Great Northern Insurance v. Interior Construction Corp.

(unless caused solely by Landlord’s negligence) occurring in, at or upon the Premises; and (D) any breach or default by Tenant in the full and prompt payment and performance of Tenant’s obligation under this Lease . . .

The lease further obligated Depository, at its expense, to maintain a comprehensive general liability insurance policy naming New Water as an additional insured with coverage to be no less than $5 million “combined single limit per occurrence for bodily injury and property damage liability.” Another lease term directed New Water and Depository to obtain mutual waivers of subrogation in their respective insurance policies. Depository procured the specified insurance coverage, and New Water also maintained a separate insurance policy for the building.

After entering into the lease, Depository hired Interior Construction Corporation to renovate a portion of its premises. Interior subcontracted with TM & M Mechanical Corporation to perform work on an existing sprinkler system as part of the project. In August 1999, during construction, a flood occurred, causing property damage to the premises of Neuberger & Berman, LLC, a tenant on the floor below. The water damage resulted from the failure to drain the pipes properly before beginning the sprinkler work.

Great Northern Insurance Company — Neuberger’s insurer— commenced a subrogation action against New Water, Depository and Interior in June 2001 to recover the monies it had paid to Neuberger on its property damage claim.^[1] As relevant to this appeal, New Water interposed a cross claim against Depository for contractual indemnification. In 2004, the subrogation action was settled for $200,000 and all claims and cross claims among the parties were resolved, except for New Water’s indemnification claim against Depository.^[2] As part of the settlement, the parties stipulated that if the case had been tried by a jury, 90% of the liability would have been allocated to New Water and 10% to Interior. After the settlement, New Water moved for summary judgment against Depository on its claim for contractual indemnification. Supreme Court denied the motion. The

Depository advances two arguments to support its position that New Water is not entitled to contractual indemnification. First, Depository asserts that the language of the lease provision at issue does not unmistakably require indemnification under the circumstances of this case. Alternatively, even if interpreted to entitle New Water to indemnification, Depository urges that the lease provision is unenforceable and contrary to public policy under General Obligations Law § 5-321 because it obligates a tenant to indemnify a landlord for the landlord’s own negligence. We address each contention in turn.

Courts will construe a contract to provide indemnity to a party for its own negligence only where the contractual language evinces an “unmistakable intent” to indemnify (see Levine v Shell Oil Co., 28 NY2d 205 , 212 [1971]). As we have explained:

“When a party is under no legal duty to indemnify, a contract assuming that obligation must be strictly construed to avoid reading into it a duty which the parties did not intend to be assumed. The promise should not be found unless it can be clearly implied from the language and purpose of the entire agreement and the surrounding facts and circumstances” (Hooper Assoc. v AGS Computers, 74 NY2d 487 , 491-492 [1989] [citations omitted]; see also Rodrigues v N & S Bldg. Contrs., Inc., 5 NY3d 427 , 433 [2005]).

Here, subsection (C) of the indemnification clause in the lease required Depository to indemnify New Water for “any” accident occurring in Depository’s premises “unless caused solely by [New Water’s] negligence.” This broadly drawn provision unambiguously evinced an intent that Depository indemnify New Water for the latter’s own negligence, provided New Water was not 100% negligent. In this case, the parties stipulated that New Water was 90% at fault and Depository’s contractor was 10% responsible for the water damage. Hence, New Water was not solely liable under the terms of the stipulation and the clear language of the lease unmistakably affords indemnification under the circumstances of this case.^[3]

“It is against this background of declared purpose that the indemnification clauses before us must be considered. So analyzed, [the landlord] is not exempting itself from liability to the victim for its own negligence. Rather, the parties are allocating the risk of liability to third parties between themselves, essentially through the employment of insurance. Courts do not, as a general matter, look unfavorably on agreements which, by requiring parties to carry insurance, afford protection to the public” (i d. at 161).

There is no meaningful distinction between Hogeland and the case before us. As in Hogeland, this case presents a commercial lease negotiated between two sophisticated parties who included a broad indemnification provision, coupled with an insurance procurement requirement. That arrangement afforded Neuberger, the tenant who sustained water damage, adequate recourse for the damages it suffered. Additionally, Depository’s insurer — not Depository itself — will bear ultimate responsibility for the indemnification payment, which is precisely the result contemplated by the parties when they entered into the lease. Where, as here, a lessor and lessee freely enter into an indemnification agreement whereby they use insurance to allocate the risk of liability to third parties between themselves, General Obligations Law § 5-321 does not prohibit indemnity.^[4]

Finally, we decline Depository’s invitation to overrule Hogeland. Under the doctrine of stare decisis, we do not lightly depart from our precedents, particularly those involving