ABRAHAM M. KRAMER v. FOKIS, INC., d/b/a MIDTOWN DINER

 

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-5833-05T55833-05T5

ABRAHAM M. KRAMER, by PUBLIC

SERVICE MUTUAL, as Subrogee,

Plaintiff-Appellant,

v.

FOKIS, INC., d/b/a MIDTOWN DINER,

Defendant-Respondent.

_______________________________________

 

Argued April 18, 2007 - Decided May 21, 2007

Before Judges Stern, Collester and Lyons.

On appeal from the Superior Court of New Jersey, Law Division, Hudson County, Docket No. L-2107-05.

David Lustbader argued the cause for appellant.

Stephen R. Katzman argued the cause for respondent (Methfessel & Werbel, attorneys; Mr. Katzman, on the brief).

PER CURIAM

Plaintiff, Public Service Mutual, as insurer and subrogee of landlord, Remark Realty Associates ("Remark"), sued defendant, tenant, Fokis, Inc. ("Fokis"), for losses arising out of a fire on leased premises. Plaintiff appeals from a summary judgment dismissing the action, following defendant's motion, in which it argued that a waiver of subrogation paragraph in the lease barred plaintiff's recovery. Because we find the waiver of subrogation in the lease bars recovery, we affirm.

The following factual and procedural history is relevant to our consideration of the issues advanced on appeal. On April 4, 2003, a fire occurred at a building located on 538 Washington Street, Hoboken. The building was owned by Remark and leased to Fokis. The lease was dated January 7, 2000, and was subsequently modified to extend the term through October 31, 2007. Paragraph 8 of the lease is entitled "Insurance Indemnity." Pursuant to paragraph 8.1,

[t]enant shall, at Tenant's expense, obtain and keep in force during the term of this Lease for the benefit of Landlord, a policy of Bodily Injury and Property Damage insurance insuring Landlord and Tenant against any liability arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto.

Paragraph 8.3 of the lease reads as follows:

Waiver of Subrogation. Tenant and Landlord each hereby release and relieve the other and waive their entire right of recovery against the other for loss or damage arising out of or incident to the perils insured against under this Lease, which perils occur in, on or about the Premises, whether due to the negligence of the Landlord or Tenant or their agents, employees, contractors and/or invitees. Tenant shall, upon obtaining the policies of insurance required hereunder, give notice to the insurance carrier or carriers that the foregoing mutual waiver of subrogation is contained in this Lease.

Pursuant to these lease terms, tenant obtained a businessowners policy from the Cumberland Mutual Fire Insurance Company. Tenant is the named insured under that policy, and by way of an endorsement, landlord was made an additional insured with respect to Part II of the policy. Part IIB, Paragraph 2A extends coverage to include tenant's liability to pay any property damage arising out of the tenant's expressed assumption of the liability of another under a lease agreement. That coverage (Part IIA Coverage E) provides payment for all sums that the tenant would be legally obligated to pay as damages because of property damage that occurs during the policy term. "Property damage" includes fire damage in Part IC of the policy, and the declaration sheet shows a $1,000,000 limit of liability for coverage for this contractual liability insurance. This amount satisfies the requirements set forth in Paragraph 8.1 of the lease. Hence, tenant obtained the appropriate amount and type of coverage required under the lease, which coverage included fire loss.

Landlord obtained an insurance policy from Public Service Mutual Insurance Company, subrogee in this action. Section I on page 2 of the Public Service Insurance form states:

TRANSFER OF RIGHTS OF RECOVERY AGAINST OTHERS TO US. If any person or organization to or for whom we make payment under this Coverage Part has rights to recover damages from another, those rights are transferred to us to the extent of our payment. That person or organization must do everything necessary to secure our rights and must do nothing after loss to impair them. But you may waive your rights against another party in writing: 1. Prior to a loss to your Covered Property or Covered Income . . . This will not restrict your insurance.

Following the fire, plaintiff settled the fire loss claim with landlord for $989,206.82. A subrogation release was signed by landlord which release also assigned any subrogation rights to Public Service in exchange for the settlement amount.

On April 22, 2005, therefore, plaintiff filed the present subrogation action against defendant. Plaintiff has amended its complaint twice. The second amended complaint has three counts; one sounding in negligence, the second in gross negligence and the third in breach of contract.

On January 11, 2006, defendant filed a motion for summary judgment based upon the waiver of subrogation provision contained in Paragraph 8.3 of the lease. In an order dated June 6, 2006, Judge Joseph Charles, after placing his oral decision on the record, granted defendant's motion. This appeal ensued.

On appeal, plaintiff presents the following arguments for our consideration:

POINT I

DOES THE "WAIVER OF SUBROGATION" CLAUSE THAT BARS NEGLIGENCE ALSO BAR GROSS NEGLIGENCE AND BREACH OF CONTRACT, EVEN THOUGH IT DOES NOT SAY SO?

POINT II

THE PLAINTIFF LANDLORD MAY SIGN A SUBROGATION ASSIGNMENT TO ITS INSURANCE COMPANY.

POINT III

PLAINTIFF PUBLIC SERVICE MUTUAL HAS STANDING TO BRING AN ACTION FOR BREACH OF CONTRACT UNDER THE LEASE ON BEHALF OF ITS INSURED TO WHOM IT MADE FIRST-PARTY PAYMENTS.

The Supreme Court has recently reviewed the backdrop against which an appellate analysis of contractual issues is had. It stated:

[a]s a general rule, courts should enforce contracts as the parties intended. Henchy v. City of Absecon, 148 F. Supp. 2d 425, 439 (D.N.J. 201); Kampf v. Franklin Life Ins. Co., 33 N.J. 36, 43 (1960). Similarly, it is a basic rule of contractual interpretation that a court must discern and implement the common intention of the parties. Tessmar v. Grosner, 23 N.J. 193, 201 (1957). The court's role is to consider what is written in the context of the circumstances at the time of the drafting and to apply a rational meaning in keeping with the "expressed general purpose." Northern Airlines, Inc. v. Schwimmer, 12 N.J. 293, 302 (1953); accord Dontzin v. Myer, 301 N.J. Super. 501, 507 (App. Div. 1997).

[Pacifico v. Pacifico, _____ N.J. _____, _____ (2007) (slip op. at 16-17).]

It is incumbent on us, therefore, to review the language of the lease in the context of the circumstances at the time of execution and to apply a rational meaning in keeping with the contractual provisions' expressed general purpose. In SAIF v. Fama Constr. Co., we discussed mutual waiver of subrogation clauses, such as that set forth in paragraph 8.3 of the lease, and noted that:

[t]he purpose behind a mutual waiver of subrogation is to assure that, to the extent any loss is covered by a policy, the insurer should bear the risk of loss, regardless of any fault on the part of one or both of the parties. Another purpose is to prevent a potential windfall to the insurer subrogated to the rights of the insured against the other parties to the contract. Because the insurer presumably has considered the risk of loss in establishing its premiums, the insurer should not have the ability to recoup that loss by subrogation against the other parties allegedly causing the loss.

[ 353 N.J. Super. 131, 140 (Law. Div. 2001), aff'd, 353 N.J. Super. 1 (App. Div. 2002).]

In that case, the judge also pointed out that "[t]here has been no hesitancy in upholding and enforcing the waiver provisions in both federal and state courts throughout the United States". Ibid.

The initial attempt in determining the meaning of a contractual provision is to review its plain language. Paragraph 8.3 provides that the landlord and tenant mutually release and relieve each other and waive their entire right of recovery against the other for certain losses and damages. The losses and damages addressed are those "arising out of or incident to the perils insured against under this Lease." The perils insured against under the lease are those outlined earlier in Paragraph 8.1 and are bodily injury and property damage claims that arise out of the ownership, use, occupancy or maintenance of the premises. Property damage claims clearly include those arising out of fire. Paragraph 8.3 then modifies these "perils insured against" to require that the perils occur in or about the premises and by way of emphasis and clarity, the language goes on to say "whether due to the negligence of landlord or tenant or their agents, employees, contractors and/or invitees".

It is this last clause which the plaintiff interprets to mean that only damages due to ordinary negligence claims are mutually waived. That analysis, however, does not comport with either a plain reading of the paragraph nor the purpose for which mutual waivers of subrogation are exchanged between commercial business persons. The losses or damages for which the parties mutually waive their claims are for those arising out the "perils insured against" under the lease. One of the perils insured against is fire and the appropriate insurance policies were in place. The clause, "whether due to negligence of landlord or tenant" explains, clarifies, and emphasizes that even if negligence is involved, there is a waiver. The clause does not limit the exchange of releases to solely those arising from simple negligence. If that were the intention of the drafter, he or she would have deleted the word "whether" altogether. The word "whether," which introduces the clause on which the plaintiff relies, is meant to introduce an alternative. See Webster's New World Collegiate Dictionary 1629 (4th ed. 2001). That usual definition of the word "whether" would have the clause read "whether or not due to the negligence of landlord or tenant." This interpretation supports the point that the clause is one of emphasis and clarity and not a limited exculpation clause as to losses arising from simple negligence only.

Rather than the cause of action defining the type of loss or damage for which the waiver is given, paragraph 8.3 makes it clear that it is the type of peril insured against under the lease that limits the loss or damage for which the waiver has been given. In this case, there is no question that fire is one of the perils that was insured against under the lease and the waiver of subrogation, therefore, released landlord and tenant and placed the obligation to pay for such damage on an insurer. This is consistent with the usual business purpose of such a clause. See SAIF, supra.

Accordingly, we read Paragraph 8.3 to provide that landlord and tenant release and relieve each other and waive their right of recovery against each other for loss or damage arising out of a fire which occurred on the premises whether or not due to the negligence of the landlord or tenant or their agents, employees, contractors and/or invitees.

Plaintiff, of course, is correct that the landlord may execute a subrogation assignment to its insurer. See Standard Acc. Ins. Co. v. Pellecchia, 15 N.J. 162 (1954). However, where the subrogor has waived subrogation rights, the subrogee's rights are similarly impaired. See Continental Ins. Co. v. Boraie, 288 N.J. Super. 347 (Law Div. 1995). Moreover, in the instant matter, plaintiff insurer's policy provides in Section I that its insured, in this case, landlord, may waive rights against another party without restricting its insurance, if done prior to the loss. This is exactly what happened here. Therefore, while landlord may subrogate any claim it has to its insurer, it assigned claims which have been waived and the insurer is bound by such waiver.

In light of our earlier discussion, plaintiff's last point that it has standing to bring a breach of contract action is without merit, for it is the "perils insured against," which defines what claims are waived under the lease. As the loss or damage in the breach of contract claim arose out of a fire on the premises, and the parties waived claims arising out of such a peril, the parties' right to recovery from the other for such a claim is waived. We note further that any argument that landlord has that it may still have a claim against an individual agent or employee of tenant, also fails. See Mayfair Fabrics v. Henley, 101 N.J. Super. 363 (Law Div. 1968).

Accordingly, the judgment is affirmed.

 

Plaintiff also filed a motion to amend its complaint to allege a claim against defendant's employee. The court denied the motion finding that, "no basis has been established by plaintiff for imposing personal liability."

While defendant raised that Kramer could not assign the right of subrogation because he was not the owner, we note that he is the managing partner of the L.L.C. and, in that capacity, can assign it on behalf of the business organization.

(continued)

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A-5833-05T5

May 21, 2007