Opinion ID: 790378
Heading Depth: 2
Heading Rank: 2

Heading: The Public Policy Theory

Text: 52 Finally, St. Paul contends that even if UBS breached no contractual obligation, a waiver-of-subrogation clause is unenforceable where the claim is that the loss resulted from the defendant's gross negligence. Although the New York Court of Appeals has not addressed this precise question, we agree with the district court that, based on the pertinent well-established principles of New York law, St. Paul's contention should be rejected. 53 The principle to which St. Paul would have us analogize is that New York [p]ublic policy ... forbids a party's attempt to escape liability, through a contractual clause, for damages occasioned by grossly negligent conduct. Colnaghi, U.S.A., Ltd. v. Jewelers Protection Services, Ltd., 81 N.Y.2d 821, 823, 595 N.Y.S.2d 381, 382-83, 611 N.E.2d 282 (1993) (internal quotation marks omitted). This prohibition applies to bar so-called exculpatory clauses, which typically deprive a contracting party of the right to recover for damages suffered as the result of the exonerated party's tortious act, Austro v. Niagara Mohawk Power Corp., 66 N.Y.2d 674, 676, 496 N.Y.S.2d 410, 410, 487 N.E.2d 267 (1985). Thus, [t]o the extent that agreements purport to grant exemption for liability for willful or grossly negligent acts they have been viewed as wholly void. Gross v. Sweet, 49 N.Y.2d 102, 106, 424 N.Y.S.2d 365, 367, 400 N.E.2d 306 (1979). 54 It is important, however, to distinguish between [such] exculpatory clauses and indemnity contracts that simply shift the source of compensation without restricting the injured party's ability to recover. Austro v. Niagara Mohawk Power Corp., 66 N.Y.2d at 676, 496 N.Y.S.2d at 410, 487 N.E.2d 267 (emphasis added). The latter agreements are not contrary to public policy unless they purport to indemnify a party for damages flowing from an injury that was intentional. See id. The New York Court of Appeals has held that a party may obtain insurance as protection against its own gross negligence. See, e.g., Public Service Mutual Insurance Co. v. Goldfarb, 53 N.Y.2d 392, 400, 442 N.Y.S.2d 422, 427, 425 N.E.2d 810 (1981) (indemnity for compensatory damages would be allowable for acts of gross negligence, recklessness or wantonness); Town of Massena v. Healthcare Underwriters Mutual Insurance Co., 98 N.Y.2d 435, 445, 749 N.Y.S.2d 456, 460-61, 779 N.E.2d 167 (2002) (although insurance coverage for intentional injuries cannot [a]s a matter of policy ... [be] covered by insurance, insurance coverage for reckless conduct would not be precluded by public policy (emphasis omitted)). 55 The decision of the New York Court of Appeals in Valden highlighted the distinction between exculpatory clauses and indemnity agreements in connection with builder's risk policies. The construction contract in Valden required the owner to provide `fire, extended coverage, vandalism and malicious mischief insurance upon the entire structure on which the work of the Contract [wa]s to be done,' and also provided that `[t]he Owner, Contractor, and all subcontractors waive all rights, each against the others, for damages caused by fire or other perils covered by insurance provided for under the terms of the Contract Documents, except such rights as they may have to the proceeds of insurance.' 46 N.Y.2d at 655-56, 416 N.Y.S.2d at 202-03, 389 N.E.2d 798. The requisite builder's risk insurance was obtained; a fire caused damage to the property; and the insurer paid the loss claim filed by the owner and then, as subrogee of the owner, attempted to obtain reimbursement from the contractor and subcontractors whose negligence allegedly caused the fire. The defendants argued that the contractual waivers quoted above barred suit against them by the insurer. The insurer contended that the waivers were barred by a statutory provision that states that agreements in which a contractor purports to exempt[ ] himself from liability for injuries to person or property caused by or resulting from the negligence of such contractor ... shall be deemed to be void as against public policy and wholly unenforceable, N.Y. Gen. Oblig. Law § 5-323 (McKinney 2001). The Valden Court rejected the insurer's contention, stating that [a] distinction must be drawn between contractual provisions which seek to exempt a party from liability to persons who have been injured or whose property has been damaged, and contractual provisions, such as those involved in this suit, which in effect simply require one of the parties to the contract to provide insurance for all of the parties involved in the construction project, Valden 46 N.Y.2d at 657, 416 N.Y.S.2d at 203, 389 N.E.2d 798 (emphases added), and thereby shift to an insurance company the risk of damage to the construction property. Absent any indication of overreaching or unconscionability, the latter type of provision violate[s] neither section 5-323 of the General Obligations Law nor any other public policy. Id. (emphasis added). 56 Although St. Paul seeks to distinguish Valden on the ground that it dealt with a claim of simple, not gross, negligence, we conclude that that difference is immaterial given the other New York cases referred to above, establishing that insurance coverage for gross negligence is not contrary to public policy.