Lessee’s Agreement to Self-Insure Lessor Treated Like Insurance

Self Insured Lessee Must Defend Lessor

Posted on July 7, 2021 by Barry Zalma

Contracts, like leases, often determine who is stuck with the obligation to defend and/or indemnify against bodily injuries occurring on the leased premises. This is usually accomplished by requiring the lessee to acquire liability insurance naming the lessor as an additional insured. In Anthony Foti and Cristina Foti, his wife v. JG Elizabeth II, LLC D/B/A The Mills At Jersey Garden Mall et al, No. A-1638-19, Superior Court of New Jersey, Appellate Division (July 2, 2021) the lease required JG Elizabeth (Elizabeth) to self-insure the risk and refused to defend.

FACTUAL HISTORY

In a concurrent appeal the Appellate Division affirmed the trial court’s orders granting summary judgment to defendants City of Elizabeth (Elizabeth), and JG Elizabeth II, LLC,  (collectively, JG), and dismissing the negligence complaint brought by Anthony Foti (plaintiff) and his wife, Christina. After the court entered summary judgement, JG moved for an order compelling Elizabeth to reimburse JG for counsel fees, costs, and expenses incurred in defense of plaintiff’s negligence claims. The trial court conducted oral argument and subsequently entered the September 27, 2019 order entitling JG to reimbursement. The judge’s December 12, 2019 order required Elizabeth to pay $62, 041.65 in counsel fees and costs. Elizabeth appealed.

ANALYSIS

Elizabeth argues that an oral lease existed between JG and the County of Union (the County) that superseded the written lease between Elizabeth and the Glimcher Group (Glimcher), the developer of the mall and JG’s predecessor in interest. In the alternative, Elizabeth argues the provisions of the written lease did not impose a duty to defend JG against plaintiff’s lawsuit.

Elizabeth first executed a lease for the space in 2000 (the Lease) and, pursuant to its terms, Glimcher charged Elizabeth no rent. Section 11.01 of the Lease was entitled “Tenant’s Insurance.” Subsection (a) provided various insurance coverage Elizabeth was required to procure; Section 11.01(d) included an alternative for Elizabeth to satisfy its obligations “by means of self-insurance.” The parties crossed out the underlying text of the entire section and wrote in its place, “Tenant and Landlord hereby acknowledge and agree that all insurance requirements of Landlord under this Lease shall be satisfied by Tenant by means of Tenant’s self-insurance.”

It is undisputed that when plaintiffs’ filed suit naming Elizabeth and JB as defendants, JB tendered its defense to Elizabeth. Elizabeth declined without any reservation of rights, denying it was obligated to provide a defense or indemnification.

It is well-settled that courts enforce contracts based on the intent of the parties, the express terms of the contract, surrounding circumstances and the underlying purpose of the contract.

A reviewing court must consider contractual language in the context of the circumstances at the time of drafting and apply a rational meaning in keeping with the expressed general purpose. If the contract into which the parties have entered is clear, then it must be enforced as written. Whether a contract term is clear or ambiguous amounts to a question of law.

There is nothing ambiguous about the meaning of self-insurance as used in the Lease. Self-insurance is a plan under which a business maintains its own special fund to cover any loss. Unlike other forms of insurance, there is no contract with an insurance company. Rather than retaining a specific insurance policy, the parties agreed that Elizabeth had its own special fund to provide insurance coverage.

Elizabeth argues that the Lease did not require it provide a defense to JB because the Lease specifically did not require Elizabeth to indemnify JB for its own negligence. Since plaintiff’s complaint alleged both Elizabeth and JB were negligent, Elizabeth had no obligation to defend JB.

However, the duty to defend is independent of or broader than the duty to pay. In other words, potentially coverable claims require a defense.

The Lease was not ambiguous because it is not susceptible to at least two reasonable alternative interpretations. Indeed, Elizabeth has never offered an alternative interpretation to JB’s claim that it was an additional insured through Elizabeth’s self-insurance program.

In general the intention of the parties as disclosed by the language used in the lease is controlling. Taken in its entirety, and evidence of the attendant circumstances may be considered, not to change the agreement made but to secure light by which to measure its actual significance. Terms will be implied in a contract where the parties must have intended them because they are necessary to give business efficacy to the contract as written

An insurer’s obligation to defend becomes an obligation to reimburse for defense costs to the extent that the defense is later determined to have been attributable to the covered claims and, if coverage is not determinable in the underlying action, it is later determined that there was in fact coverage. Here, the only reasonable interpretation of the Lease was that the parties intended Elizabeth would, through its self-insurance program, provide a defense to the landlord, JB, against plaintiff’s claim for injuries that occurred in Space 1158 unless they were caused by the landlord’s own negligence.

ZALMA OPINION

The Appellate Division treated the lease’s agreement to allow the tenant to replace the requirement for insurance in the lease with its self-insurance program. It then interpreted the lease provision as if it was an insurance policy which, necessarily, would have provided for a defense. If the parties wanted the agreement to be limited to indemnity only, they could easily have included that language in the lease. Sloppy contract language resulted in unnecessary litigation.

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© 2021 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

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