The Subrogation Strategist

In Travelers Indem. Co. of Am. v. Schwarz Props., L.L.C., 2020 U.S. Dist. LEXIS 18176, the United States District Court for the Western District of North Carolina considered whether the lease between a commercial tenant and its landlord barred the tenant’s insurance carrier from subrogating against the landlord for damages to the tenant’s goods. The court found that the tenant’s carrier could not subrogate against the landlord because the lease clearly and explicitly stated that the landlord was not responsible for the tenant’s property. In addition, the lease required the tenant to insure its own property and to hold the landlord harmless for any damage to the tenant’s goods. This case establishes that, in North Carolina, negligence claims between a landlord and tenant may be barred if the lease includes clear and explicit exculpatory and indemnification provisions.

In May 2017, the plaintiff’s insured, CVB, Inc. d/b/a Malouf (Malouf), began leasing a portion of a warehouse from defendant, Schwarz & Schwarz, LLC (Schwarz), who owned the building. The lease agreement was between Malouf and the property manager, Schwarz Properties, LLC (Schwarz Properties). The lease was solely for the storage and warehousing of Malouf’s goods. A representative of Schwarz did not sign the lease, but the first page of the lease stated that Schwarz Properties was acting on behalf of the building owner. The lease required Malouf to carry “all risk” property insurance for its stored goods, and held Malouf solely responsible for the personal or business contents of the leased premises. The agreement also required Malouf to hold the landlord harmless for any destruction of its property. In addition, the lease stated that Schwarz would not carry insurance for Malouf’s property and was not responsible for repairing any damage to Malouf’s property.

In January 2018, a sprinkler pipe on the third floor of the warehouse froze and burst, causing water damage to the insured’s property. Malouf submitted a claim to its business property insurance carrier, who paid Malouf for the damage. In February 2019, Malouf’s insurer filed a subrogation action against the defendants to recover the amount paid to Malouf for this loss. The insurer alleged counts for negligence, gross negligence and negligence per se on grounds that the defendants failed to properly heat the area where the sprinklers were located. The defendants filed a motion to dismiss all claims pursuant to the exculpatory and hold harmless provisions in the lease.

Applying North Carolina substantive law, the court agreed with the defendants that a recent North Carolina Supreme Court decision, Morrell v. Hardin Creek, Inc., 371 N.C. 672 (2018), was controlling in this case. In Morrell, commercial tenants sued their landlord for improperly constructing a kitchen in violation of the building code. The Supreme Court held that the tenants’ claims were barred by the lease agreement, which unambiguously stated the clear intent of the parties to discharge each other from all claims and liabilities for damages resulting from hazards covered by insurance. As in the Morrell case, the District Court held that when the intent of the parties is clearly expressed in a written contract with no ambiguities requiring consideration of extrinsic evidence, the contract may be interpreted as a matter of law. The District Court found that the exculpatory and hold harmless provisions in the lease between Malouf and Schwarz Properties were “clear and explicit” in that Malouf was solely responsible for its business property and agreed to hold Schwarz harmless of any destruction of such property. Since Malouf unambiguously agreed to store its goods at its own risk and had no right to seek reimbursement from the landlord, the court upheld the contract and dismissed the case.

In deciding the case, the court also rejected the insurer’s argument that the lease did not apply to the building owner, Schwarz, since it did not sign the release. The court found that the lease clearly stated that Schwarz Properties was acting on behalf of the building owner, and that the exculpatory provisions protected both defendants. The court also rejected the insurer’s argument that the exculpatory provisions did not apply to the gross negligence and negligence per se counts. The court found that the broad exclusionary language of the relevant lease provisions considered any and all claims, including those “couched as gross negligence.”

The Schwarz Props., LLC case supports the position that in North Carolina, a subrogation claim against a commercial tenant or landlord may be barred if there are clear and explicit exculpatory or indemnification provisions limiting liability. Although there were no actual subrogation waivers in the lease at issue, the court found that the provisions exculpating the landlord for damages to the tenant’s property also barred subrogation claims by the tenant’s carrier. This case also suggests that in North Carolina, claims for “gross negligence” and “negligence per se” are not exceptions to exculpatory provisions in commercial leases. Lastly, North Carolina subrogation professionals should be mindful that even if the building owner did not sign the lease, the lease may still protect the building owner if its agent signed the lease on the building owner’s behalf.