Facts
- A subtenant occupied office premises in a Manhattan building under a sublease requiring it to maintain commercial general liability insurance and name the landlord as an additional insured.
- The subtenant obtained liability insurance but did not name the landlord as an additional insured, breaching the insurance-procurement clause.
- After learning it was not an additional insured under the subtenant’s policy, the landlord purchased its own liability policy covering the relevant risks.
- A visitor was injured when a ceiling tile dislodged and struck her while she was on the subleased premises.
- The visitor sued the landlord for negligence.
- The landlord filed a third-party action against the subtenant for breach of the insurance-procurement provision, seeking indemnity-type relief and damages including defense-related costs.
Issues
- What is the proper measure of contract damages when a tenant breaches a lease obligation to procure liability insurance naming the landlord as an additional insured, and the landlord has its own insurance covering the risk?
- May the landlord recover more than its actual economic loss by treating its own insurance as a “collateral source” that should not reduce recoverable contract damages?
Decision
- The trial court granted summary judgment to the landlord on breach but limited damages to the cost of obtaining substitute insurance.
- The Appellate Division agreed there was a breach and held damages were not necessarily limited to replacement-policy cost, allowing recovery of additional provable, breach-caused out-of-pocket items (e.g., deductibles or uncovered portions of loss).
- The Court of Appeals affirmed breach liability but held the landlord’s recovery is limited to actual out-of-pocket economic loss caused by the failure to procure the promised coverage.
- The Court of Appeals rejected application of the collateral source rule to expand contract damages where the landlord’s own insurance covered the underlying exposure.
- The Court of Appeals identified recoverable items as those actually incurred because of the breach, including the cost of replacement insurance and documented expenses such as deductibles and increased premiums causally linked to the breach.
Legal Principles
- A promise to procure insurance is distinct from an agreement to indemnify; breach damages focus on the loss from not having the promised insurance protection.
- Contract damages for failure to procure required insurance are limited to the promisee’s proven, breach-caused out-of-pocket economic loss.
- Where the promisee’s own insurance covers the risk, the promisee may not recover the full value of an insured underlying liability as contract damages, absent proof of additional, uncompensated economic loss.
- The collateral source rule, rooted in tort policy, does not enlarge contract damages in an insurance-procurement breach; recovery may not exceed actual economic loss.
- Recoverable damages may include the cost of obtaining substitute coverage and other proven expenses (e.g., deductibles or premium increases) attributable to the breach.
Conclusion
The Court of Appeals held that when a tenant fails to procure liability insurance naming the landlord as an additional insured and the landlord’s own policy covers the risk, the landlord’s contract recovery is limited to provable out-of-pocket losses caused by the breach, and the collateral source rule does not permit a larger, windfall recovery.