INCHAUSTEGUI v. 666 5TH AVENUE LTD. PARTNERSHIP, 96 N.Y.2d 111 (2001)

749 N.E.2d 196, 725 N.Y.S.2d 627

Court of Appeals of the State of New York.
Decided April 26, 2001.

Appeal, by permission of the Appellate Division of the Supreme Court in the First Judicial Department, from an order of that court, entered April 13, 2000, which modified, on the law, and, as modified, affirmed so much of an order of the Supreme Court (Alice Schlessinger, J.), entered in New York County, as limited the third-party plaintiffs’ recoverable damages to the cost of purchasing the insurance that the third-party defendant had failed to purchase on their behalf. The modification consisted of adding the right of the third-party plaintiffs to seek damages for any other expense arising out of plaintiff’s liability claim and not covered by the Appellate Division: “Was the order of this Court, which modified the order of the Supreme Court, properly made?”

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Curtis B. Gilfillan, for appellants.

Robin Mary Heaney, for third-party respondent.

Chief Judge Kaye and Judges Smith, Levine, Ciparick, Wesley and Graffeo concur.

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ROSENBLATT, JUDGE:

The case before us involves the remedy for a tenant’s breach of an agreement to obtain liability insurance for the landlord’s benefit.

As occupant of a floor in a Manhattan office building, Petrofin (the tenant) agreed to maintain comprehensive general public liability insurance on the premises and name the landlord as an additional insured.[1] Although the tenant took out a policy, it failed to include coverage for the benefit of the landlord. Plaintiff (tenant’s employee) was injured on the premises and sued the landlord, who then brought a third-party action against the tenant for breach of the lease. Supreme Court granted the landlord’s summary judgment motion, holding that the tenant breached its agreement to add the landlord as a named insured. Concluding that the landlord had its own liability insurance, the court limited the landlord’s damages to the costs of “maintaining and securing” the insurance policy for “the year that included the date of the accident.”

A divided Appellate Division modified, holding that the landlord should recover not only the purchase cost of the insurance but also certain out-of-pocket expenses “arising out of the liability claim and not covered by the substitute insurance procured by the landlord.” The majority

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stated that these additional damages could include, for example, any co-payment, deductible or rate increase in the landlord’s insurance. The court concluded that under contract law this relief gives the landlord the benefit of its bargain without holding the tenant liable for the entire loss. It also held that the common law collateral source rule would not apply and that any potential insurance recovery inuring to the landlord should be counted in calculating its contract damages.

The two dissenting Justices, on the other hand, would have awarded the landlord all damages resulting from the tenant’s failure to acquire insurance, including the full amount of the loss on the underlying personal injury claim, along with defense costs. They contended that, under the common law collateral source rule, any insurance the landlord may have had should not be considered in determining its damages.

The only question before us — and the source of the disagreement at the Appellate Division — is the measure of damages recoverable by the landlord. We agree with the majority that the landlord’s recovery should be limited to out-of-pocket damages caused by the tenant’s breach.

Lease provisions by which the tenant covenants to procure insurance and name the landlord as an additional insured are generally valid and enforceable (see, e.g., Kel Kim Corp. v. Central Mkts., 70 N.Y.2d 900, 901; see also, 2 Rasch, Landlord and Tenant § 21:7, at 145-146 [4th ed]). A landlord who has no knowledge of a tenant’s failure to acquire the requisite insurance and is left uninsured may recover the full amount of the underlying tort liability and defense costs from the tenant (see,Marconi Wireless Tel. Co. v. Universal Transp. Co., 194 A.D. 272, 273, affd 233 N.Y. 581; see generally, 2 Rasch’s Landlord and Tenant § 21:11, at 148 [4th ed]). Here, however, the landlord procured its own insurance covering the risk. The landlord would apply the same measure of damages — the full amount of the settlement and defense costs in the underlying tort claim — even though it had acquired its own insurance. Citing Mavashev v. Shalosh Realty (233 A.D.2d 301, 302) and Richfield Props., Ltd. v. Galaxy Knitting Mills, Inc. (269 A.D.2d 516, 517), the tenant contends that the Appellate Division was correct in limiting the landlord’s damages to its out-of-pocket expenses (notably, the premiums and any additional costs it incurred such as deductibles, co-payments and increased future premiums). We agree. The landlord obtained its own insurance and therefore sustained no loss beyond its out-of-pocket costs (see, Marconi Wireless Tel. Co. v.Universal

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Transp. Co., supra, at 273; Rodriquez v. Nachamie, 57 A.D.2d 920). Accordingly, it may not now look to the tenant for the full amount of the settlement and defense costs in the underlying tort claim.

Contrary to the landlord’s contention, Kinney v. G.W. Lisk Co. (76 N.Y.2d 215) does not require a different result. In Kinney, a subcontractor covenanted to procure insurance for the benefit of a general contractor. The subcontractor asserted that such an agreement freed the general contractor from its own negligence, in violation of General Obligations Law § 5-322.1 (Kinney v. G.W. LiskCo., supra, at 217). We rejected that argument and concluded that the subcontractor, owing to its failure to procure insurance to cover the general contractor, was liable for all the resulting damages including the general contractor’s liability to plaintiff (Kinney v. G.W. LiskCo., supra, at 219). The question of whether resulting damages could be minimized by any insurance the general contractor had obtained was not raised by the parties or considered by the Court.

The dissenters at the Appellate Division would have applied the common law collateral source rule to preclude reduction of the landlord’s damages. We disagree. Under this rule, “a personal injury award may not be reduced or offset by the amount of any compensation that the injured person may receive from a source other than the tortfeasor” (Oden v.Chemung County Indus. Dev. Agency, 87 N.Y.2d 81, 85; see also, Iazettiv. City of New York, 94 N.Y.2d 183, 187 [citing Bryant v. New York CityHealth Hosps. Corp., 93 N.Y.2d 592, 605]). This concept has been part of New York’s common law tort jurisprudence for well over a century (see, e.g., Drinkwater v. Dinsmore, 80 N.Y. 390, 392 [citing Briggs v.N YC. H.R.R. Co., 72 N.Y. 26, 32]).[2] The common law collateral source rule is designed to ensure that tortfeasors pay for all damages caused by their tortious conduct.[3]

The landlord argues that we should apply the rule in this breach of contract case and hold that its damages should not

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be reduced by virtue of any insurance proceeds it stands to receive. Under settled contract principles, however, the landlord — the only appellant before us — is entitled to be placed in as good a position as it would have been had the tenant performed. Its recovery is limited to the loss it actually suffered by reason of the breach (see, Restatement [Second] Contracts §§ 344[b], 347 [comment e]; see also, 3 Dobbs, Law of Remedies § 12.2(1), at 22-23 [2d ed]).

Contrastingly, the common law collateral source rule is inherently a tort concept. It has a punitive dimension (see, 4 Harper James, Law of Torts § 25.22, at 655 [2d ed]) that does not comport with contract law.[4] Contract damages, unlike tort damages, are limited to the economic injury caused by the breach. Moreover, contrary to the landlord’s suggestion, we need not invoke the common law rule as an incentive for compliance. A tenant obligated by contract to procure insurance will have little reason to forego compliance and tag along at its peril, hoping that the landlord obtained its own adequate coverage. The tenant’s exposure to liability without insurance, not to mention the risk of eviction, is disincentive enough to all but the most reckless. We therefore agree with the Appellate Division majority that the common law collateral source rule does not apply in this case.

Accordingly, the order of the Appellate Division should be affirmed, with costs and the certified question answered in the affirmative.

Order affirmed, with costs, and certified question answered in the affirmative.

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