New York Law Review

Tag: Insurance Procurement

  • Great Northern Ins. Co. v. Interior Constr. Corp., 7 N.Y.3d 412 (2006): Enforceability of Indemnification Clauses in Commercial Leases

    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.

  • Inchaustegui v. 666 5th Avenue Ltd. Partnership, 96 N.Y.2d 111 (2001): Damages for Failure to Procure Insurance

    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”.

  • Cromwell Towers Construction Co. v. Florence & George Plastering Co., 78 N.Y.2d 1096 (1991): Enforceability of Insurance Procurement Agreements in Construction Contracts

    Cromwell Towers Construction Co. v. Florence & George Plastering Co., 78 N.Y.2d 1096 (1991)

    An agreement to procure insurance in a construction contract is distinct from an agreement to indemnify or hold harmless and does not violate General Obligations Law § 5-322.1, even if the insurance policy covers the promisee’s own negligence.

    Summary

    This case clarifies the distinction between agreements to indemnify and agreements to procure insurance within the context of New York’s General Obligations Law § 5-322.1. Cromwell Construction, a general contractor, sought indemnification from its subcontractor, Hudson Steel, after Hudson’s employee was injured and Cromwell was found partly liable. Cromwell argued that Hudson breached their contract by failing to procure insurance covering Cromwell’s liability. The New York Court of Appeals held that Hudson’s agreement to obtain insurance for Cromwell was enforceable and did not violate General Obligations Law § 5-322.1, even though the insurance would cover Cromwell’s own negligence. The Court emphasized that procuring insurance is different from indemnifying or holding harmless, and such agreements are consistent with public policy.

    Facts

    Cromwell Construction, Inc. (general contractor) hired Hudson Steel Fabricators & Erectors, Inc. (subcontractor) for work on property owned by G. W. Lisk Co., Inc.
    Hudson’s employee was injured on the job and received a settlement against Cromwell and Lisk.
    The jury apportioned negligence: Cromwell (12%) and Hudson (88%).
    The subcontract between Cromwell and Hudson required Hudson to maintain insurance policies to protect both parties from bodily injury claims arising out of the work.

    Procedural History

    The trial court granted summary judgment to Cromwell in its third-party action against Hudson, based on Hudson’s failure to procure the required insurance.
    The Appellate Division affirmed the trial court’s decision, holding that the insurance procurement provision did not violate General Obligations Law § 5-322.1.
    Hudson appealed to the New York Court of Appeals.

    Issue(s)

    Whether a contractual provision requiring a subcontractor to maintain insurance coverage for the general contractor against personal injury claims violates General Obligations Law § 5-322.1 when the injury is caused, in part, by the general contractor’s negligence.

    Holding

    No, because General Obligations Law § 5-322.1 only prohibits agreements to indemnify or hold harmless, and an agreement to procure insurance is distinct from such agreements.

    Court’s Reasoning

    The Court of Appeals reasoned that General Obligations Law § 5-322.1 explicitly addresses agreements to indemnify or hold harmless, not agreements to purchase or maintain insurance. The statute renders void agreements “purporting to indemnify or hold harmless the promisee against liability for damage arising out of bodily injuries to persons * * * contributed to, caused by or resulting from the negligence of the promisee, his agents or employees”.
    The court emphasized a “well recognized” distinction: “Whereas the essence of an indemnification agreement is to relieve the promisee of liability, an agreement to procure insurance specifically anticipates the promisee’s ‘continued responsibility’ for its own negligence for which the promisor is obligated to furnish insurance”.
    The Court cited legislative history indicating that the statute targeted “’broad form hold-harmless’ clauses” that caused contractors to “assume liability for the negligence of others”. The legislature understood that liability protection insurance was less expensive than hold-harmless coverage and expected insurance-procurement agreements to continue in construction contracts.
    The Court referenced prior decisions like Board of Educ. v Valden Assocs., 46 NY2d 653, 657, and Hogeland v Sibley, Lindsay & Curr Co., 42 NY2d 153, 160 which upheld similar agreements.
    Because Hudson breached its agreement to procure liability insurance covering Cromwell, it was liable for the resulting damages, including Cromwell’s liability to the injured employee. The court explicitly stated that “To the extent that Patenaude v General Elec. Co. (147 AD2d 335) is to the contrary, it should not be followed.”

  • Kel Kim Corp. v. Central Markets, Inc., 70 N.Y.2d 900 (1987): Excuses for Non-Performance of Contractual Obligations

    Kel Kim Corp. v. Central Markets, Inc., 70 N.Y.2d 900 (1987)

    Impossibility and force majeure clauses excusing nonperformance of a contract are narrowly construed and generally do not apply unless the specific event preventing performance was unforeseeable and specifically included in the contract’s force majeure clause.

    Summary

    Kel Kim Corporation leased a supermarket from Central Markets, Inc. to operate a roller skating rink, requiring specific liability insurance. When Kel Kim’s insurer refused to renew the policy due to the reinsurer’s financial instability, Kel Kim couldn’t find a replacement policy meeting the lease requirements. Kel Kim argued impossibility and invoked the lease’s force majeure clause to excuse non-compliance. The court held that Kel Kim’s inability to obtain insurance was foreseeable and not specifically covered by the force majeure clause, thus not excusing performance. This case highlights the limited scope of impossibility and force majeure defenses in contract law.

    Facts

    In early 1980, Kel Kim leased a vacant supermarket from Central Markets to operate a roller skating rink. The lease required Kel Kim to maintain a public liability insurance policy of at least $500,000 per person and $1,000,000 per accident. Kel Kim obtained the required insurance and operated the rink for six years. In November 1985, the insurance carrier notified Kel Kim that the policy would expire on January 6, 1986, and would not be renewed due to the reinsurer’s financial condition. Kel Kim informed Central Markets and attempted to procure replacement insurance, but was unable to obtain a policy for the required amount due to a liability insurance crisis. Kel Kim obtained a $500,000 policy effective March 1, 1986, and the required coverage by August 1987.

    Procedural History

    On January 7, 1986, Central Markets sent Kel Kim a notice of default for being uninsured and demanded a cure within 30 days. Kel Kim filed a declaratory judgment action, arguing impossibility and the lease’s force majeure clause should excuse compliance. Special Term granted Central Markets’ motion for summary judgment, nullifying the lease and directing Kel Kim to vacate. The Appellate Division affirmed.

    Issue(s)

    1. Whether Kel Kim’s inability to procure the required insurance coverage excused performance under the doctrine of impossibility?
    2. Whether Kel Kim’s inability to procure the required insurance coverage was covered by the lease’s force majeure clause, excusing performance?

    Holding

    1. No, because Kel Kim’s inability to procure and maintain the requisite insurance coverage could have been foreseen and guarded against when it undertook the obligation in the lease.
    2. No, because the force majeure clause did not specifically include the inability to procure and maintain insurance, and the catchall provision only applies to events similar in nature to those specifically listed.

    Court’s Reasoning

    The court reasoned that contractual obligations must be performed, even when unforeseen circumstances make performance burdensome, unless performance is objectively impossible due to the destruction of the subject matter or means of performance, caused by an unanticipated event that could not have been foreseen or guarded against. The court found that Kel Kim’s inability to procure insurance was foreseeable, especially given the business it operated. The court emphasized that the purpose of contract law is to allocate risks. Regarding the force majeure clause, the court stated, “Ordinarily, only if the force majeure clause specifically includes the event that actually prevents a party’s performance will that party be excused.” The court further explained that general words in a force majeure clause are interpreted narrowly, applying only to events similar to those specifically mentioned. The clause in question listed labor disputes, inability to procure materials, failure of utility service, restrictive governmental laws, riots, insurrection, war, adverse weather, and Acts of God. The court concluded that the events listed pertained to a party’s ability to conduct day-to-day commercial operations, while the insurance requirement protected the landlord’s economic interests. Therefore, the inability to obtain insurance was not of the same kind or nature as the listed events and did not excuse Kel Kim’s non-performance. The court effectively stated that parties should explicitly negotiate and include potential risks such as insurance availability when drafting contracts rather than relying on general clauses to excuse their obligations.

  • Board of Educ., Union Free School Dist. No. 3, Town of Huntington v. Delle Cesa, 40 N.Y.2d 648 (1976): Enforceability of Insurance Procurement and Waiver Clauses in Construction Contracts

    Board of Educ., Union Free School Dist. No. 3, Town of Huntington v. Delle Cesa, 40 N.Y.2d 648 (1976)

    A contractual provision requiring a party to a construction contract to procure insurance coverage for all parties and containing a mutual waiver of rights for damages covered by that insurance does not violate General Obligations Law § 5-323, provided there is no indication of overreaching or unconscionability.

    Summary

    This case concerns the validity of clauses in a construction contract requiring the owner to obtain insurance covering fire and other perils on the entire structure and a mutual waiver of rights for damages covered by that insurance. After a fire caused damage, the insurer, as subrogee, sued the contractor and subcontractors. The defendants argued the contractual provisions barred the suit. The New York Court of Appeals held that such clauses are enforceable, as they require insurance procurement rather than exemption from liability, and do not violate General Obligations Law § 5-323 or public policy when there is no overreaching.

    Facts

    The Board of Education (owner) entered into a construction contract that contained two key provisions: First, the owner was required to provide fire, extended coverage, vandalism, and malicious mischief insurance on the entire structure to 100% of its insurable value. Second, the owner, contractor, and all subcontractors waived all rights against each other for damages caused by fire or other perils covered by the required insurance, except for rights to the insurance proceeds.

    During the project, a fire broke out, allegedly due to the negligence of the contractor or subcontractors, causing damage to the building. The owner’s insurer paid for the damages and then, as a subrogee of the owner, brought an action against the contractor and subcontractors to recover the amount paid.

    Procedural History

    The lower court’s decision is not explicitly mentioned but the case reached the New York Court of Appeals after an appeal regarding the validity of the contractual provisions as a defense to the action by the insurer. The Court of Appeals reviewed the relevant statute and contractual language to determine enforceability.

    Issue(s)

    Whether a contractual provision requiring an owner to procure insurance coverage for all parties involved in a construction project and containing a mutual waiver of rights for damages covered by that insurance violates Section 5-323 of the General Obligations Law, which prohibits contractors from exempting themselves from liability for negligence.

    Holding

    No, because the contractual provision requires insurance procurement rather than exemption from liability, and such provisions do not violate General Obligations Law § 5-323 or any other public policy in the absence of overreaching or unconscionability.

    Court’s Reasoning

    The court reasoned that Section 5-323 of the General Obligations Law does not prohibit contractual provisions that require one party to a contract to provide insurance for all parties involved. The court distinguished between provisions that seek to exempt a party from liability and those that simply require insurance coverage.

    The court stated, “Insofar as damages for injuries are in fact compensable under an insurance policy mandated by contract, a provision waiving all rights to recover for those same injuries other than from the proceeds of the insurance policy does not constitute a violation of the statute.”

    The court emphasized the importance of freedom of contract, stating that absent overreaching or unconscionability, parties are free to allocate risk through insurance and waivers. The court cited Hogeland v Sibley, Lindsay & Curr Co., 42 NY2d 153, in support of the principle that such provisions do not violate public policy.

    The court found no indication of overreaching or unconscionability in the case, thus upholding the validity of the contractual provisions. The practical effect is to allow parties to construction contracts to allocate risk to insurance companies, thereby avoiding litigation among themselves for damages covered by the insurance.