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LIG Insurance Co., Ltd. v. Bonanno Real Estate Group II, L.P.

Superior Court of New Jersey, Appellate Division

July 3, 2013

LIG INSURANCE CO., LTD. a/s/o TRIPLE SEVEN, INC., Plaintiff-Appellant,
BONANNO REAL ESTATE GROUP II, L.P., Defendant-Respondent.


Argued April 15, 2013

On appeal from Superior Court of New Jersey, Law Division, Bergen County, Docket No. L-9821-11.

Fran J. Garb argued the cause for appellant (Law Office of Fran J. Garb, attorney; Ms. Garb, on the brief).

Jeffrey W. Mazzola argued the cause for defendant (Law Offices of William E. Staehle, attorney; Mr. Mazzola, on the brief).

Before Judges Graves and Ashrafi.


Plaintiff LIG Insurance Co. appeals from dismissal of its subrogation action arising out of payments it made to its insured, Triple Seven, Inc., for water damage to its inventory. LIG claims that the negligent failure of defendant-landlord Bonanno Real Estate Group II, L.P., to repair a public bathroom above Triple Seven's commercial premises was the cause of the damages. The Law Division dismissed the subrogation action on the ground that the terms of the lease between Bonanno and Triple Seven bar recovery for such damages. The lease expressly required that each party obtain its own insurance coverage for property damage, without the right of subrogation, and it waived all such claims between the lessor and lessee. We agree with the Law Division's understanding of the lease and affirm its judgment dismissing LIG's complaint.

Because judgment was entered pursuant to Rule 4:6-2(e), before any discovery was conducted in the litigation, we accept as true all the factual allegations contained in LIG's complaint and all reasonable inferences that can be drawn from those facts. Banco Popular N. Am. v. Gandi, 184 N.J. 161, 165 (2005); Printing Mart-Morristown v. Sharp Elecs. Corp., 116 N.J. 739, 746 (1989). We also derive the relevant facts from documents that were presented to the Law Division on the motion to dismiss and not excluded by the court, thus treating the motion as one for summary judgment under Rule 4:46.

At a time when Triple Seven was known as 2000 Import and Export International, Inc., it entered into a lease with Bonanno to rent commercial premises on the ground floor at 1050 Slocum Avenue in Ridgefield, New Jersey. On February 3, 2008, a water leak in an upstairs bathroom caused damage to Triple Seven's inventory, and consequently its business operations. LIG had provided an insurance policy to Triple Seven that covered such property and consequential damages, and it paid more than $150, 000 on Triple Seven's claim. LIG then brought this action to recover from Bonanno the amount it paid to Triple Seven.

In the first count of its complaint, LIG alleged that Bonanno's negligent repair of the bathroom had caused the leak and the damages. The second count alleged that the same conduct also constituted a breach of the covenant of quiet enjoyment included in the lease between Bonanno and Triple Seven. Under the lease, Bonanno was responsible for the repair of "Common Facilities, " which include the leaky bathroom. According to LIG's complaint, Triple Seven repeatedly informed Bonanno that the bathroom was in need of repair, the last of the complaints occurring by telephone on January 31, 2008, just a few days before the water leak that damaged Triple Seven's inventory.

In lieu of an answer to LIG's complaint, Bonanno moved to dismiss the complaint based on sections 10 and 30 of the lease. Section 10 provides in relevant part:


Except as provided in Section 5 hereof, [1]notwithstanding the provisions of this Section or any other provision of this Lease, in the event of any loss or damage to the Building, the Premises and/or any contents (herein "property damage"), each party waives all claims against the other for any such loss or damage and each party shall look only to any insurance which it has obtained to protect against such loss (or in the case of Lessee [Triple Seven], waives all claims against any tenant of the Building that has similarly waived claims against such Lessee) and each party shall obtain, for each policy of such insurance, provisions waiving any claims against the other party (and against any other tenant(s) in the Building that has waived subrogation against the Lessee) for loss or damage within the scope of such insurance.

Similarly, Section 30 provides in relevant part:


Lessee [Triple Seven] represents, said representation being specifically designed to induce the Lessor [Bonanno] to execute this Lease, that Lessee shall insure its business against interruption and its improvements, alterations, personal property and fixtures and any other items which Lessee may bring to the Demised Premises or which may be under Lessee's care, custody and control which may be subject to any claim for damages or destruction, which property value shall never exceed the amount of insurance which Lessee is required to carry pursuant to this Lease. . . . Should Lessee fail to do so, or fail to maintain insurance coverage adequate to cover the aforesaid, then Lessee shall be in default hereunder and shall be deemed to have breached its covenants as set forth herein.
Each such insurance policy carried by Lessor and each such insurance policy carried by Lessee insuring the Demised Premises, its business against interruption, and its fixtures and contents against loss by fire, water and causes covered by standard extended coverage or all risks endorsement insurance, shall be written in a manner so as to provide that the insurance company waives all right of recovery by way of subrogation against Lessor or Lessee in connection with any loss or damage covered by such policies. Neither party shall be liable to the other for any loss or damage caused by fire, water or any of the risks enumerated in standard extended coverage insurance or all risks endorsement insurance, provided such insurance was obtainable at the time of such loss or damage.

Finally, Section 37, which neither party cites or relies upon, reads:


Lessor shall not be liable to Lessee for any loss suffered by Lessee under any circumstances, however occurring, but this exculpatory provision shall not preclude Lessee's remedies as specifically provided for in Section 21 with respect to interruption of services or use.

Bonanno points to the quoted provisions of the lease as mandating dismissal of LIG's complaint. It argues that each party agreed to waive all property damage claims against the other, and each party also agreed to obtain insurance policies in which the insurer waived its right to subrogation for claims within the scope of insurance coverage. Bonanno asserts that, because the insurer cannot subrogate to rights greater than its insured, the lease precludes LIG's action.

LIG argues on appeal that summary judgment should have been denied because there is a factual dispute as to whether the waiver of "all claims" by the lease includes claims arising from the other party's negligence, and also whether the water leak is attributable to Bonanno's failure to make proper repairs of a common facility, thus amounting to a breach of the lease. By written opinion, the Law Division concluded that the waiver and insurance clauses apply to the claim for property damage at issue here. We agree.

Subrogation is defined as the "principle under which an insurer that has paid a loss under an insurance policy is entitled to all the rights and remedies belonging to the insured against a third party with respect to any loss covered by the policy." Black's Law Dictionary 1440 (7th ed. 1999). The right of subrogation may arise by operation of law or by contract. Perreira v. Rediger, 169 N.J. 399, 412 (2001). Thus, an insurer who indemnifies its insured for a loss caused by a third party is subrogated to whatever rights the insured may have had against the third party. Standard Accident Ins. Co. v. Pellecchia, 15 N.J. 162, 171 (1954).

The right to subrogation is not absolute, and parties may agree to waive or limit it. This is a necessary corollary to the principle that the insured is subrogated only to those rights the insured could have claimed. See, e.g., Sullivan v. Naiman, 130 N.J.L. 278, 280 (Sup. Ct. 1943). A third party may assert any defenses against the insurer that it would have had against the insured, including that any claim for recovery was waived by contract. See Culver v. Ins. Co. of N. Am., 115 N.J. 451, 456 (1989) ("[S]ubrogation 'is not applicable where its enforcement would be inconsistent with the terms of a contract or when the contract, either expressly or by implication, forbids its application.'" (quoting Ganger v. Moffet, 8 N.J. 73, 80 (1951))); Standard Accident Ins., supra, 15 N.J. at 172-73 (insurer takes insured's rights "subject to all legal and equitable defenses"); Skulskie v. Ceponis, 404 N.J.Super. 510, 513 (App. Div. 2009) (right of subrogation may be "waived or limited by agreement").

Bonanno's primary argument is that Triple Seven gave up its right to sue for Bonanno's allegedly negligent failure to repair the public bathroom, and it simultaneously extinguished any future right of subrogation on the part of LIG. LIG argues that the waiver of "all claims" should be read not to bar suit against Bonanno for harm caused by its own negligent acts or by breach of its obligations under the lease.

Exculpatory agreements in commercial leases, including ones that release a party from the consequences of its own negligence, are generally applied as written because they do not involve the inequities in bargaining power often associated with residential lease agreements. Mayfair Fabrics v. Henley, 48 N.J. 483, 488 (1967); Chem. Bank of N.J. Nat'l Ass'n v. Bailey, 296 N.J.Super. 515, 527-28 (App. Div.), certif. denied, 150 N.J. 28 (1997).[2] By enforcing the agreement the parties made, the court facilitates the ability of businesspeople to allocate risk between themselves in a way that is privately and socially beneficial. Swisscraft Novelty Co. v. Alad Realty Corp., 113 N.J.Super. 416, 422 (App. Div. 1971).

While courts will generally enforce exculpatory clauses in commercial agreements, they are disfavored and will be strictly construed. Marcinczyk v. N.J. Police Training Comm'n, 203 N.J. 586, 593 (2010); Abel Holding Co. v. Am. Dist. Tel. Co., 138 N.J.Super. 137, 146 (Law Div. 1975), aff'd o.b., 147 N.J.Super. 263 (App. Div. 1977). Our Supreme Court stated many years ago that "an exculpatory clause should not be construed to exculpate a landlord for his negligence unless the clause expressly so states, or the intent to do so is evident from the arrangement of the parties." Carbone v. Cortlandt Realty Corp., 58 N.J. 366, 368 (1971) (citations omitted); see also Freddi-Gail, Inc. v. Royal Holding Corp., 34 N.J.Super. 142, 143-44 (App. Div. 1955) ("The strict construction . . . given to the [exculpatory] clause is in part to be laid to the disfavor with which [the common law] look[s] upon any possible attempt by a landlord to secure exoneration from his own wrongdoing."), certif. denied, 25 N.J. 56 (1957).

When the parties' agreement lacks an explicit reference to negligence in the exculpatory clause, the intent to relieve a party of liability for its negligence may be shown by an agreement that "deliberately distribute[s] the risks and designate[s] who [is] to obtain the necessary insurance." Mayfair, supra, 48 N.J. at 488. The operative question is whether the agreement indicates that the parties "so clearly allocated the risks that each party knew, or should have known, the existence of its contingent liability and was thus placed in a position where it could protect itself against such loss by adequate insurance coverage or otherwise." Swisscraft, supra, 113 N.J.Super. at 422.

LIG emphasizes that Section 10 of the lease makes no mention of negligence. Although that observation is accurate, the agreement must be read as a whole, Town of Kearny v. Discount City of Old Bridge, Inc., 205 N.J. 386, 411 (2011), including in conjunction with Section 30, the insurance provision. The latter section provides that Triple Seven was to obtain insurance sufficient to cover the value of its inventory, among other things, and that the insurance policy was to contain a waiver of the insurer's subrogation rights. Triple Seven apparently complied with the requirements of Section 30. The purpose of a mutual waiver of subrogation by the parties to the lease was to "assure that, to the extent any loss is covered by a policy, the insurer [will] bear the risk of loss, regardless of any fault on the part of one or both of the parties." School Alliance Ins. Fund v. Fama Constr. Co., 353 N.J.Super. 131');"> 353 N.J.Super. 131, 140 (Law Div. 2001) (emphasis added), aff'd o.b., 353 N.J.Super. 1 (App. Div. 2002). This purpose is inconsistent with LIG's contention that the lease preserved Bonanno's liability for its own negligence.

In Mayfair, supra, 48 N.J. 483, the Supreme Court encountered a clause that, although not explicit on the subject of negligence, provided sufficient detail to indicate the intent of the parties to exculpate the landlord. There, the relevant clause provided:

It is mutually agreed that the landlords will insure the building against fire and the tenant agrees to carry fire insurance upon all equipment and personal property used, placed or stored in, on or near the leased premises and in no event shall the landlord be responsible or liable for loss or damage to the tenant's property by fire, explosion or otherwise.

When fire damaged the tenant's property as a result of the landlord's negligence, the tenant recovered under the insurance it had procured, and then sued the landlord. Id . at 486. Although the quoted clause did not mention negligence, the Court stated that there "are no required words of art" for an exculpatory clause. Id . at 489. It held that the clear intent of the parties was to allocate risk and insurance obligations between the landlord and tenant (landlord insures and is responsible for building; tenant for its equipment and personal property), and to exculpate each for its own negligence. Ibid.

Matters of contract interpretation are typically questions of law, appropriate for the court to resolve on summary judgment. E.g., Selective Ins. Co. of Am. v. Hudson E. Pain Mgmt. Osteopathic Med. & Physical Therapy, 210 N.J. 597, 605 (2012). Here, the interpretation of the lease is not contingent on the resolution of uncertain facts, thus requiring the trier of fact to resolve factual disputes before the terms of the contract can be applied. See Driscoll Constr. Co. v. N.J. Dept. of Transp., 371 N.J.Super. 304, 314 (App. Div. 2004).

Section 10 of the lease provides that "in the event of any loss or damage to . . . the Premises and/or any contents . . . each party waives all claims against the other . . . and each party shall look only to any insurance which it has obtained to protect against such loss." Similarly, Section 37 exculpates Bonanno from liability for any loss "however occurring." Although neither of these sections refers to negligence, when read in conjunction with Section 30, which required Triple Seven to maintain insurance adequate to cover its property damage and to include in such policies a waiver of the insurer's subrogation rights, the implication is clear. The parties desired to allocate the risk of loss of Triple Seven's own property to Triple Seven, and specifically provided that Triple Seven would procure insurance sufficient to cover any such loss. As in Mayfair, these provisions of the lease released Bonanno from claims of property damage suffered by Triple Seven even if Bonanno's negligence was the cause.

The Law Division correctly dismissed count one, the negligence count, of LIG's complaint.

We also conclude that Triple Seven had no claim against Bonanno, and therefore LIG has no subrogation claim, under count two of its complaint based on Bonanno's alleged breach of its covenant to make repairs to common facilities of the leased premises.

Section 5 of the lease provides that the "Lessor shall make all necessary repairs to the Common Facilities." The lease defines "Common Facilities" to include "public lavatories." Consequently, Bonanno was obligated under the lease to repair the leaky bathroom that LIG alleges caused damage to its insured's inventory. Further, LIG alleges that Triple Seven repeatedly informed Bonanno of leaks in the bathroom, including as recently as a few days before the water damage occurred.

We have stated that:

[A]n exculpatory clause should not be construed to absolve a landlord from liability arising from the landlord's breach of covenants in the lease unless that result is unavoidable. . . . [G]enerally an exculpatory clause has as its purpose the imposition of the insurable risk of personal injury or property damage loss upon the tenant which in no way attenuates the landlord's contractual covenants to repair.

Nevertheless, Bonanno's duty to repair the bathroom must be read in conjunction with the explicit provisions we have quoted requiring Triple Seven to obtain insurance coverage and waiving "all claims" for property damage against Bonanno. The purpose of sections 10, 30, and 37 of the lease, as we have stated, was to allocate the risk of loss of Triple Seven's property to Triple Seven, and to require insurance coverage without the right of subrogation for such loss.

Triple Seven maintained the right to enforce the duty undertaken by Bonanno to repair the common bathroom, including by injunctive relief and recovering the costs of such repairs if Triple Seven was compelled to undertake them itself, or perhaps a deduction from its rent obligation if the common facilities were not available for Triple Seven's use. But claims for damages to Triple Seven's inventory were waived by the terms of the lease, even if Bonanno breached a provision of the lease.

The Law Division also correctly dismissed LIG's subrogation claims based on an alleged breach of contract by Bonanno.


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