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.