Rosario Inchaustegui v. 666 5th Avenue Limited Partnership

New York Court of Appeals · 2001 · Contracts

749 N.E.2d 196 (2001)

Updated July 26, 2026

Contractscontract damagesprocure insurance clauselandlord-tenantadditional insuredout-of-pocket losscollateral source rulebenefit of the bargain

Facts

The tenant leased space in a Manhattan office building and agreed to maintain comprehensive general public liability insurance on the premises naming the landlord as an additional insured. Although the tenant obtained a policy, it failed to include coverage for the landlord's benefit. After the tenant's employee was injured on the premises and sued the landlord, the landlord sought damages from the tenant for breach of the lease. The landlord had procured its own insurance covering the risk at issue.

Issue

When a tenant breaches a lease covenant to procure liability insurance for the landlord's benefit, but the landlord has obtained its own insurance covering the same risk, may the landlord recover the full amount of the underlying settlement and defense costs from the tenant, or is recovery limited to the landlord's actual out-of-pocket losses caused by the breach?

Rule

A party injured by breach of a contract to procure insurance is entitled to be placed in as good a position as if the contract had been performed, and recovery is limited to the actual loss suffered by reason of the breach. Thus, where the landlord procured its own insurance covering the risk, damages for the tenant's failure to name the landlord as an additional insured are limited to out-of-pocket damages such as premiums and other uninsured expenses, not the full underlying liability and defense costs. The common-law collateral source rule is a tort doctrine and does not apply to expand contract damages in this setting.

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Lakeside Market Hall leased retail space in Buffalo to Nora Ellis for a café. The lease required Nora to obtain liability insurance naming Lakeside as an additional insured, but she failed to do so. After a customer slipped in the café, Lakeside’s own liability insurer paid the settlement and defense costs, except for a $25,000 deductible and a later premium increase.

If Lakeside sues Nora for breach of the insurance-procurement covenant, what is the best measure of damages?

Explanation. When a party breaches a promise to procure insurance, contract damages aim to place the nonbreaching party in as good a position as performance would have done, not a better one. If the promisee had its own insurance covering the risk, recovery is limited to actual out-of-pocket losses caused by the breach, such as deductibles, co-payments, premiums, or rate increases. The full settlement and defense costs are not recoverable in that circumstance.