Construction Contract, Subrogation Waivers: Dangers, Dilemmas, and Opportunities

September 2, 2010

By: Stephen D. Palley*


Presented at "We Won’t Get Fooled Again: Lessons Learned From the Economic Downturn," a meeting of the American Bar Association's Forum on the Construction Industry

Co-authored with Arlan Lewis1

 

“Drink nothing without seeing it; sign nothing without reading it.”  - Spanish proverb2

 

  1. Introduction: A Mistaken Case of Short Shrift

    Pity the poor subrogation waiver. Along with other insurance-related provisions in construction contracts it gets perpetual short shrift from lawyers. Sophisticated clients and their lawyers endlessly redline other contract sections but glaze over and inexplicably defer to non-lawyer insurance brokers and insurance consultants for advice about insurance contract provisions. There are many reasons why this practice should be avoided.3 The hazard of doing so is thrown into particular relief by the fact that insurance sections typically include waiver clauses that can have a significant financial impact on the parties, depending on how they are drafted. This delegation also makes little sense when one considers that it is lawyers – not brokers or consultants – who must litigate the meaning of such clauses in the event of a dispute.

    If subrogation waivers seem a dull topic for discussion amidst the sand and sun of Miami, consider their impact in the following real world scenario – one regularly played out in different iterations — if the number of reported cases is any gauge:

    1. An Owner’s building burns down during the course of a construction project, causing $4 million in property damage and resulting business interruption losses.
    2. While the fire was caused by a subcontractor, there is no evidence that it was anything but an accident.
    3. Per the construction contract, (a) the owner agreed to secure property insurance during the course of construction for “the Work” and (b) the general contractor agreed to indemnify the owner for losses caused by its negligence and the negligence of its subcontractors.
    4. The loss includes insured and non-insured property damage.
    5. The Owner maintains a corporate property insurance policy containing a $1 million self-insured retention.
    6. The Owner’s insurer pays $2.5 million dollars to the Owner, excess of the $1 million SIR, and the Owner and insurer agree that $500,000 of the loss is not covered by the insurance.

    As we will see below, whether or not the general contractor is responsible for any portion of the $4 million loss may turn on subrogation waivers contained in the contract as well as state specific case-law interpreting them. With this backdrop in mind, we provide a review of basic subrogation principles and pitfalls at issue in construction contracts. This is not intended to be a comprehensive survey of subrogation case-law, which would be well beyond our page and time limitations.4 Rather, our goal is to identify and discuss some of the issues routinely encountered in the interpretation of waivers of subrogation in the construction context.

  2. The Basics of Subrogation
    1. A Noble Latin Participle

      In principle, a right of subrogation5 exists where one party pays a loss for which another is primarily liable.6 To that end, it is similar to contribution and implied or common law indemnity.7 In practice and common parlance, insurance companies use subrogation8 to stand in the shoes of their insured and file suit to recover money that the insurance company has paid to the insured after a loss. In a recent Third Circuit case, the Court summarized how this plays out in the construction context:

      On a construction project, the contractor risks liability for negligence and the owner risks damage to its property. The contractor purchases liability insurance and the owner purchases property insurance. If the contractor damages the owner’s property, the owner or its property insurer (as subrogee) may sue the contractor for negligence. To prevent such litigation, an owner may waive its rights against the contractor for property damage to the extent covered by the owner’s property insurance. This assigns losses from property damage caused by the contractor’s negligence exclusively to the owner’s property insurer (again, to the extent it pays the owner for damages incurred).

      Other courts and commentators have observed that the subrogation waiver helps avoid litigation and keeps parties involved in a construction project focused on construction, instead of recrimination.10

      In some states, subrogation rights are waived by the very act of agreeing to provide builder’s risk insurance in a construction contract. For example, the Virginia Supreme Court has held that where “a plaintiff has contracted to protect the defendant from a loss by procuring insurance, the plaintiff (or his subrogee) may not recover for that loss from the defendant even if the loss is caused by the defendant’s negligence.”11 Given this rule, a waiver may be deemed to exist even when an express waiver of subrogation provision has been deliberately stricken from a contract document.12

    2. A Waiver Runs Through It, Probably.

      It depends on the state but in most cases a “subrogation” lawsuit typically names the insured as plaintiff, even though an insurer is prosecuting the lawsuit and is waiting in the wings.13 However, the waiver runs between the parties who entered into the contract and, depending on its language, can be used in litigation even where an insurer is not involved. For example, the Colorado Supreme Court recently considered the impact of AIA waiver of subrogation clauses on an owner’s claim against a general contractor and subcontractor where no insurer was involved.14 The Court noted that “[i]n most reported cases concerning analogous provisions, property owners have subrogated their claims to insurers, and in some instances the insurer has assigned its subrogation rights back to the owner. In the present case, however, [Owner] is pursuing its own claims for damages, so we simply refer to [the waiver of subrogation clause] as a “waiver provision” or “waiver clause."15

    3. An Insurer Can’t Subrogate Against its Own Insured (But May Try Anyway).

      As a general rule, insurers are not allowed to subrogate against their own insureds.16 This is relevant in the construction context because standard form construction contracts require owners to secure course of construction property insurance (builder’s risk, almost always) naming the contractor and its subcontractors as additional insureds, at least with respect to their “interest” in insured property.17 At least in theory, a builder’s risk insurer should not be able to pay a loss and then sue its insured. As a U.S. District Court in Massachusetts noted in a 2007 opinion: “[a] waiver of subrogation clause makes sense when property insurance is intended to cover any loss suffered during the course of construction. If subrogation rights were not waived, not only would a protracted dispute become likely but also a severe conflict of interest would exist if the insurer were permitted to recover from one of its insureds.”18 Accordingly, despite a lack of privity with the owner, subcontractors are often allowed to enforce waivers of subrogation provisions contained within the construction contract as co-insureds or third party beneficiaries.19 Nevertheless, some courts have refused to enforce a subrogation waiver for the benefit of subcontractors where such entities are not specifically mentioned in the provision.20

      Of course owners may neglect to name their contractors as insureds.21 In addition, insurers may argue that if a contractor caused property damage to elements of a construction project that that they did not build or that they do not have an interest in, the anti-subrogation rule does not apply. Thus, from a contractor’s standpoint, a course of construction property damage waiver of subrogation provision may have a (salutary) belt and suspenders effect. Likewise, other project participants (i.e., subcontractors, architects, etc.) would be well advised to consider expressly including an appropriate subrogation waiver in their contracts.22

    4. The Make Whole Rule

      An insured is entitled to be made whole prior to an insurer having the right to share in third party recoveries.23 This is commonly referred to as the “make whole” rule. As one Virginia Court has explained, “[u]nder the make whole doctrine, an insured who has settled with a third-party tortfeasor is liable to the insurer-subrogee only for the excess received over the total amount of his loss... [thus] absent an agreement to the contrary, an insurance company may not enforce a right to subrogation until the insured has been fully compensated for her injuries, … been made whole.24

      Just as an insurer may not subrogate in the name of its insured and keep subrogation monies until its insured has been made whole, the general rule is that an insurer is not entitled to credits or off-sets for payments made by third parties unless and until their insured has been made fully whole for their loss, including uninsured losses.25 While this is the general rule, some courts have held otherwise where there is an express pre-loss agreement with the insurer.26

    5. Insurer Consent to Subrogation Waivers

      Form contract subrogation waivers usually apply to losses covered by property insurance, though broader waivers may be negotiated.27 While most insurers use their own manuscripted builders risk policy form,28 the various policies typically specify that an insured may not do anything to impair the insurer’s right of recovery after paying a loss without the insurer’s consent. Policies may also specify, however, that an insured may waive such rights in a written pre-loss contract – this is sometimes referred to a broad form waiver of subrogation where required by written contract. What is important here is that if a contract requires a party to waive rights of subrogation, that agreement must be harmonized with the terms and conditions of any applicable insurance policy.29 If a party waives subrogation rights but fails to get insurer consent it may have breached the underlying construction contract and given its insurer an excuse to deny coverage.30

      If an insurer’s subrogation rights are derivative of their insureds, it should follow that where an insured has waived rights of recovery, the insurer is subject to that waiver, regardless of its consent. As one commentator notes: “Since an insurer’s right to subrogation is limited to the rights of the insured, and there can be no subrogation where an insured has no cause of action against a defendant, an insurer has no subrogation claim against a party to an agreement where the agreement entered before the loss releases the tortfeasor.”31 Moreover, some courts have pointed out that insurers are not without ways to protect themselves from waivers of subrogation:

      Insurers can protect themselves by (1) inserting an exclusion into their policies that permits the insurer to deny coverage if an insured waives the insurer’s subrogation rights, (2) raising premiums to offset outlays incurred from the loss of their subrogation rights, (3) investigating whether a potential insured has already waived any subrogation rights, (4) requiring insureds to warrant at the time a policy is issued that the insured has not, and will not, waive the insurers’ subrogation rights, and (5) obtaining reinsurance to cover any waiver of subrogation rights.32

      There are a few cases, however, that suggest insurer consent may be required.33 In almost all of those cases, however, clear and unequivocal waivers of underlying contract rights would effectively bar an insurer subrogation claim.

  3. Contract Provisions Relevant to Waiver of Subrogation Analysis

    Waiver of subrogation provisions are not interpreted in a vacuum and courts often find several other contract clauses to be pivotal to their analysis of subrogation waiver issues. Courts strive mightily to harmonize contract provisions and avoid apparent contradictions. This is a common theme in construction contract subrogation waiver cases and often arises when a party tries to avoid the effect of a subrogation clause by arguing that it conflicts with other provisions when the contract is interpreted as a whole.

    Given the longstanding and frequent use of the American Institute of Architects (“AIA”) family of construction contract documents in the construction industry, it is not surprising that the majority of cases involve interpretation of the various versions of the AIA waiver of subrogation and insurance provisions. In many instances, even where AIA forms have not been used, the waiver of subrogation language is substantially similar. Accordingly, the authors have elected to use AIA contract provisions as the basis for this discussion with the expectation that courts’ interpretation of the AIA waiver of subrogation language may be of value in evaluating non-AIA subrogation waivers.34

    1. Waivers of Subrogation

      The AIA waiver of subrogation provision most often cited is contained in A201- The General Conditions of the Contract for Construction and provides:

      11.3.7 WAIVERS OF SUBROGATION The Owner and Contractor waive all rights against (1) each other and any of their subcontractors, sub-subcontractors, agents and employees, each of the other, and (2) the Architect, Architect’s consultants, separate contractors described in Article 6, if any, and any of their subcontractors, sub-subcontractors, agents and employees, for damages caused by fire or other causes of loss to the extent covered by property insurance obtained pursuant to this Section 11.3 or other property insurance applicable to the Work, except such rights as they have to proceeds of such insurance held by the Owner as fiduciary. The Owner or Contractor, as appropriate, shall require of the Architect, Architect’s consultants, separate contractors described in Article 6, if any, and the subcontractors, sub-subcontractors, agents and employees of any of them, by appropriate agreements, written where legally required for validity, similar waivers each in favor of other parties enumerated herein. The policies shall provide such waivers of subrogation by endorsement or otherwise. A waiver of subrogation shall be effective as to a person or entity even though that person or entity would otherwise have a duty of indemnification, contractual or otherwise, did not pay the insurance premium directly or indirectly, and whether or not the person or entity had an insurable interest in the property damaged.35

      Other form contracts promulgated by various construction industry groups also contain waivers of subrogation provisions.36

    2. Insurance Obligations

      In evaluating the proper scope and application of a subrogation waiver, courts often look to the contractual allocation of insurance responsibilities among the parties as a starting point to determine the intended risks the parties sought to cover through insurance. For example, Subparagraph 11.3.1 of A201-2007 requires the Owner to obtain builder’s risk property insurance.37

      11.3.1 Unless otherwise provided the Owner shall purchase and maintain, in a company or companies lawfully authorized to do business in the jurisdiction in which the Project is located, property insurance written on a builder’s risk “all-risk” or equivalent policy form in the amount of the initial Contract Sum, plus value of subsequent Contract Modifications and cost of materials supplied or installed by others, comprising total value for the entire Project at the site on a replacement cost basis without optional deductibles. Such property insurance shall be maintained, unless otherwise provided in the Contract Documents or otherwise agreed in writing by all persons and entities who are beneficiaries of such insurance, until final payment has been made as provided in Section 9.10 or until no person or entity other than the Owner has an insurable interest in the property required by this Section 11.3 to be covered, whichever is later. This insurance shall include interests of the Owner, the Contractor, Subcontractors and Sub-subcontractors in the Project.

      The contractor is required to obtain liability insurance covering, among other things, claims for damages to non-work property. Paragraph 11.1.1.5 of A201-2007 provides that:

      11.1.1 The Contractor shall purchase from and maintain in a company or companies lawfully authorized to do business in the jurisdiction in which the Project is located such insurance as will protect the Contractor from claims set forth below which may arise out of or result from the Contractor’s operations and completed operations under the Contract and for which the Contractor may be legally liable, whether such operations be by the Contractor or by a Subcontractor or by anyone directly or indirectly employed by any of them, or by anyone for whose acts any of them may be liable: ...
      .5 Claims for damages, other than to the Work itself, because of injury to or destruction of tangible property, including loss of use resulting therefrom;

      Other industry contract forms also require the contractor to obtain liability insurance.38

    3. Indemnity

      It is not uncommon for construction contracts to contain a provision which obligates a contractor to indemnify the owner, architect, and their consultants, agents and employees for, among other things, damage to tangible property, other than the work itself, to the extent such damage is caused by the contractor’s negligent acts or omissions.39

      The A201 waiver of subrogation expressly provides that the waiver is effective even where the person or entity seeking protection of the waiver would otherwise have a duty of indemnification.40 Where the waiver of subrogation provision has not been so explicit, it has been challenged as being inconsistent with the contractual indemnity obligations.

      In Trump-Equitable Fifth Ave. Co. v. H.R.H. Const. Corp.,41 a New York appellate court ruled that a construction contract’s indemnification clause was not inconsistent with a subrogation waiver in the general conditions. The court reasoned that the indemnification is for third party claims, as demonstrated by the type of insurance that the contractor was required to obtain (i.e., worker’s compensation, public liability, comprehensive automobile liability, etc.). In contrast, the general conditions required the owner to obtain first party property insurance for property loss during construction and to waive subrogation against the general contractor and its subcontractors:

      An examination of the indemnification provision of the typewritten agreement and the printed general conditions does not reveal any inconsistency. The types of insurance which the contractor was required to provide and maintain by the agreement – workers’ compensation, public liability [i.e., CGL insurance], comprehensive automobile liability, etc. – evidence the intent of the parties that the owner would be indemnified and held harmless from liability to third parties. Plaintiff makes no claim that such third-party coverage was not provided by the defendants. In contrast, the general conditions required the owner to obtain first-party coverage for property loss in the event of damage to the building during construction and to waive its right of subrogation in favor of the defendants. Inasmuch as the owner has been fully recompensed for its loss, the indemnification provision is inapplicable and the waiver of subrogation clause governs. Such a result would not, as plaintiff argues, result in an illegal contracting away of liability by defendants of their own negligence, if negligence there was... [S]uch a waiver of subrogation provision, in effect simply requires one of the parties to the contract to provide insurance for all of the parties.”42

      Many other courts have reached similar conclusions, often noting that insurance procurement provisions themselves reflect a bargained for agreement to wholly shift the risk of loss for insured damage to insurance.43

      Tellepsen Builders, L.P. v. Kendall Heaton Associates, Inc.44, a recent Texas Court of Appeals case, involved a modified version of the AGC standard form agreement. The case arose out of construction of a retreat for a Texas church diocese. Tellepsen served as the general contractor and entered into subcontracts with Kendall for architectural design work and CBM for structural engineering and design work. Several years following completion, the Owner demanded that Tellepsen repair structural and water damage. Its CGL carrier reimbursed repair costs of $841,042. Tellepsen then filed suit against Kendall and CBM “as subrogor” of its CGL insurer (that is, Tellepsen sued in its own name but presumably at the insurer’s instance).

      Kendall and CBM moved for summary judgment, arguing that the following waiver of subrogation clause “precluded Tellepsen from seeking recovery from them for property damage covered by Tellepsen’s CGL insurance policy”:

      WAIVER OF SUBROGATION The Contractor and Architect/Engineer waive all rights against each other the Owner, Subcontractors and Subsubcontractors for loss or damage to the extent covered by property or equipment insurance, except such rights as they may have to the proceeds of such insurance.

      Tellepsen raises two interesting issues regarding the interpretation of a waiver of subrogation: (1) whether a waiver regarding property insurance applies to a liability policy (CGL); and (2) if so, whether a subrogation waiver renders the parties’ contractual indemnity obligations meaningless.

      Concerning the waiver’s application to the CGL policy, the designers argued that the CGL insurer covered the “property damage” and that the plain language of the waiver of subrogation clause could be read to mean that the parties waived any subrogation rights with respect to property damage. Tellepsen responded by arguing that “a property insurance policy is first-party insurance that protects the insured’s own assets against specific perils, such as fire or flooding.”45 “Property or equipment insurance” was not a defined term in the contract.

      Both subcontracts contained indemnity provisions which required the Architect/Engineer (i.e., Kendall and CBM) and the Contractor (Tellepsen) to indemnify each other for damages sustained as a result of their respective negligent acts or omissions. Tellepsen argued that an interpretation that the subrogation waiver applied to the damages caused by CBM and Kendall would make the indemnity clauses in the subcontracts “meaningless.” The appellate court observed that “[t]hese provisions are evidence of the parties’ intent that a right of indemnity exists in favor of the Contractor or the Architect/Engineer, and against the opposite party, as circumstances may require, in the event of a claim against one arising from the negligence of the other. Under the construction of the waiver-of-subrogation clause proposed by Kendall and CBM, these provisions arguably could be rendered meaningless when the indemnitee also has third-party insurance coverage, such as a CGL policy.”46 The court held that the indemnity clauses, when read together with the waiver of subrogation clause, created an ambiguity and remanded the case for resolution of the ambiguity through use of extrinsic evidence to determine the parties’ intent.47

      In Gray Ins. Co. v. Old Tyme Builders, Inc.,48 the court rejected an argument that a CGL policy was not subject to the waiver of subrogation clause in A201 §11.3.7 simply because it was a “liability” policy, rather than a “property” policy. Instead, the court held that where the subrogation clause provided that “damages caused by fire or other perils to the extent covered by property insurance obtained pursuant to this Paragraph 11.3 or other property insurance applicable to the Work”, it applied to any property damage covered by insurance that was in effect during the time period required by ¶¶ 11.3.1 and 11.3.7.49 Accordingly, the waiver barred the CGL insurer’s subrogation claim.

  4. What is Covered by the Subrogation Waiver?
    1. The “Work”

      Subrogation waiver provisions typically address property, and other, insurance applicable to the “work” as defined in the contract. It is generally undisputed that the “work” includes that which is being constructed pursuant to the contract. In the context of a loss, the determination of what is, or is not, “work” is of critical importance. The term “Work” is defined in Paragraph 1.1.3 of A201-2007 as follows:

      1.1.3 THE WORK

      The term “Work” means the construction and services required by the Contract Documents, whether completed or partially completed and includes all other labor, materials, equipment and services provided or to be provided by the Contractor to fulfill the Contractor’s obligations. The work may constitute the whole or a part of the Project.

      As one court has summarized, the Work is the construction and services to be provided by the contractor to fulfill the contractor’s obligations under the contract and may constitute the whole or a part of the “Project.”50

      Paragraph 1.1.4 of A201-2007 defines “Project” as the “total construction of which the Work performed under the Contract Documents may be the whole or a part and which may include construction by the Owner and by separate contractors.” Stated more simply, the Project incorporates all the construction to be done, whether by the contractor, the owner, or other contractors.51 Disputes commonly arise, particularly in the context of repair and renovation projects, as to whether damage to existing or adjacent property, or its content, is a part of the “work.”

    2. Do Waivers Extend Beyond “The Work”?

      Several recent cases address the applicability of standard subrogation waivers to property other than “the Work.” One such case is the Colorado Supreme Court’s 2009 decision in Copper Mountain v. Industrial Systems.52 Copper Mountain, a resort owner, entered into a contract with a general contactor to perform renovations and build an addition, which subcontracted construction of a steel framework.53 The contract included the A201-1997 General Conditions. Copper Mountain covered the project by securing an endorsement to its insurance policy for existing property, as opposed to securing separate builders risk insurance through a stand alone policy. During the course of construction, the steel subcontractor’s welding operations caused a fire which resulted in significant damage to existing property. Copper Mountain was responsible for a $1 million self insured retention, and sued the general contractor and its subcontractor to recover this amount.

      The defendants argued that Copper Mountain’s claims were barred by a waiver of subrogation in ¶ 11.4.5, waiving subrogation rights with respect to adjacent property during the course of construction, and with respect to property insurance secured on the completed Project after final payment “for damages caused by fire or other causes of loss covered by this separate property insurance.” They also argued that ¶ 11.4.7 waived claims, through language mutually waiving rights “against each other and any of their subcontractors ... for damages caused by fire or other causes of loss to the extent covered by property insurance pursuant to this Paragraph 11.4, or other property insurance applicable to the Work.”

      The trial court agreed with the defendants and was affirmed by the court of appeals. The Colorado Supreme Court reversed, holding that “the contract [did] not bar Copper Mountain’s claims... for damages to property that was not part of the contractual Work, despite the fact that Copper Mountain insured the damaged property under an existing policy covering the Work.”54 The Court framed the issue as “whether Copper waived its right to sue... for damages to its non-Work property even though Copper insured that property under an existing policy covering Work property.” The Court held that neither ¶ 11.4.5 nor ¶ 11.4.7 barred non-Work damages claims. The Court reasoned that 11.4.7 refers to insurance secured for the Work and, therefore, the waiver did not apply to damages to non-Work.

      The Court also examined a number of other contract clauses (set forth at n.52) and reasoned that they provided contextual support for its conclusion. For example, if Copper Mountain had waived claims for non-Work, there would be no reason to require the contractor to secure insurance for damage “other than to the Work itself”, per ¶ 11.5. Similarly, the ¶ 10.2.5 contractor obligation to remedy damage to property other than that insured by property insurance would also be meaningless if claims for non-work property were waived. The Court stated that it was effectuating “a construction of the contract that harmonizes provisions instead of rendering them superfluous. If the intent of the contract were to waive all claims to the non-Work to the extent covered by Copper’s insurance, the contract could have stated this explicitly.”55

      The Nebraska Supreme Court reached the opposite conclusion in 2008 in Lexington Insurance Company v. Entrex Communications Services, Inc.56 That case arose out of property damage caused by a collapsing television tower. The construction contract included A201-1997 which contained ¶¶ 11.4.5 and 11.4.7. By the time the case reached the Nebraska Supreme Court, the insured had assigned its claims to its property insurer, Lexington. The trial court had previously ruled that the owner “had waived all claims covered by its all-risk insurance policies, including damages to the Work and non-Work property.”57 The Nebraska Supreme Court affirmed.

      The Court observed a split of authority between what it characterized as a majority and minority approach, citing the following Texas Court of Appeals description:

      One approach makes a distinction between Work (as that word is defined in the contract) and non-Work property and limits the scope of the waiver to damages to the Work; and the second approach draws no distinction between Work and non-Work, but instead, limits the scope of the waiver to the proceeds of the insurance provided under the contract between the owner and contractor.58

      The Court followed the second approach. It reasoned that this is consistent with ¶ 11.4.5, which the Court observed applies to non-Work owner property at or adjacent to the property: “applying suparagraphs 11.4.5 and 11.4.7, the owner waives damages to both the Work and the non-Work property when the owner obtains two separate policies. We see no reason why the parties would intend a different result when, instead of purchasing two separate policies, the owner relied on one policy covering the Work and the non-Work property as [the Owner] did here.”59 While other courts have noted the distinction between an owner’s decision to obtain property coverage for construction work through an existing policy and the owner’s purchase of a new policy intended for the construction work only, the majority view is that the A201 waiver of subrogation applies regardless of whether a separate policy exists.60

      Willis Realty Assocs. v. Cimino Cons. Co.61 provides a similar interpretation of the A201 subrogation waiver. This case arose out of a wall collapse during construction. The contractor had contracted with the owner for construction of an addition to property leased by an owner affiliated company. The owner and contractor entered into “a standard [AIA] form construction contract” containing a subrogation waiver waiving all damage claims “to the extent covered by insurance obtained pursuant to this [contract] or any other property insurance applicable to the work.”62 Following execution of the contract, the parties agreed that the contractor would secure builder’s risk insurance, instead of the owner; the waiver of subrogation language did not change, however. The wall collapse took place in October 1986. The contractor did not secure builder’s risk insurance for another month, and that policy did not cover pre-existing damage, including the October collapse.

      The owner and lessor were covered by a Royal property insurance policy – their insurance paid the loss and then instituted a subrogation action against the contractor, in the name of their insureds. After a bench trial, the court entered judgment against the general contractor in favor of the owner and lessor. On appeal, Maine’s Supreme Judicial Court affirmed in part and reversed in part. The court observed that the ¶ 11.3.6 waiver of subrogation clause is “liberally constructed.”63 The wall was “an integral part of the project” and thus fell within the rubric of “the work.” As a consequence, the court of appeals held (1) that the trial court erred in entering judgment in favor of the owner; but (2) that the trial court did not err in entering judgment against the lessor – because it was not a party to the contract, the subrogation waiver did not apply.64

    3. Claims for Gross Negligence

      The Entrex case, discussed previously, also raised the issue of whether waivers of subrogation are applicable to claims for gross negligence. Challenges to the application of subrogation waivers to a party’s grossly negligent acts are generally based upon the argument that public policy precludes parties from contractually disclaiming or limiting their liability for gross negligence. In Entrex,65 the Court noted a split of authority among jurisdictions regarding whether to enforce contractual waivers of subrogation against claims for gross negligence.

      Some courts have held that even though traditional exculpatory provisions may not be effective against claims for gross negligence, waivers of subrogation are effective to bar gross negligence claims. But other courts have decided that because a traditional exculpatory clause is generally ineffective against a gross negligence claim, a waiver of subrogation will similarly be ineffective.66

      In contrast to public policy considerations that limit exculpatory clauses purporting to limit parties’ rights to recover for gross negligence, the Court made the following distinction between prohibited exculpatory clauses and subrogation waivers:

      the danger with exculpatory clauses is that a party injured by another’s gross negligence will be unable to recover its losses. But such danger is not present in cases involving waivers of subrogation because the waiver only applies to losses covered by insurance, so “there is no risk that an injured party will be left uncompensated. Also, waivers of subrogation serve other important policy goals not met by exculpatory clauses... We, like other jurisdictions, recognize the important policy goal that waivers of subrogation serve in avoiding disruption of construction projects and reducing litigation among parties to complicated construction contracts. Concluding that waivers of subrogation cannot be enforced against gross negligence claims would undermine this underlying policy by encouraging costly litigation to contest whether a party’s conduct was grossly negligent.67

      Other courts have used a similar rationale in finding that waivers of subrogation are sufficiently distinct from exculpatory provisions and thus, not prohibited by anti-indemnity statutes.68

    4. Post Completion Losses: It Ain’t Over ‘Til It’s Over... Maybe.

      Typically, parties think of waivers of subrogation as applying to property damage occurring during the construction process, particularly as regards builder’s risk policies. However, contractual waivers of subrogation may also apply to losses incurred after final completion and final payment, even where an insurance policy is issued after completion. Where courts have considered this issue, the decisions have turned on whether the contract language evidences the parties’ intent that the waivers of subrogation apply after completion of construction.

      One important factor is whether the contract contains a subrogation continuation clause69 such as ¶ 11.3.5 of AIA A201-2007 which, in pertinent part provides:

      If... after final payment, property insurance is to be provided on the completed Project through a policy or policies other than those insuring the Project during the construction period, the Owner shall waive all rights in accordance with the terms of Section 11.3.7 for damages caused by fire or other causes of loss covered by this separate property insurance. All separate policies shall provide this waiver of subrogation by endorsement or otherwise.70

      When read in conjunction with the waiver of subrogation clause contained in A201 § 11.3.7, courts have generally held that the language of ¶ 11.3.5 is unambiguous and extends the waiver of subrogation to post-construction losses.71 Courts have been more reluctant to extend waivers of subrogation to post-construction losses where a subrogation continuation clause is not included.72

      Nevertheless, in Lumbermens Mut. Cas. Co. v. Grinnell Corp.,73 the court held that the contractual waiver of subrogation contained in A201-1997 did not bar an insurer’s subrogation claims for post-construction losses, even though the contract contained a subrogation continuation clause. The Lumbermens court decision was based primarily on its distinction between the extension of the same insurance policy that was in effect during construction and, along with it, the related waiver of subrogation rights, and instances where a separate policy is purchased after construction.74

      It does not follow that a general contractor and subcontractors should be released from post-construction liability under 11.4.5 simply because the property owner chooses to purchase a post-construction insurance policy for its own benefit. That would likely result in a windfall for the general contractor and the subcontractors unless they had negotiated such a release in advance. Furthermore, if it knew that its insured had waived subrogation rights, an insurer would certainly assess a higher premium than if it retained its common law right to subrogation. The converse, of course, is also true: if the original policy covering the construction period for which subrogation rights were waived was simply extended into the future, it is logical to extend the waivers because the premium for that policy had taken into account such waivers.75

      The court interpreted the subrogation continuation clause as giving the owner an option, to purchase post-completion insurance, not imposing a requirement.76 Therefore, according to the court, the parties had not explicitly intended that the owner was to purchase additional insurance beyond the coverage required by ¶ 11.4.1, which was to be maintained during construction until final payment was made.77 Accordingly, it was held that “the parties manifested their intent not to provide post-construction insurance nor to waive post construction subrogation rights as to the defendants.”78

  5. Conclusion

    Waivers of subrogation are not to be taken lightly as their interpretation can have serious, and often devastating, consequences in the event of a loss. Parties should be careful in reviewing not only the specific waiver of subrogation provisions, but also provisions regarding insurance, indemnity, waivers upon final payment, and even the definitions of the terms “Work” and “Project,” as all of these provisions could have significant bearing on the scope and effectiveness of subrogation waivers. Accordingly, here are a few things to consider when evaluating subrogation waivers:

    • Does the party waiving subrogation rights need to obtain a written waiver from its insurance company? Is coverage prejudiced if the insured waives subrogation rights without insurer consent?
    • Is the waiver defined by the scope of work in the contract or the type of risks covered by insurance?
    • Does the waiver cover damage to the work only, or does it apply to damage to existing or adjacent property?
    • Does the waiver apply to subcontractors, sub-subcontractors, and suppliers? Do they need to be specifically mentioned in the subrogation waiver clause?
    • Does the waiver apply to post-completion losses?
    • Does the waiver apply even where no insurance coverage is available?

    While this list is not exhaustive, these are critical issues that should be considered, analyzed and understood in order to avoid an unpleasant surprise after a loss has occurred. The analysis of these issues should not be blindly delegated to non-lawyer insurance brokers and consultants. Instead, no matter how daunting (or boring) the task may seem, during your next contract review, we think you would be wise to settle down into a “comfortable chair, with a strong cup of coffee nearby” and carefully examine waiver of subrogation issues head-on.


ENDNOTES

1 Arlan Lewis is an attorney in Construction and Government Contracts Practice group of Bradley Arant Boult Cummings LLP in Birmingham, Alabama. Stephen Palley is an attorney in the Construction and Government Contracts and Insurance Group of Howrey, LLP in Washington, DC. The opinions expressed herein are the authors alone, and not endorsed by their respective firms or clients. In addition, while any errors are their own, the authors gratefully acknowledge invaluable editorial assistance by William Warnock, Jr. of Buist Moore Smythe McGee of Charleston, South Carolina.

2 Robert I. Fitzhenry, Harper Book of Quotations, (3d Ed. 1993), p. 21.

3 In fairness, the authors recognize that subrogation waivers may hold less immediate appeal than other components of a construction contract. As a California appeals court noted in a recent subrogation case, “the issues are from enthralling; they demand an almost microscopic examination of dry, lengthy contract documents. As we embark on the resolution of these issues, then, we think it is only fair to suggest that the reader might want to be sitting in a comfortable chair, with a cup of strong coffee nearby.” American Guarantee and Liability Insurance Company v. ADP Marshall, Inc., 2007 WL 4239997, * 1 (Cal. Ct. App. 2007).

4 Readers whose appetite is whetted for more on this subject might consider the following, in addition to several other excellent treatments cited elsewhere in the notes: OWEN J. SHEAN AND DOUGLAS L. PATIN, CONSTRUCTION INSURANCE: COVERAGE AND DISPUTES, § 4-8 (1995); 4 PHILIP L. BRUNER & PATRICK J. O’CONNOR, JR. BRUNER AND O’CONNOR ON CONSTRUCTION LAW §§ 11:189 - 11:197(2002)

5 There is nothing like a little bit of Latin (or etymology) to enliven a discussion of insurance. With that in mind, we note that the word subrogation has noble Latin roots, as a participle form of “subrogare to nominate (someone) as a substitute), equiv. to sub- sub- + roga(re) to request + -tus ptp. Suffix).” See www.dictionary.com (last visited May 26, 2010).

6 See generally, supra, n. 4.

7 Id.

8 In some jurisdictions, insurers may also have a right of equitable subrogation that allows them to sue other insurers for reimbursement of losses for which other carriers share some liability. See e.g., In re September 11 Litigation, 649 F. Supp.2d 171, 178 (S.D.N.Y. 2009).16 George J. Couch et al., Couch on Insurance 2d § 61:1 (2d rev. ed. 1983 and Supp.1998) (cited in Allstate Insurance Company v. Mazzola, 175 F.3d 225 (2d Cir. 1999)).

9 St. Paul Fire and Marine Insurance Company v. Turner Construction Company, 2009 WL 738768, * 1 (3d Cir. 2009) (citing Universal Underwriters v. Kacin, 916 A2d 686, 692 (Pa. Super. 2007) and Commercial Union Insurance v. Bituminous Casualty, 851 F.2d 98 (3d Cir. 1998)).

10 See Lexington Ins. Co. v. Entrex Communication Services, Inc., 749 N.W.2d 124, 130 (Neb. 2008)(noting that waivers of subrogation are particularly useful in a construction contract in that it avoids disruptions and eliminates the need for lawsuits while protecting the parties from loss by bringing all property damage under the all risk builder’s property insurance); TX. C.C., Inc. v. Wilson/Barnes General Contractors, 233 S.W.3d 562, 567-68 (Tex. App. Dallas 2007) (waiver of subrogation clause intended to avoid disruption during construction and substitutes the protection of insurance for the uncertain and expensive protection of liability litigation).

11 Walker v. Vanderpool, 225 Va. 266, 271 (1983), cited in Loverde v. Building Management, Inc., 2006 WL 1994576 (Va. Cir. Ct. 2006).

12 Loverde supra, 2006 WL 1994576 at *2,

13 In some states the insured remains the real party in interest. See e.g. Knob Noster R-VIII School District v. Dankenbring, 220 S.W.3d 809, 816 (Insured was a named party in subrogation action: [w]hen the insurer pays the insured, the insured retains legal title to the claim. The insurer has a right to subrogation, however. The exclusive right to pursue the tortfeasor remains with the insured, and the insured holds the proceeds for the insurer.”) In others, the insurer is characterized as the real party in interest in a subrogation action. See Trump-Equitable Fifth Avenue Company V. H.R.H. Construction Corporation, 106 A.2d 242, 243 (plaintiff filed suit in its own name “for real party in interest, [the Insurer], as subrogee.” Although this degree of procedural minutiae is outside the scope of this essay, two things are clear – (1) approaches differs by state, (2) courts use terminology loosely.

14Copper Mountain, Inc. v. Industrial Systems, Inc., 208 P.3d 692, 696 (Colo. 2009).

15 Id. at 693.

16 See e.g., Allstate Ins. Co. v. Palumbo, 296 Conn. 253, --- A.2d ----, 2010 WL 1850367 (Conn. 2010).

17 See AIA A201-2007, §§ 11.3.1, 11.3.7; AGC Doc. No. 200, ¶ 10.4.1; EJCDC No. 1910-8 (1996 Edition), ¶¶ 5.06 and 5.07; DBIA Doc. No. 535, §§ 5.3.1 and 5.3.5; ConsensusDOCS 200, §§10.3.1 and 10.3.3.

18 Lumberman’s Mutual Casualty Co. v. Grinnell Corp., 477 F. Supp.2d 327, 332 (D. Mass. 2007) (citing cases).

19 See Midwestern Indemnity Co. v. Systems Builders, Inc., 801 N.E.2d 661, 669-71 (Ind. App. 2004); See also Indiana Ins. Co. v. Erhlich, 880 F. Supp. 513 (U.S.D.C, W.D. Mich. 1994) (waiver applied to subcontractor by virtue of Michigan’s third party beneficiary statute); Gulf Insurance Co. v. Quality Building Contractor, Inc., 58 A.D.3d 595 (N.Y. App. Div. 2009) (subcontractor protected by waiver of subrogation in prime contract where subcontract incorporated prime contract); Best Friends Pet Care, Inc. v. Design Learned, Inc., 823 A.2d 329 (Ct. App. 2003) (subcontractor covered by waiver of subrogation in prime contract even where subcontract did not contain a waiver of subrogation provision).

20 See Touchet Valley Grain Growers, Inc. v. Opp & Seibold General Construction, Inc., 831 P.2d 724 (Wash. 1992); Fortin v. Nebel Heating Corp., 429 N.E.2d 363 (Mass. App. Ct. 1981).

21 Owners sometimes balk at broad subrogation waivers or including contractors as insureds under project builder’s risk policies. In addition to raising the possibility of finger pointing and recrimination in the event of a loss, there may be unintended financial consequences for an Owner who, in addition to securing builder’s risk insurance, also provides liability insurance through an OCIP. If a builder’s risk carrier is able to prosecute a subrogation action against an OCIP enrolled general contractor, the contractor will simply demand a defense and indemnity from the OCIP carrier. If the Owner is liable for the OCIP policy SIR or deductible and the insurance premium is “loss sensitive” (that is, higher or lower depending on loss frequency) the Owner can end up paying more for a builder’s risk loss than an OCIP insured contractor.

22 See Gulf Insurance Co. v. Quality Building Contractor, Inc., 58 A.D.3d 595 (N.Y. App. Div. 2009)(waiver of subrogation in prime contract did not entitle architect to summary judgment against property insurer’s claim where architect’s contract with the owner did not contain a waiver of subrogation and the architect was not a party to the prime contract). The AIA has expressly included a waiver of subrogation in the owner-architect agreement form B101-2007, ¶ 8.1.2.: “To the extent damages are covered by property insurance, the Owner and Architect waive all rights against each other and against the contractors, consultants, agents and employees of the other for damages, except such rights as they may have to the proceeds of such insurance as set forth in AIA Document A201-2007 . . .”

23 Travelers Prop. Cas. Co. of Am. v. Kansas City Power & Light, 568 F. Supp. 2d 1040, 1061 (W.D. Mo. 2008) (an insured is permitted to keep proceeds from third party tortfeasors for uninsured damages; “public policy supports a holding that the insurer, who has been paid to assume a risk, be made to bear that risk until the insured has recovered its uninsured damages”); Chong v. State Farm Mut. Auto. Ins. Co., 428 F. Supp. 2d 1136, 1147 (S.D. Cal. 2006) (absent a contractual provision to the contrary, the make-whole rule requires that a policyholder fully recover her loss and litigation expenses before a nonparticipating insurance carrier could seek reimbursement); York v. Sevier County Ambulance Auth., 8 S.W.3d 616, 621 (Tenn. 1999) (concluding that an insured must receive full compensation and be made whole for his or her losses for his or her damages before an insurer is entitled to assert subrogation rights).

24 PRC, Inc. v. O’Bryan, 47 Va. Cir. Ct. 81 (1998) (citations omitted).

25 See, e.g., Ins. Co. of N. Am. v. Lexow, No. 88-67 CIV-OC-12, 1989 U.S. Dist. LEXIS 18428, at *11 (N.D. Fla. July 12, 1989) (insured must be made whole for total damages, including consequential business losses, before insurer is entitled to subrogation for damages paid under fire insurance policy); Travelers Prop., 568 F. Supp. 2d at 1061 (where insured recovered less than its uninsured damages in a third party action it has not been compensated twice for any damages and insurer was not entitled to any part of settlement proceeds).

26 See e.g. Northern Buckeye Education Council Group Health Benefits Plan v. Lawson, 103 Ohio St.3d (Oh. 2004) (Non-ERISA group health insurance plan allowed to secure reimbursement of losses prior to full recovery by insured, per pre-loss agreement; over strong dissent by Pfeiffer, J.)

27 One such broader waiver is included in the final section of this essay.

28 There is an ISO Inland Marine form, though (unlike CGL coverage) the ISO form has not become the market standard.

29 See A201-2007, §11.3.7 (“The policies shall provide such waivers of subrogation by endorsement or otherwise.”); AGC Doc. No. 200, ¶10.4.1 (“This policy shall provide for a waiver of subrogation in favor of the Contractor, Subcontractors, Subsubcontractors, Material Suppliers and Architect/Engineer . . .”)

30 For example, a carrier may cite § 4(8) of the standard ISO CGL policy form, “Transfer Of Rights Of Recovery Against Others To Us” (“If the insured has rights to recover all or part of any payment we have made under this Coverage Part, those rights are transferred to us. The insured must do nothing after loss to impair them. At our request, the insured will bring "suit" or transfer those rights to us and help us enforce them.” As a matter of contract construction, an argument can be made that this only applies to post-loss waivers. However, broad waivers “where required by written contract” can be secured when policies are placed, thereby avoiding such arguments altogether.

31 Couch on Insurance, § 224:97, cited in Universal Underwriters Insurance Co. v. A Richard Kacin, Inc., 916 A.2d 686 (Pa. 2007); and see, e.g. Allianz Insurance Company v. Structure Tone et al., 2006 WL 2006701, * 3 (S.D.N.Y. 2005) (rejecting under New York law insurer argument that it was not bound by subrogation waiver to which it had not consented).

32 Kacin, 916 A.2d at 695.

33 Id. (citing Lopez v. Concord General Mut. Ins. Group, 583 A.2d 602 (1990); St. Paul Fire & Marine Ins. Co. v. Amerada Hess Corp., 275 N.W.2d 304, 308 (N.D. 1979)).

34 The authors note that there is a dearth of case law interpreting the subrogation provisions contained in other form contracts promulgated by ConsensusDOCS, EJCDC, DBIA and AGC. However, to the extent such cases have been discovered, they are discussed elsewhere in the materials.

35 A201-2007, ¶11.3.7. In the 1997 version of A201, this subparagraph was numbered as ¶11.4.7. The 1997 numbering was due to the inclusion of ¶11.3 entitled “Project Management Protective Liability Insurance.” The Project Management Protective Liability Insurance paragraph was removed from the 2007 version and was not contained in the 1987 version of A201. The 1987 version of the waiver of subrogation provision is numbered as ¶11.3.7. Substantively, the language of the waiver of subrogation provision did not significantly change from 1987 through 2007.

36 ConsensusDOCS 200 –Standard Agreement and General Conditions Between Owner and Contractor (2007), ¶10.3.3.; AGC Doc. No. 200 - Standard Agreement and General Conditions Between Owner and Contractor (2000), ¶10.4.3; DBIA Doc. No. 535-Standard Form of General Conditions of Contract Agreement between Owner and Design-Builder (2009), §5.3.5; EJCDC No. 1910-8 (1996 Edition)- Standard General Conditions of the Construction Contract, ¶5.07.

37 See also ConsensusDOCS 200, ¶10.3.1; AGC Doc. No. 200,¶10.4.1; DBIA Doc. No. 535, §5.3.1; EJCDC No. 1910-8, ¶5.06

38 See also ConsensusDOCS 200, ¶10.2; AGC Doc. No. 200, ¶10.3; DBIA Doc. No. 535, §5.1; EJCDC No. 1910-8, ¶5.04

39 See A201-2007, §3.18.1; ConsensusDOCS 200 (2007), ¶ 10.1; DBIA Doc. No. 535 – Standard Form of General Conditions of Contract Agreement between Owner and Design-Builder, §7.4.1

40 A201-2007, §11.3.7

41 106 A.D.2d 242, (1st Dept. 1985)

42 Id. at 245 (internal citation and brackets omitted).

43 See e.g., Acadia Ins. Co. v. Buck Const. Co., 756 A.2d 515 (Me. 2000); Indiana Ins. Co. v. Carnegie Constr., Inc., 661 N.E.2d 776 (Oh. Ct. App. 1995); Len Immke Buick v. Architectural Alliance, 611 N.E.2d 399 (10th Dist. 1992). Insurance Co. of North America v. E.L. Nezelek, Inc., 480 So. 2d 1333 (Fla. Ct. App. 1985).

44 2010 WL 1491940 (Tex. App. 1st Dist 2010).

45 Id. at *4, citing, inter alia, 4 PHILIP L. BRUNER & PATRICK J. O’CONNOR, JR. BRUNER AND O’CONNOR ON CONSTRUCTION LAW § 11:106, 33637 (2002); Warrilow v. Noreell, 891 S.W.2d 515, 527-528 (Tex. Ct. App. 1989).

46 Id. *5.

47 Id. at *6.

48 878 So.2d 603 (La. App. 1 Cir. 2004).

49 Id. at **7-8 (emphasis in original).

50 Entrex, 749 N.W.2d 124, 127 (Neb. 2008).

51 Id.

52 208 P.3d 692, 696 (Colo. 2009).

53 Id. at 694. The Colorado Supreme Court noted several relevant contract provisions: § 1.1.3, defining the Work as “the construction and services required by the Contract Documents, whether completed or partially completed, and . . . all other labor, materials, equipment, and services provided to or to be provided by the Contractor to fulfill the Contractor’s obligations”; § 3.3.2, providing that the general contractor would be responsible to the owner “for acts and omission of [its] employees [and]” the subcontractor and its “agents and employees”;§ 10.2.5, requiring the general contractor “to promptly remedy damage and loss (other than damage or loss insured under property insurance required by the Contract Documents)” caused by the contractor or its subcontractors “to the Work, or to other property at or adjacent to the site, such as structures not designated for removal, relocation or replacement during the construction”; § 11.5, obligating the general contractor to secure insurance to protect it from claims “which may arise our of or result from [contractor’]s operations under the Contract and for which [contractor] may be legally liable . . . including [c]laims for damages, other than to the Work itself, because of injury to or destruction of tangible property”; § 11.4.1, requiring Copper to secured all risk builders insurance for “the amount of the Initial Contract Sum, plus value of subsequent Contract modifications[.]

54 Id. 696. The Court followed Town of Silverton v. Phoenix Heat Source System, Inc., 948 P.2d 9 (Col. Ct. App. 1997), and also relied precedent from other jurisdictions, including Midwestern Indem. Co. v. Sys. Builders, Inc., 802 N.E.2d 661, 672-673 (Ind. Ct. App. 2004); Fid. & Guar. Co. v. Craig-Wilkinson, Inc., 948 F. Supp. 608, 611 (S.D. Miss. 1996); Butler v. Mitchell-Hugeback, Inc., 895 S.W.2d 15, 22 (Mo. 1995); Pub. Employees Mut. Ins. Co. v. Sellen Costr. Co.,740 P.2d 913, 916 (1987); Travelers Ins. Co. v. Dickey, 799 P.2d 625, 631 (Ok. 1990). The Court also noted the following contrary authority in cases holding that AIA § 11.4.7 “bars an owner’s claim for damages to non-Work property to the extent the owner’s insurance policy covering Work also covers the non-Work property”: Lexington Ins. Co. v. Entrex Commc’n Servs., 749 N.W.2d 124 (2008); Trinity Universal Ins. Co. v. Bill Cox Constr, Inc., (Tex. Ct. App. 2001); Employers Mut. Cas. Co. v. A.C.C.T., Inc., 580 N.W.2d 490, 493 (Minn. 1998).

55 Id. at 700.

56 749 N.W.2d 124 (Neb. 2008).

57 Id. at 127.

58 Id. at 1329 (citing Trinity Universal Ins. Co. v. Bill Cox Const., 75 S.W.3d 6, 11 (Tex. App. 2001)

59 Id. at 135.

60 See Walker Engineering, Inc. v. Bracebridge Corp., 102 S.W.3d 837 (Tex. App. 2003); Rahr Malting Company v. Climatic Control Company, Inc., 150 F.3d 835 (8th Cir. 1998). For the minority view, see Employer’s Mut. Cas.Co. v. A.C.C.T., 580 N.W.2d 490, 493 (Minn. 1998); Independent School District 833 v. Bor-Son Construction, Inc., et al., 631 N.W.2d 437 (Minn. App. 2001).

61 623 A.2d 1287 (Me. 1993).

62 Per the Court, the relevant portion of Article 11.3.6 read as follows: “The Owner and Contractor waive all rights against . . . each other . . . for damages caused by fire or other perils to the extend covered by insurance obtained pursuant to Paragraph 11.3 or any other property insurance applicable to the Work except such rights as the may have for the proceeds of such insurance held by Owner, as trustee.”Id. at 1288, n. 2 (ellipses in original).

63 Id. at 1288, citing Village of Rosemont v. Lentin Lumber Co., 494 N.E.2d 592, 597 (Il. Ct. App. 1st Dist. 1986); Haemonetics Corp. v. Brophy & Phillips Co., Inc., 23 N.E.2d 524, 526 (Mass. Ct. App. 1986).

64 See also Bruner & O’Connor, Section 5:231 at p. 410.

65 749 N.W.2d 124 (Neb. 2008)

66 Id. at 129 (citations omitted).

67 Entrex, 749 N.W.2d 124 at 130. “The argument against permitting such waivers is that it makes the contractor less vigilant in preventing property damage. Despite this argument, the American Institute of Architects, which drafted the form of waiver in this case, has made ‘strenuous efforts’ to convince courts to enforce such waivers, and Pennsylvania courts have agreed.” St. Paul v. Turner Const., supra, 2009 WL 738768 at * 1 (citing 2 Justin Sweet et al., Sweet on Construction Industry Contracts: Major AIA Documents § 22.04[m] (4th ed. 1999)).

68 Best Friends Pet Care, Inc. v. Design Learned, Inc., 823 A.2d 329 (Conn. App. 2003); Ralph Korte Construction Co. v. Springfield Mechanical Co., 369 N.E.2d 561 (Ill. App. 1977); vChadwick v. CSI, Ltd., 629 A.2d 820 (N.H. 1993).

69 This is sometimes referred to as a “completed project insurance clause.”

70 A similar provision is contained in the 1996 version of the EJCDC Standard General Conditions of the Construction Contract at Paragraph 5.07.B.2:

B. OWNER waives all rights against CONTRACTOR, Subcontractors, ENGINEER, ENGINEER’s Consultants, and the officers, directors, partners, employees, agents, and other consultants and subcontractors of each and any of them for:...

2. loss or damage to the completed Project or part thereof caused by, arising out of, or resulting from fire or other insured peril or cause of loss covered by any property insurance maintained on the completed Project or part thereof by OWNER during partial utilization pursuant to paragraph 14.05, after Substantial Completion pursuant to paragraph 14.04, or after final payment pursuant to paragraph 14.07.

71 Argonaut Great Cent. Ins. Co. v. DiTocco Construction, Inc., 2007 WL 4554219 (D.N.J.); Midwestern Indemnity Co. v. Systems Builders, Inc., 801 N.E.2d 661 (Ind. App. 2004); Colonial Properties Realty, Ltd. Partnership v. Lowder Constr. Co., Inc., 567 S.E.2d 389 (Ga. App. 2002); Town of Silverton v. Phoenix Heat Source System, Inc., 948 P.2d 9 (Colo. Ct. App. 1997).

72 See Hartford Underwriters Ins. Co. v. Phoebus, 979 A.2d 299 (Md. App. 2009)(Subrogation waiver did not extend to post-completion damage because, without subrogation continuation clause, contract was ambiguous as to post-completion application of waiver); Royal Surplus Lines Ins. Co. v. Weis Builders, 2006 WL 897078 (W.D. Ky.)(parties intentionally omitted subrogation continuation clause and where waiver of subrogation provision applied to the“Project” which, as defined in the contract, terminated upon completion); Automobile Ins. Co of Hartford Connecticut v. United H.R.B. General Contractors, Inc., 876 S.W.2d 791 (Mo. Ct. App. E.D. 1994)(subrogation waiver did not continue after building completion and final payment where no subrogation continuation clause and where, by making final payment, owner waived all claims “except those arising from faulty or defective Work”)

73 477 F. Supp 2d 327 (D. Mass. 2007)

74 Id. at 331-32.

75 Id. at 332-33.

76 Id.

77 Id. at 333.

78 Id.

 

 

*Stephen D. Palley is a former Ober|Kaler attorney.

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