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The Rogak Report: 02 Feb 2005 ** Subrogation -- Lease Waivers **

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  • Lawrence Rogak
    WAIVER OF LIABILITY AND ASSUMPTION OF RISK BY INSURED BAR INSURER S SUBROGATION LAWSUIT Industrial Risk Insurers v. The Port Authority of New York and New
    Message 1 of 1 , Feb 2 2:32 PM
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      WAIVER OF LIABILITY AND ASSUMPTION OF RISK BY INSURED BAR INSURER'S
      SUBROGATION LAWSUIT

      Industrial Risk Insurers v. The Port Authority of New York and New
      Jersey, NYLJ 2/02/05 (USDC - SDNY) (Hellerstein, j.)

      The fires of September 11, 2001 brought down not only the Twin Towers
      of the World Trade Center, buildings One and Two, but building Seven
      as well, an adjacent 47-story office tower. The terrorists flew the
      airplanes they hijacked directly into buildings One and Two, and the
      resulting fires caused them to collapse. Chunks of the collapsing
      buildings fell onto Seven, causing the fires to spread to that
      building, where they created another inferno, causing a collapse also
      of that building.

      The plaintiff, Industrial Risk Insurers, insured the lessee of Seven
      World Trade Center, Silverstein Properties Inc. Claiming rights as a
      subrogee to the extent of its payments to Silverstein, IRI sued the
      parties whose fault, it alleges, contributed to, or proximately
      caused, the collapse of 7WTC. IRI sued the airlines, the airport
      security companies, and the airplane manufacturer for allowing the
      terrorists to board and hijack the airplanes. And IRI sued the Port
      Authority of New York and New Jersey, the owner of 7WTC, and
      Citigroup Inc. and Citigroup Global Market Holdings Inc., the
      sublessee from Silverstein of portions of floors one through five,
      and of floors 28 through 47 of 7WTC, for gross negligence in
      maintaining, or allowing Citigroup to maintain, large stocks of
      diesel fuel in 7 WTC that intensified the fires that engulfed
      building number seven and made them impossible to extinguish.

      IRI's action against the airlines, the airport security companies,
      and the airplane manufacture will be progressing on a separate track,
      with other property claims arising from the terrorist-related
      aircraft crashes of September 11, 2001. The other defendants in this
      case, The Port Authority and Citigroup, moved to dismiss the
      complaint against them for failing to state a legally sufficient
      claim for relief. This Opinion treats the motion of Citigroup.

      The Court held that the covenants of Citigroup's lease with
      Silverstein and IRI's insurance agreement of Silverstein bar IRI from
      proceeding as Silverstein's subrogee against Citigroup. Accordingly,
      IRI's complaint against Citigroup, Inc. and Citigroup Global Markets
      Holdings, Inc. was dismissed.

      IRI alleges that Silverstein acquired the land and air space rights
      to 7WTC in 1980 from the Port Authority and, in 1987, constructed a
      47-story office tower. Salomon Inc. (later acquired by Citigroup)
      leased floors 28-47 and portions of floors 1-5, largely to operate a
      trading floor and sustain its trading operations, and built a
      pressurized diesel fuel system and nine high powered emergency
      generators, served by two 6,000 gallon fuel tanks and piping always
      filled with fuel, to ensure that a power outage would not interrupt
      its trading activities. IRI alleged that Citigroup "designed,
      constructed, installed and used an emergency generator system that
      utilized an unreasonable amount of diesel fuel and that continuously
      pumped that fuel unreasonably close to critical structural supports
      in the building without proper safeguards," and that the Port
      Authority had design control and allowed the construction in
      violation of City ordinances, that the fuel tanks contributed to the
      intensity of the fires and inability to bring them under control and
      proximately caused the collapse of 7WTC in the afternoon of 9/11, and
      that both Citigroup and the Port Authority were guilty of gross
      negligence with respect to that design.

      The complaint cited a report of the United States Emergency
      Management Agency, "World Trade Center, Building Performance Study,"
      finding that the building collapsed due to the failure of critical,
      non-redundant transfer trusses that were subjected to significant and
      prolonged fire heating fed by the diesel fuel stored in the tanks in
      the building. IRI alleges that its loss exceeded $75 million.

      The lease agreement between Silverstein and Salomon Inc. provided
      specifically for Salomon's emergency generator system, with its two
      6,000 gallon, diesel fuel tanks. Annexes to the lease described the
      design of the system, and subjected it to approvals of engineers of
      both Silverstein and the Port Authority. The parties also mutually
      released one another from liability. And, the parties involved the
      insurer, IRI, with regard to such risks, and negotiated provisions
      that allocated the risk of loss to IRI.

      The lease agreement gave Salomon the "exclusive right to install on
      the fifth floor . . . up to eleven 1750 KVA diesel emergency power
      generators . . . ," and promised to "facilitate Tenant's exclusive
      access to emergency power generator diesel fuel capacity of not less
      than 12,000 gallons . . . ." Silverstein retained the right, within a
      ten-day period after submission of detailed plans, to disapprov[e]
      such Alterations." Lease ยง14.03(c)(i). One stated ground for
      withholding approval was the potential for the alteration
      to "jeopardize the structural integrity of the Building." Id.
      Furthermore, the installation and placement of the fuel risers and
      fuel lines were to be made "subject to the Landlord's approval." The
      plans for alterations were to be reviewed by
      Silverstein's "architects, engineers or other consultants" and the
      lease required Salomon to reimburse Silverstein for the costs of such
      review.

      "In view of the intimacy they acquired with respect to the emergency
      generator and fuel tank system, the parties mutually released each
      other to the extent each was insured under a policy containing
      permission to grant such release."

      Section 12.06(d) of the lease provided:

      "Each party hereby releases the other party with respect to any claim
      (including a claim for negligence) which it might otherwise have
      against the other party for loss, damage, or destruction with respect
      to its real or personal property . . . occurring . . . with respect
      and to the extent to which it is insured under a policy or policies
      containing . . . permission to release liability."

      This policy issued by IRI explicitly recognized this right of
      release. The insurance agreement provided, "[t]his insurance shall
      not be invalidated should the Insured waive by express agreement
      prior to a loss any or all right of recovery against any party for
      loss or damage insured against by this policy." And, further to
      enhance this provision, Salomon and Silverstein agreed in their lease
      to require their insurers to waive subrogation rights against the
      other:

      "Landlord and Tenant shall each include in its insurance policies
      covering loss, damage or destruction by fire or other such peril in
      respect of the Building . . . an express agreement that such policy
      shall not be invalidated if the insured waives before the casualty
      the right of recovery against any party responsible for a casualty
      covered by such policy . . . . "

      IRI's insurance agreement with Silverstein expressly recognized the
      release and waiver-of-subrogation clauses of the Salomon/Silverstein
      lease. Section IV.C provided:

      This insurance shall not be invalidated should the Insured waive by
      express agreement prior to any loss any or all right of recovery
      against any party for loss or damage insured against by this policy.

      Citigroup moved to dismiss based on these provisions of the
      Silverstein lease and insurance agreements.

      As subrogee, held the Court, IRI has only the same claims that
      Silverstein could make. Thus, if Silverstein and Citigroup each have
      released the other, IRI's claim must be dismissed if Silverstein's
      claim against Citigroup would be released.

      The Silverstein-Citigroup lease agreement provides that "[e]ach party
      hereby releases the other party with respect to any claim (including
      a claim for negligence) which it might otherwise have against the
      other party for loss, damage, or destruction with respect to its real
      or personal property."

      IRI argued that it would be against New York's public policy to apply
      the release clause of the lease to claims of gross negligence. The
      New York Court of Appeals has held that releases of claims for gross
      negligence are unenforceable, though the party seeking to enforce the
      agreement will have to meet a particularly high standard of gross
      negligence. IRI alleged that Citigroup was grossly negligent in
      locating two 6,000 gallon tanks filled with diesel fuel close to
      critical support elements of 7WTC, and that the collapse of the
      building proximately resulted from the feeding of the fires emanating
      from buildings One and Two by the diesel fuel in the 7WTC tanks.

      The New York rule for the permissibility of waivers of liability is
      often stated in quite general terms. "To the extent that agreements
      purport to grant exemption for liability for willful or grossly
      negligent acts they have been viewed as wholly void." However, the
      limitations on this rule are "readily apparent."

      Ordinary mistakes or miscalculations in performing a task will not
      meet this standard. For example, the New York Court of Appeals has
      held that an expert opinion that the defendant alarm company should
      have installed additional motion detectors and a shock sensor failed
      to raise an issue of fact regarding gross negligence. David Gutter
      Furs v. Jewelers Protection Servs., Ltd., 79 N.Y.2d 1027, 1029, 594
      N.E.2d 924, 924, 584 N.Y.S.2d 430(1992).

      The purpose of excepting claims of gross negligence from the rule
      permitting the release of claims for negligence, is to ensure that
      parties will have legal recourse for injuries from particularly
      malicious behavior. The rule exists to protect parties in positions
      of weaker bargaining power from unknowingly agreeing in advance to
      allow the other party to recklessly disregard its rights in broad and
      unforeseeable ways. However, parties, especially those of equal
      bargaining power, should be able to rely upon the general New York
      rule that enforces contracts for the release of claims of
      liability. "If a party needs only to add gross negligence as a theory
      of liability to force litigation to proceed through discovery and a
      trial, contracting parties would be stripped of the substantial
      benefit of their bargain, that is, avoiding the expense of lengthy
      litigation."

      Accordingly, held the Court, "IRI has not stated a claim for gross
      negligence" and thus the contractual waivers of liability are valid.

      IRI's tort claim also failed "because, under New York law,
      Silverstein assumed the risk of the injury and Citigroup thus does
      not owe Silverstein a duty of care."

      IRI, as Silverstein's subrogree, derived its right to make claim from
      Silverstein; it succeeded to Silverstein's rights and interests and
      to Silverstein's disabilities. "Since Silverstein's lease agreement
      with Citigroup makes it clear that Silverstein knew about and
      accepted the risks posed by Citigroup's emergency generator and
      diesel fuel system, Silverstein must be considered to have assumed
      the risks presented by that system."

      The lease gave Silverstein the right to have its architect, engineers
      and technical consultants review Salomon's system. If, in the opinion
      of Silverstein's experts and advisors, the system might "jeopardize
      the structural integrity of the Building," Silverstein had the right
      to disapprove the system. Salomon was required to reimburse
      Silverstein for the costs of Silverstein's review.

      "Clearly, Silverstein was intimately involved with the design and
      implementation of the emergency backup generator system. The parties
      made their business decisions in light of Salomon's need for such a
      system, Silverstein's review of its feasibility and safety, and the
      commercial reflection of the parties' interests in the rental and
      other commercial terms and conditions of the lease."

      "It is clear," held the Court, that Silverstein entirely "encountered
      the risks presented by Citigroup's emergency generator and diesel
      fuel tanks system. The many clauses of the lease fully describing the
      system, Silverstein's reservation of right to examine the system
      using his technical experts and consultants and taking due regard for
      its size, capacity, and placement within 7WTC, and Silverstein's
      right to disapprove the system proposed by Citigroup for its
      potential to 'jeopardize the structural integrity of the Building,'
      make clear how thoroughly Silverstein 'encountered' the risks of the
      diesel fuel system, and had 'full understanding of the possible harm'
      it posed to the building. When a party estimates the risks it
      encounters, it is not necessary that the consenting party foresee the
      exact manner in which the injury would occur so long as it was aware
      of the mechanism from which the injury arose."

      Silverstein was thus not required to foresee the exact chain of
      events, or the extraordinary circumstances of the terrorist related
      aircraft crashes. Silverstein's intimate acquaintance with
      Citigroup's emergency generator and diesel fuel system, its right
      through experts and consultants thoroughly to review that system, and
      its right to disapprove the system for its potential to "jeopardize
      the structural integrity of the building," constituted an assumption
      of risk "in the context of the risks inherent in the act which
      plaintiff engaged in."

      The doctrine of assumption of risk, is not limited, as IRI argued, to
      participants in sporting events.

      Accordingly, "IRI is barred from suing Citigroup because its
      subrogee, Silverstein, assumed the risks posed by Citigroup's
      emergency generator and diesel fuel tank system."

      Finally, Silverstein waived subrogation rights in his lease and IRI's
      policy consented to the waiver. The reasoning behind permitting
      insurers to waive subrogation rights evinces a different public
      policy than the reasoning prohibiting insureds to release claims
      against them for gross negligence. Waivers of subrogation are not
      seen as an instrument for the mutual release of claims. Rather,
      subrogation waivers "reflect the parties' intention to look first to
      their insurers for recovery of losses." In such situations, "the
      mutual agreement to procure insurance ensures that the injured party
      will have a source of recovery. That policy would be defeated if one
      party could simply pass along the costs to its insured."

      Accordingly, held the Court, "IRI must be held to the covenant it
      gave Silverstein when it issued its insurance policy, that it would
      indemnify Silverstein against loss and not look to any subrogation
      rights against Silverstein's tenant."

      IRI's complaint against Citigroup was dismissed with prejudice.

      Larry Rogak
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