Understanding Property Insurance, Mutual Releases, and Waivers of Subrogation in Commercial Leases

May 18, 2023

By Brian Triplitt Selogie

Property insurance, a mutual release, and a mutual waiver of subrogation are common and often misunderstood provisions in a commercial lease agreement.  In a well-drafted commercial lease, these provisions create a framework whereby the parties allocate risk- first to the respective insurance carriers and then to the responsible party.  This appropriate allocation of risk furthers the goals of economic efficiency and minimizes the risk of disputes and litigation between the parties.

In order to gain a more comprehensive understanding of these provisions and the interplay between them—and thereby more effectively negotiate their terms and conditions—it is useful to examine each provision individually.

What is the role of property insurance in a commercial lease agreement?

As an initial matter, the landlord and tenant in a commercial lease will typically agree to each insure their property against damage or loss.  The terms of such coverage, including policy limits, covered causes of loss, allowance for self-insurance, and deductible amounts are subject to negotiation between the parties and often expressly set forth in the lease agreement. In a multi-tenant setting (i.e., shopping center, etc.), tenants may be required to pay their proportionate share of the landlord’s insurance premiums as part of the tenant’s additional rent or “triple net” expenses.

What to include in a Mutual Release and Waiver of Damages

In consideration of the parties’ agreement to carry property insurance as mentioned above, the landlord and tenant in a commercial lease will often agree to release each other and waive any claim for damages against the other arising from a loss of property covered by such insurance.  This mutual release and waiver of damages will often apply regardless of whether the loss covered by insurance was the result of negligence or willful misconduct of the landlord or tenant. 

The intent behind this provision is that the parties should allocate risk to their respective insurers and avail themselves of the protection afforded by the insurance they’ve each agreed to carry and pay for.  This is especially significant for any tenant who pays a share of the landlord’s insurance premiums under the terms of a lease.

Why is a Waiver of Subrogation important?

The mutual waiver of subrogation in a commercial lease is a provision whereby each party agrees to have its respective insurance carriers waive the right to pursue the responsible party in the event of a covered loss.  “Subrogation” is a process under which an insurance company that has paid for damage or a loss covered under a policy is entitled to all of the same rights and remedies that the insured party would have against the party responsible for the loss. 

In other words, subrogation allows the insurance carrier to “step into the shoes” of the insured and pursue the responsible party for the amount of insurance proceeds allocated and paid to compensate the policy holder for the covered loss.  The agreement of each party to prohibit its insurance carriers from pursuing the other party through subrogation furthers the objective of allocating risk to the insurers.  This protects the parties from liability related to covered claims.  Of note, mutual waiver of subrogation provisions in a commercial lease will often include a condition stating that the waiver will apply “unless such insurance is invalidated thereby”.  Landlords and tenants should be wary of such language as it could undermine the parties’ intent in including a mutual waiver of subrogation in their lease agreement.

The property insurance, mutual release, and mutual waiver of subrogation in a commercial lease are nuanced provisions requiring a thorough review by an attorney experienced with commercial real estate transactions. When drafted properly, these provisions provide for an appropriate allocation of risk among the parties and their respective insurance carriers.

Please Note: This document does not constitute legal advice. Please consult an attorney for legal advice on what to do in a particular situation.


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