Most property occupiers think that if a particular risk is insured against, they can rest easy: but can they?
Subrogation is the right of an insurer to take over any legal rights that a policy holder may have so that the insurer can recover its losses.
To illustrate the subrogation concept in practice:
L = a landlord of a building.
T = an existing tenant under a lease of part of the building.
U = a proposed undertenant of T who intends to undertake a fit-out.
L’s building is insured for the usual occupied property risks. U’s negligent fit-out contractor causes L’s building to be destroyed. L’s insurer, I, agrees to pay out under the insurance policy to L. I then decides to see whether it can recoup its losses by making a claim against anyone else.
Under T’s lease with L there is an indemnity clause whereby T agrees to indemnify L against any expenses, costs, claims or damages of whatsoever nature incurred by L caused by T, its undertenants, contractors, or agents.
I, applying the principle of subrogation, decides to enforce L’s rights under the indemnity clause against T to recoup its losses. T is then liable to I to the extent of I’s losses.
T may benefit from an indemnity provision in U’s underlease in similar terms to the indemnity clause in its lease with L. However, T may not be able to recover the extent of its losses from U: it will depend on whether U (or its contractor) carried the necessary insurance.
What is the moral of this story?
Occupiers of property should try to ensure that when they take a lease of premises, the lease specifies that the landlord is required to procure that the landlord’s insurer waives its rights of subrogation against occupiers of the building.
If that is unsuccessful the occupier could try to negotiate with the landlord to delete provisions in the lease such as indemnity clauses. If the landlord does not have a right against the occupier then the landlord’s insurer cannot pursue a claim against the occupier.
The occupier may also consider arranging a stand alone insurance policy to cover the risk of subrogation exposure.