N.Y.2d 111 (2001)

When a tenant breaches a lease agreement by failing to obtain liability insurance for the landlord’s benefit, and the landlord has its own insurance, the landlord’s damages are limited to its out-of-pocket expenses, not the full underlying tort liability and defense costs.

Summary

A tenant, Petrofin, breached a lease agreement by failing to name the landlord, 666 5th Avenue Limited Partnership, as an additional insured on its liability insurance policy. An employee of the tenant was injured on the premises and sued the landlord, who then brought a third-party action against the tenant. The New York Court of Appeals addressed the measure of damages recoverable by the landlord. The Court held that because the landlord had its own insurance covering the risk, its recovery was limited to out-of-pocket expenses (premiums, deductibles, co-payments, and increased future premiums) caused by the tenant’s breach, and the common-law collateral source rule does not apply.

Facts

Petrofin, a tenant, agreed in a lease to maintain liability insurance and name the landlord, 666 5th Avenue Limited Partnership, as an additional insured. Petrofin obtained a policy but failed to include the landlord as an insured. Plaintiff, Petrofin’s employee, was injured on the premises and sued the landlord. The landlord then sued Petrofin for breach of the lease agreement.

Procedural History

The Supreme Court granted the landlord’s motion for summary judgment, finding Petrofin breached the lease. However, the court limited damages to the cost of maintaining the insurance policy for the year of the accident. The Appellate Division modified, allowing the landlord to recover out-of-pocket expenses arising from the liability claim and not covered by the landlord’s insurance. The dissenting Justices would have awarded the landlord the full amount of the loss. The New York Court of Appeals affirmed the Appellate Division’s modified order.

Issue(s)

Whether the landlord, who procured its own insurance, can recover the full amount of the settlement and defense costs in the underlying tort claim from the tenant who breached the lease agreement to obtain insurance for the landlord, or whether the landlord’s recovery is limited to its out-of-pocket expenses?

Holding

No, because the landlord obtained its own insurance covering the risk, it sustained no loss beyond its out-of-pocket costs. The common-law collateral source rule does not apply in this breach of contract case.

Court’s Reasoning

The Court reasoned that lease provisions requiring a tenant to procure insurance for the landlord are generally enforceable. A landlord without knowledge of the tenant’s failure and who is left uninsured can recover the full tort liability and defense costs. However, in this case, the landlord procured its own insurance. The Court cited Mavashev v Shalosh Realty, 233 A.D.2d 301 (1996) and Richfield Props. v Galaxy Knitting Mills, 269 A.D.2d 516 (2000) to support limiting damages to the landlord’s out-of-pocket expenses. The Court stated that the landlord “obtained its own insurance and therefore sustained no loss beyond its out-of-pocket costs… Accordingly, it may not now look to the tenant for the full amount of the settlement and defense costs in the underlying tort claim.”

The Court distinguished Kinney v G. W. Lisk Co., 76 N.Y.2d 215 (1990), noting that the issue of minimizing damages by insurance the general contractor obtained was not raised or considered in that case.

The Court rejected applying the common-law collateral source rule, stating it is a tort concept with a punitive dimension not aligned with contract law. Contract damages are limited to the economic injury caused by the breach, aiming to place the injured party in as good a position as if the contract had been performed. The Court highlighted that a tenant’s potential liability without insurance and the risk of eviction are sufficient disincentives for non-compliance, removing the need to invoke the collateral source rule as an incentive. As the court stated, the landlord “is entitled to be placed in as good a position as it would have been had the tenant performed. Its recovery is limited to the loss it actually suffered by reason of the breach”.