The Rogak Report: 02 Feb 2005 ** Subrogation -- Lease Waivers **
- WAIVER OF LIABILITY AND ASSUMPTION OF RISK BY INSURED BAR INSURER'S
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 §14.03(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
"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
"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
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.