Commercial Division Blog

Posted: March 21, 2016 / Categories Commercial, Contracts, Insurance

Provision Exempting Warehouse from Liability for Damage Caused By Own Negligence Unenforceable

On March 17, 2016, the First Department issued a decision in XL Specialty Insurance Co. v. Christie's Fine Art Storage Services, Inc., 2016 NY Slip Op. 01901, holding an exculpatory clause unenforceable.

In XL Specialty Insurance, the defendant warehouse stored artworks for the plaintiff's insured. The insured "had the option to either (a) have defendant 'accept liability for physical loss of, or damage to, the Goods,' or to (b) 'sign a loss/damage waiver,' under which [the insured] accepted that defendant 'shall not be liable for any physical loss of, or damage to, the Goods." (Emphasis added). The insured "sign[ed] the waiver, which provided that [he] was responsible for" insuring the artworks "against All Risks of loss or physical damage" while it was in the defendant's possession and "absolv[ing] defendant of all responsibility for loss or damage to" the artworks.

The artwork was damaged during Hurricane Sandy, allegedly because the defendant failed to move the artwork to an upper floor of its warehouse. The plaintiff paid the insured's claim and brought a subrogation actin against the defendant.

The trial court dismissed the plaintiff's claim, enforcing the loss damage waiver of the insurance contract. See our post on the trial court's decision here.

The First Department reversed, explaining:

UCC 7-204(a) provides that a warehouse is liable for damages for loss of or injury to the goods caused by its failure to exercise care with regard to the goods that a reasonably careful person would exercise under similar circumstances and is not liable for damages that could not have been avoided by the exercise of that care. UCC 7-204(b) provides that damages may be limited by a term in the warehouse receipt or storage agreement limiting the amount of liability in case of loss or damage beyond which the warehouse is not liable. However, such limitations on liability are limited by UCC 7-202(c), which provides that such terms must not impair its duty of care under Section 7-204. Any contrary provision is ineffective.

[T]he [trial] court erred in finding that the waiver of subrogation contained in the agreement's loss/damage waiver is enforceable and bars this action.

Provisions purporting to exempt the bailee from liability for damage to stored goods from perils against which the bailor had secured insurance, even when caused by the bailee's negligence have been held to run afoul of the statutory scheme of UCC Article 7.

In Kimberly-Clark Corp. v Lake Erie Warehouse, Div. of Lake Erie Rolling Mill [4th Dept 1975], the Court found such an exculpatory clause to be invalid. In that case, the agreement between the bailee and bailor provided that the bailor waives any and all right of recovery from the warehouseman for losses caused by the perils covered by fire and extended coverage insurance and caused by any other perils against which customer has insured.

In invalidating this clause, the Court noted that while UCC 7-204 permits a warehouseman to limit the amount of liability, it cannot completely exempt itself from liability as imposed by UCC Article 7. [A] warehouseman may not contract away or lessen his responsibility except in such manner as the statue provides. Any other attempted exoneration or limitation would defeat the statue and must be held void. It should be noted that the exoneration clause at issue in Kimberley-Clark was not as broad as the provisions in this case in that it did not contain an express waiver of subrogation clause or a requirement that the bailor obtain a waiver of subrogation from its insurer. The Kimberley-Clark Court did note that the implied waiver of subrogation in that case was nothing more than another attempt by defendant to exempt itself from all liability, which would defeat the statute and must be held void.

(Internal quotations and citations omitted) (emphasis added).