Consider the Risks: An Insurance Law Blog
Last week, the Massachusetts Supreme Judicial Court (SJC) held that a provision in a commercial lease requiring the tenant to procure liability insurance protecting the landlord from claims arising out of the condition of the leased premises, including common areas, did not violate a Massachusetts statute whose acknowledged purpose was “to preclude a landlord from shifting responsibility for its own negligence to its tenants.” The case, Norfolk & Dedham Mutual Fire Ins. Co. v. Morrison (SJC-10513) which may be accessed here, presents an interesting example of linguistic juggling to arrive at the desired result: allowing risk transfer for landlord negligence, when the transferee is an insurer, even though the tenant is saddled with the cost of the transfer.
The lease in question required the tenant to procure insurance as follows:
LESSEE shall secure and carry at its own expense a commercial general liability policy insuring …OWNER against any claims based on bodily injury (including death) or property damage arising out of the condition of the leased premises (including any common areas as described above) …, such policy to insure … OWNER against any claim up to $1,000,000 for each occurrence involving bodily injury (including death), and $1,000,000 for each occurrence involving damage to property. This insurance shall be primary to and not contributory with any insurance carried by LESSOR, whose insurance shall be considered excess. LESSOR and OWNER shall be included in each such policy as additional insureds … and each such policy shall be written by or with a company or companies satisfactory to LESSOR[.]
Norfolk & Dedham, Slip-op, p. 2-3.
The statute, G.L. c. 186, § 15, is broadly worded and precludes and declares “void” and “against public policy:”
Any provision of a lease … whereby a …tenant enters into a covenant, agreement or contract, by the use of any words whatsoever, the effect of which is to indemnify the …landlord …from any or all liability …for any injury, loss, damage or liability arising from any omission, fault, negligence or other misconduct of the …landlord[.]
Notwithstanding the broad scope of the statutory provision, and the acknowledged legislative intent to preclude risk shifting between the landlord and the tenant, the SJC was able to distinguish between a prohibited indemnity agreement and a non-prohibited insurance contract:
An “indemnity clause” is a “contractual provision in which one party agrees to answer for any specified or unspecified liability or harm that the other party might incur.” Black’s Law Dictionary 837-838 (9th ed.2009). …
The effect of an indemnity agreement is that A assumes the responsibility for B’s negligence, regardless whether A itself bears any responsibility for the negligence. The extent of the obligation is determined by reference to the indemnity agreement. If, however, A agrees to purchase insurance for B’s benefit, A will not personally bear any responsibility for B’s negligence. Instead, A’s insurer will bear the costs of B’s negligence, provided that it is covered under the policy. The scope of an insurer’s obligation is determined by an interpretation of the insurance policy.
Id. p. 5-6.
Although the court cited decisions from other jurisdictions which made similar distinctions, it is difficult to reconcile the decision with the plain meaning of the statute or the acknowledged legislative intent. Since the tenant is saddled with the cost of the risk transfer vehicle (the insurance policy) the tenant is in fact assuming at least some responsibility for the landlord’s negligence, a condition which seems to be expressly prohibited by the statute: “Any provision of a lease … whereby a …tenant enters into a covenant, agreement or contract, by the use of any words whatsoever, the effect of which is to indemnify the …landlord.”
The result here does not shock the conscious, and will not likely rock the insurance industry. Contractual risk transfer via agreements to provide liability insurance are commonplace, and insurers have easily handled requests for “additional insured” status, although there are certainly other issues regarding such coverage, for example see the discussion here. What the decision does represent, however, is a results- oriented determination, which may itself lead to unintended consequences as it creates what some may think of as an artificial distinction among risk transfer or “indemnity” vehicles.