The Appellate Division of the New York State Supreme Court, First Department, recently held that a storage company can limit its amount of liability owed to an insurer pursuing its subrogation rights, but it cannot completely waive all UCC Article 7 liability for damages incurred by the insured. XL Specialty Ins. Co. v. Christie's Fine Art Stor. Servs., 2016 NY Slip Op 01901 (1st Dep’t Mar. 17, 2016).

In February 2011, Chowaiki & Co. Fine Art Ltd. (“Chowaiki”), a private fine art gallery, entered into a one-year managed storage agreement with defendant, Christie’s Fine Art Storage Services, Inc. wherein Christie’s was to provide secure storage for certain of Chowaiki’s fine art works at its facility in Brooklyn. The agreement gave Chowaiki an option to either (a) have Christie’s “accept liability for physical loss of, or damage to, the Goods,” or to (b) “sign a loss/damage waiver.” Chowaiki elected to sign the waiver and renewed the policy and waiver in February 2012.

The waiver stated that Christie’s “shall not be liable for any physical loss of, or damage to, the Goods.” By signing the storage agreement, Chowaiki was required to “effect and maintain adequate insurance in respect of the Goods deposited,” and was responsible for obtaining an “All Risks of loss or physical damage” insurance policy covering the goods deposited with Christie’s. The agreement also provided that if Christie’s was found “liable for any loss of, or damage to, the Goods,” liability was not to exceed the lower of $100,000 or the market value of the goods. Chowaiki chose plaintiff, XL Specialty Insurance Co., to provide insurance. The waiver also absolved Christie’s of all responsibility for loss or damage to Chowaiki’s goods, and required Chowaiki to notify its insurer of the waiver and “arrange for them to waive any rights of subrogation” against Christie’s with respect to any loss or damage to Chowaiki’s goods while in Christie’s custody.

Prior to Superstorm Sandy striking New York in October 2012, defendant notified Chowaiki that “extra precautions” were being taken regarding Chowaiki’s goods, specifically, that “all property on the first floor” of the building where Chowaiki’s artwork was stored would be “checked to ensure all items are raised off the floor,” or, if necessary, the goods would be removed to empty rooms on the upper floor of Christie’s storage facility. Chowaiki’s goods, however, were damaged because the goods were allegedly left on the first floor.

XL Specialty reimbursed Chowaiki for its losses and then sued Christie’s as subrogee for Chowaiki. Christie’s moved to dismiss, asserting, inter alia, that the loss/damage waiver in the storage agreement signed by Chowaiki contained a waiver of subrogation clause and a limitation of liability, both of which barred the insurer’s claims.

The Appellate Division affirmed the motion court’s decision that the agreement between Chowaiki and Christie’s created a bailor/bailee relationship under Article 7 of the Uniform Commercial Code, but that the agreement’s limitation of liability was unenforceable because it purported to exempt Christie’s from all liability in contravention of then UCC 7-204(2) (UCC 7-204[b], as amended by L. 2014, ch. 505, §23, eff. Dec. 17, 2014]). Id., Slip Op. at *2.

The Appellate Division thus reversed that part of the motion court’s decision that found the waiver of subrogation contained in the agreement’s loss/damage waiver clause to be enforceable. The court noted that while UCC Article 7 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” it “is not liable for damages that could not have been avoided by the exercise of that care,” and that “[d]amages 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.” UCC 7-204(b). However, UCC 7-202(c), places limitations on a warehouse’s ability to limit its liability because the statute states that any limitations must not “impair its . . . duty of care.” Id. The court thus concluded that “[p]rovisions purporting to exempt the bailee from liability for damage to stored goods from perils against which the bailor had secured insurance . . . run afoul of the statutory scheme of UCC Article 7.” Id.

The Appellate Division cited an earlier case, Kimberly-Clark Corp. v. Lake Erie Warehouse, Div. of Lake Erie Rolling Mill, 49 A.D.2d 492 (4th Dep’t 1975), appeal dismissed, 39 N.Y.2d 888 (1976), in which the Fourth Department invalidated a similar exculpatory agreement, ruling that a warehouseman cannot completely exempt itself from liability imposed by UCC Article 7. Id., 49 A.D.2d at 494-95. Agreeing with that decision, the court here held that while Chowaiki, as bailor, could limit its liability, the storage agreement’s loss/damage waiver was impermissible because it purported to exempt Christie’s from all liability, Slip Op. at *2, thereby preserving XL Specialty’s ability to pursue its subrogation claim.