Federal Court Finds Waiver of Subrogation By Tenants In Residential Lease Unenforceable
by
Craig S. Provorny on Mar. 31, 2017
Real Estate Landlord-Tenant Business Insurance
Summary: In Allstate New Jersey Insurance Company v. Avalon Bay Communities, the District Court of New Jersey ruled that a waiver of subrogation by tenants in a residential lease was unenforceable because it contravened public policy and was vague and ambiguous.
Federal
Court Finds Waiver of Subrogation By Tenants In Residential Lease Unenforceable
In Allstate New Jersey Insurance Company v. Avalon Bay Communities, the District Court of New Jersey ruled
that a waiver of subrogation by tenants in a residential lease was
unenforceable because it contravened public policy and was vague and ambiguous.
In September 2016, Allstate
filed a subrogation action against Avalon after Allstate indemnified its
insured tenants for property damages caused by a fire at Avalon’s apartment
complex in Edgewater, New Jersey. The
complaint alleges that Avalon’s negligence caused the fire, which destroyed the
entire apartment property, and seeks to recover damages totaling over $700,000. Avalon moved to dismiss the complaint on the
grounds that the insured waived their subrogation rights against Avalon in
their lease agreements. Avalon argued
that because Allstate stands in the position of the insured, it is bound to the
subrogation waiver. Allstate responded
that the subrogation waiver in Avalon’s residential leases is unenforceable.
The Court recognized that
parties to a contract may agree to waive the right of subrogation, however, the
validity of the waiver “depends on the contracting parties having a meaningful
choice in how to distribute liability.”
The Court found that there was no evidence that such a choice was
afforded to the insured tenants as Avalon’s residential leases were presented
on a “take-it-or-leave-it” basis. Avalon’s
leases consisted of a standardized printed form and were non-negotiable on the
majority of the provisions, including the subrogation waiver. Moreover, the subrogation waiver in the
leases was submerged in an unconventional and obscured format, which the Court
found troubling given the likelihood unsophisticated tenants may not know what
subrogation means. In addition, the
waiver of subrogation was completely one-sided, unlike valid, mutual
subrogation waivers often found in commercial leases. Public policy considerations, including concerns
that tenant subrogation waivers may lead to decreased standards of care by
landlords and increased insurance costs for tenants, also militated toward
finding the waiver of subrogation in Avalon’s leases unenforceable.