ALBANY, N.Y., October 30 – The New York Court of Appeals, in a 6-0 decision, ruled that the enforceability of an indemnification provision in the commercial lease, coupled with an insurance procurement provision, obligates the tenant to indemnify the landlord for its share of liability when damage occurs. Newly appointed judge, Eugene Pigott, did not participate.

In Great Northern Insurance Company v. Interior Construction Corp, et.al. (The Depository Trust & Clearing Corporation, appellant, and New Water Street Corporation, respondent), the court upheld the Appellate Division, First Department decision that New Water was entitled to indemnification.

The issue started when Depository Trust & Clearing Corporation leased part of the 28th floor in a Manhattan building from New Water Street Corporation in 1999. Depository hired a contractor to work on the fire sprinklers in the offices. New Water turned the sprinkler system off but did not advise Depository or the contractor that the system was not drained. When the contractor started working, Neuberger & Berman LLC (Neuberger), tenant on the floor below, suffered property damage from the flood. Great Northern Insurance Company sued on behalf of Neuberger.

Neuberger settled with New Water, Depository, and the contractor, and in the settlement, New Water and Depository stipulated the 90 percent of the fault was New Waters, l0 percent the contractors, and Depository was not negligent. New Water then moved for summary judgment against Depository for contractual indemnification.

The Supreme Court rejected New Waters claim, concluding the lease did not require Depository to indemnify New Water for New Waters negligence in creating a dangerous condition. It said even if there were unmistakable intent, the clause would violate General Obligations Law Section 5-321, which provides that lease provisions requiring a tenant to indemnify a landlord for the landlords own negligence shall be deemed to be void as against public policy and wholly unenforceable.

The Appellate Division reversed, stating that while General Obligations Law Section 5-321 generally renders such lease provisions unenforceable, in this case, sophisticated parties negotiating at arms length have agreed to allocate the risk of liability to third parties between themselves, essentially through the employment of insurance, and so their negotiated agreement is enforceable, citing Hogeland v. Sibley, Lindsay & Curr Co. (42 NY2d 153).

The Appellate Division found the lease reflected an unmistakable intent that Depository would indemnify New Water except for damage caused solely by New Waters negligence. Since it was stipulated that New Waters negligence was not the sole cause of the damage, New Water is entitled to contractual indemnification under the lease.

Judge Victoria Graffeo, writing for the high court, said, There is no meaningful distinction between Hogeland and the case before us. As in Hogeland, this case presents a commercial lease negotiated between two sophisticated parties who included a broad indemnification provision, coupled with an insurance procurement requirement. That arrangement afforded Neuberger, the tenant who sustained water damage, adequate recourse for the damages it suffered. Additionally, Depositorys insurer " not Depository itself " will bear ultimate responsibility for the indemnification payment, which is precisely the result contemplated by the parties when they entered into the lease. Where, as here, a lessor and lesee freely enter into an indemnification agreement whereby they use insurance to allocate the risk of liability to third parties between themselves, General Obligations Law Section 5-321 does not prohibit indemnity.