Continental Ins. Co. v. Boraie

• Decision Date: 23 October 1995
• Citation: 288 N.J.Super. 347,672 A.2d 274
• Parties: CONTINENTAL INSURANCE COMPANY, as Subrogee of First Fidelity Bank, N.A., New Jersey, Plaintiff, v. Omar BORAIE, Defendant.
• Court: New Jersey Superior Court

Page 347

288 N.J.Super. 347

672 A.2d 274

CONTINENTAL INSURANCE COMPANY, as Subrogee of First Fidelity Bank, N.A., New Jersey, Plaintiff, v. Omar BORAIE, Defendant.

Superior Court of New Jersey, Law Division,

Essex County.

Oct. 23, 1995.

Debra Kalmore Wenig, New York City, for plaintiff (Wenig & Wenig, attorneys).

Anthony R. Mautone, West Orange, for defendant (Minichino & Mautone, PA, attorneys).

James J. Horan, for defendant (Of Counsel, Minichino & Mautone, PA, attorneys).

YANOFF, J.S.C. (retired and temporarily assigned on recall).

The issues in this case are raised by defendant landlord's summary judgment motion.

A lease dated May 2, 1983 between Boraie as landlord and Fidelity Union Bank as tenant was extended until May 2, 1998 by letter agreement dated July 1, 1993. Paragraph 4(a) of the lease required tenant to maintain specified casualty and liability insurance. Paragraph 4(b) obligated landlord to obtain fire and other casualty insurance protecting tenant against the consequences of fire. Paragraph 4(a) further provided All such insurance policies maintained by the Tenant, and all policies of insurance maintained by the Landlord with respect to the Demised Premises or any property of which the Demised Premises are a part shall contain provisions for waiver of subrogation against the Landlord or the Tenant, as the case may be.

Plaintiff Continental insured tenant. When Continental paid Fidelity it obtained a "Loan Receipt" which "appoints" Continental its "agent," for any claim against any party "causing or liable for the loss or damage to the property described below", in effect, a comprehensive assignment of tenant's cause of action against the tortfeasor. No claim has been made that Continental's position has been improved by reason of the terms of the "loan receipt".

Continental's fire policy of insurance to First Fidelity Bank did not contain a waiver of subrogation.

As the result of fire, Fidelity sustained property damage in the amount of $177,152.28. Since there was a $50,000 deductible, Fidelity was paid only $127,152.28. Suit is brought by Continental as subrogee for the total amount of $177,152.28 against landlord, nevertheless.

I have no difficulty in holding that Continental is not entitled to recover the sum of money which it did not pay. Colonial Penn Ins. Co. v. Ford, 172 N.J.Super. 242, 243, 411 A.2d 736 (Law Div.1979). Thus, the question is whether Continental may recover against landlord for negligence in the maintenance of a sprinkler system for the sum which Continental actually paid.

We are concerned here with an insurance policy obtained by tenant, in violation of or without conformity to the cited lease provision. It is uncontradicted that the carrier had no notice of the lease provision requiring waiver of subrogation rights.

Standard Accident Ins. Co. v. Pellecchia, 15 N.J. 162, 104 A.2d 288 (1954) established that normally, a carrier paying an insurance loss is entitled to subrogation against the tortfeasor. Involved is a case in which Pellecchia, employed by Columbus Trust Company, defalcated. Standard, as surety to Columbus for Pellecchia's conduct, paid Columbus $200,000. Columbus had claims against Federal Trust Co. by virtue of Federal's guarantee of endorsements on false or forged checks, which were settled. Thereafter, Standard brought suit against Federal on the rights which Columbus had had against Federal under the guarantee of endorsements. The trial court granted summary judgment to Federal. The Supreme Court reversed and remanded for trial. In a comprehensive opinion, Chief Justice Vanderbilt set out basic law as to subrogation:

Subrogation is a device of equity to compel the ultimate discharge of an obligation by the one who in good conscience ought to pay it. It is a right of ancient origin, having been imported from the civil law to serve the interests of essential justice between the parties. It is most often brought into play when an insurer who has indemnified an insured for damage or loss is subrogated to any rights that the insured may have against a third party, who is also liable for the damage or loss. In such a case it is only equitable and just that the insurer should be reimbursed for his payment to the insured, because otherwise either the insured would be unjustly enriched by virtue of a recovery from both the insurer and the third party, or in the absence of such double recovery by the insured the third party would go free despite the fact that he has the legal obligation in connection with the loss or damage.

[Id. at 171, 104 A.2d 288 (citations omitted) (emphasis added).]

Despite the quoted language which tends to indicate that subrogation should not be barred by the settlement between Columbus and Federal, the summary judgment in the trial court below was reversed and the case sent back for trial on Federal's claim that Columbus had been guilty of inequitable conduct.

Mayfair Fabrics v. Henley, 48 N.J. 483, 226 A.2d 602 (1967) recognized that the parties to a contract may agree to distribute the risks attendant thereon and to designate who shall obtain the necessary insurance. This type of agreement was described carefully by Judge Ackerman in Mayfair Fabrics v. Henley, 97 N.J.Super. 116, 234 A.2d 503 (Law Div.1967):

These rules favor the construction contended for by the tenant, who urges that the clause in question grants to both parties equal immunities from liability which are mutual and reciprocal. It is not necessary, however, to decide this motion on the basis of any rules of strict construction in favor of one party against the other. Here we have a commercial lease entered into between businessmen. In plain and unmistakable language they mutually agreed that each would insure his own property against loss by fire at his own expense. Their agreement should be construed to accord with the understanding of reasonable businessmen, and in harmony with the modern judicial view that provisions in leases and other commercial agreements such as that here involved, whether couched in language of indemnity or exculpation or imposing obligations with respect to obtaining insurance, are to be viewed realistically as normal common-sense efforts by businessmen to allocate between them the cost or expense of risks of property damage. They contemplate that such risks will be covered by insurance, and the only practical feature of such bargains ordinarily is the decision as to who is to bear the cost of insurance.

[Id. at 123, 234 A.2d 503 (citations omitted).]

See in accord Dome Petroleum Ltd. v. Employers Mut. Liability Ins. Co. 767 F.2d 43, 46 (3d Cir.1985).

In the Supreme Court case the lease specifically provided that in no event would landlord be responsible for fire damage "to the tenant's property." Mayfair Fabrics, supra, 48 N.J. at 490, 226 A.2d 602. The Court held that this language exculpated landlord for damage to tenant's property. In the Law Division, upon remand from the Supreme Court, the Supreme Court decision was interpreted to include exculpation against loss of profits by tenant. Pertinent to the issue here, the Court held that the subrogee insurance carrier was barred from recovery by the exculpatory lease provision. Judge Ackerman wrote:

Although the right of an insurance company to enforce subrogation rights in appropriate cases has long been well settled, it is also clear that subrogation is not applicable when its enforcement would be inconsistent with the terms of a contract or where the contract, either expressly or by implication, forbids its application. Standard Accident Ins. Co. v. Pellecchia, 15 N.J. 162 (1954); Ganger v. Moffett, 8 N.J. 73 (1951).

[97 N.J.Super. at 126, 234 A.2d 503]

In Mayfair Fabrics v. Henley, 101 N.J.Super. 363, 244 A.2d 344 (Law Div.1968), Judge Ackerman expanded the basic principle of Mayfair I, that parties to a commercial contract may validly agree that losses arising out of the contract relationship will be borne by insurance, to exculpate an employee of one of the parties, although the employee was not party to the contract.

Clearly here, the parties intended to shift the risks of loss to insurance policies which they undertook to procure. A line of authority holds that the carrier, as an innocent subrogee, is not bound by the waiver of its subrogor, the insured. See ICC Industries, Inc. v. GATX Terminals Corp., 690 F.Supp. 1282, 1286 (S.D.N.Y.1988); Zurich-American Insurance Co. v. Eckert, 770 F.Supp. 269, 272-73 (E.D.Pa.1991); Seamless Floors by Ford, Inc. v. Value Line Homes, Inc., 438 S.W.2d 598, 601-02 (Tex.App.1969); St. Paul Fire and Marine Insurance Company v. Amerada Hess Corp., 275 N.W.2d 304, 308 (N.D.1979); Aluminum Product Distributors, Inc. v. AAACon Auto Transport, Inc., 404 F.Supp. 1374, 1377 (W.D.Okla.1975); Continental Insurance Company. v. Washeon Corp., 524 F.Supp. 34, 36 (E.D.Mo.1981); Alamo Chemical Transportation Co. v. M/V Overseas Valdes, 469 F.Supp. 203, 212 (E.D.La.1979).

Cases supporting the view that where the subrogor has waived subrogation rights, the subrogee's rights are similarly impaired, are probably the minority position. Millican v....