Can an indemnification clause in a commercial lease obligate a tenant’s insurer to defend a landlord? Recently, the United States District Court for the Northern District of New York said, “Yes!” On August 9, 2022, the district court issued a decision in ConMed Corp. vs. Federal Insurance Company, holding that the indemnification clause in a policyholder’s lease triggered the insurer’s duty to defend the landlord in an action arising out of the tenant’s negligence.
Facts of the Case
ConMed is a medical technology company that leases warehouse space in Georgia from Breit Industrial Canyon (“the Landlord”) to sterilize its medical equipment. ConMed’s employees filed suit against ConMed and a contractor that performed the sterilization, alleging injuries caused by exposure to excessive amounts of chemicals used in the sterilization process (the “ConMed Action”). Thereafter, ConMed’s employees filed a separate lawsuit against the Landlord, alleging that the Landlord permitted storage of unsafe levels of the chemicals at the warehouse without adequate ventilation (the “Landlord Action”). The lease agreement required ConMed to indemnify the Landlord “except in the event of, and to the extent of, Landlord’s negligence or willful misconduct.”
The Landlord tendered the Landlord Action to ConMed, seeking defense and indemnity pursuant to the terms of the lease agreement. ConMed accepted the Landlord’s defense and tendered the Landlord Action to its insurer, Federal Insurance Company (“Federal”). Federal denied coverage for the Landlord, and ConMed filed suit in the Northern District of New York, alleging that Federal’s refusal to defend the Landlord was a breach of the insurance policies.
The Federal policies define “insureds” as, among other things, “the lessors of premises” and afford coverage against claims arising out of ConMed’s use of the leased premises, if ConMed is required by contract to provide the lessor which such coverage. However, there is no coverage for damages arising out of the lessor’s sole negligence. Additionally, the Federal policies provide coverage for “damages that [ConMed] becomes legally obligated to pay by reason of liability. . . assumed in an insured contract.” The policies define "insured contract" to include "a lease of premises."
ConMed argued that Federal is obligated to defend the Landlord against the Landlord Action because Landlord is an “insured” under the policies. Alternatively, Federal must defend the Landlord because the lease agreement is an “insured contract” whereby ConMed assumed liability for the Landlord’s defense. Federal argued that it has no duty to defend the Landlord because the Landlord Action seeks damages for the Landlord’s own negligence, rather than ConMed’s.
Exceedingly Broad Duty to Defend the Insured
Under New York law, an insurer has an exceedingly broad duty to defend an insured. As long as the complaint alleges any facts that could potentially bring the action within the policy’s coverage, the insurer must defend its insured.
Because the Landlord Action was brought by the same employees who filed the ConMed Action and seeks damages for the same injuries caused by the same harmful conduct, the court found that any negligence or willful misconduct by the Landlord clearly arose out of ConMed’s alleged negligence. It did not matter that the Landlord was exclusively named in a separate lawsuit from the ConMed Action, because the claims against the Landlord are “inextricably intertwined” with ConMed’s negligence. The court noted that while it is possible that the Landlord could be found independently liable for its own negligence or willful misconduct, which would not be covered under the Federal policies, it is equally possible that the Landlord could be found to be not at fault, or less at fault than ConMed. Thus, because Federal could not meet its heavy burden of demonstrating that there is no potential coverage for any portion of the Landlord Action, the court found in favor of ConMed.
The ConMed decision is a great example of the important interplay between contract agreements and insurance policies. For more information, contact Kerianne Kane Luckett at KKane@sdvlaw.com.