Opinion ID: 1467547
Heading Depth: 2
Heading Rank: 4

Heading: Release (Emery Associates)

Text: The parties stipulated at trial that, pursuant to the insurance policy which it carried on its personal property in inventory with The Hartford Fire & Insurance Company, Emery Waterhouse was paid by its insurer the amount of $53,388.43, which reflected payment in full of the net amount of the plaintiff's damages suffered as a result of the December 29, 1975, occurrence less salvage and policy deductible. The stipulation further admitted that its insurer has not denied coverage to Emery Waterhouse respecting the reference loss, that it made no claim of any reservation of rights and that the plaintiff and Hartford did not enter into any non-waiver agreement with regard to any disputes over claims arising from the event. The stipulation, however, adds that, in the instant action, Hartford as Emery Waterhouse's insurer is claiming a subrogation interest to the extent of the monies it paid its insured as a result of the damages caused by the bursting water pipes. The trial justice reasoned that the limitational condition placed upon the release clause of article IX(b) of the lease agreement between Emery Waterhouse and the Associates, [3] to the effect that this release shall be in force and effect only with respect to loss or damage occurring during such time as . . . Tenant's. . . policies of fire or extended covering insurance shall contain a clause to the effect that this release shall not affect said policies or the right of the insured to recover thereunder, was intended by the parties to afford them the opportunity to secure such a clause in their respective insurance contracts from their respective insurers and thereby assure that the release clause inserted in the lease agreement would not affect their ability to recover from their own insurance policy in case of loss. Emery Waterhouse, the plaintiff, did receive payment of the amount of its loss to which it was entitled under the terms of the Hartford insurance policy. The trial court concluded that, under such circumstances, the stated limitational condition, entered into only for purposes of adjusting the parties' insurance policies to their mutual release-of-liability undertaking under the release clause of the lease, had become immaterial and the mutual release provisions of article IX(b) of the lease became operative and effectively released the Associates from liability to the extent of the plaintiff's insurance recovery. In this, there was no error. The issue presented is whether the tenant-plaintiff, Emery Waterhouse, who, prior to its water-damage loss and by an exculpatory clause in the lease agreement released its landlord, the defendant Emery Associates, from liability for any loss resulting from the landlord's negligence, may set up, as a defense to the landlord's counterclaim for exculpation in this case, the absence in the plaintiff's current insurance policy with Hartford of such a specific clause as mentioned in article IX(b) of the lease agreement. We think not. We affirm the decision of the justice below and hold that the absence of such a clause from the insurance policy or one expressly prohibiting the insured from entering into any exculpatory agreements does not compel a forfeiture by the defendant Associates of their rights under the exculpatory clause, where the plaintiff-insured was not in fact impeded in any way from recovering its losses under the insurance contract. Whether or not an insurance policy expressly reserves subrogation rights, it is the universal rule that upon payment of a loss the insurer is entitled to pursue those rights against a third party whose negligence or wrongful act caused the loss. But an insured may defeat the insurance company's rights of subrogation by entering into an agreement of release with the wrongdoer before the policy is issued, or, as in the instant case, after the policy is issued, but prior to loss. See Great Northern Oil Co. v. St. Paul Fire & M. Ins. Co., 291 Minn. 97, 189 N.W.2d 404, 406-07 (1971). Indeed, it is a well-settled rule of law that where an insured settles with or releases a wrongdoer from liability for a loss before payment of the loss has been made by the insurance company, the latter's right of subrogation is thereby destroyed. The lessee, Emery Waterhouse, by the terms of the lease which was in effect at the time of the loss, released the lessor, Emery Associates, to the extent of the lessee's insurance coverage, from any and all liability to the lessee or to any persons claiming through the lessee by right of subrogation such as the lessee's insurance carrier for any loss or damage to the properties of the lessee caused by any of the extended-coverage casualties. See International Insurance Company v. Medical-Professional Bldg., 405 S.W.2d 867, 870 (Tex.Civ.App. 1966); Gerlach v. Grain Shippers' Mut. Fire Ins. Ass'n, 156 Iowa 333, 136 N.W. 691, 693 (1912). Such exculpatory agreements releasing a party to the agreement from liability caused by that party's own negligence do not contravene public policy and are enforceable on the occasion of a subsequent loss even though the agreement itself was entered into after the issuance of the policy. Id. at 407. See also E.L. Cleveland Co. v. Bangor & Aroostook Railroad Company, 133 Me. 62, 69-70, 173 A. 813, 815-16 (1934). Considerations of equitable principles upon which rights of subrogation depend ( see Leavitt v. Railway Co., 90 Me. 153, 160, 37 A. 886, 888, 38 L.R.A. 152 (1897)) do not in the instant case tip the scale against the enforceability of the exculpatory clause, but rather favor its application, since the potential subrogee insurance carrier did pay the loss without reservation and the subrogor-insured's rights were not, as a matter of fact, affected by the exculpatory clause of the lease agreement or the absence of a permissive release clause in the insurance contract. As between Emery Waterhouse and Emery Associates, the insured plaintiff was duty bound to secure from its insurer the necessary modification of its insurance policy to bring it in compliance with the requirement of article IX(b) to the effect that a permissive release clause be contained in the insurance contract, the evidence of which the plaintiff-tenant had agreed to furnish the defendant-landlord upon request when desired. The equities in the case tip on the side of the defendant Emery Associates.