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Insurance Update: "Boilerplate," Subrogation Waivers and Choice of Law
Under Construction (American Bar Association Forum on the Construction Industry)
"'That's enough to begin with,' Humpty Dumpty interrupted: 'there are plenty of hard words there. "Brillig" means four o'clock in the afternoon – the time when you begin broiling things for dinner.'"
– Humpty Dumpty to Alice in Wonderland, Through the Looking-Glass, Lewis Carroll (1871)
"Agreed payment to be made on account to our assured, including monies paid to date, of $1.2 millions in undisputed claims for loss under Policy Number XYX-123456 for 2009 to 2010, for loss suffered or paid on June 14 2011, caused by fire . . . and on the condition that the Company is Surrogated to all claims, right, obligations, liens, choses in action, and shall enter into agreements, releases, acquittances, and have the file suit in YOUR name, for all claims and losses from the loss ..."
– Insurance Company "Subrogation Receipt."
Poetic license may leaven the "subrogation receipt" quoted above, but it is mostly true to the original, and just as unclear. With Humpty Dumpty's exegetical skills in mind, we focus below on perils and pleasures of "boilerplate", discuss some recent subrogation developments, and conclude with an update on choice of law in construction insurance disputes.
During a recent negotiation for a commercial insurance policy subject to a substantial premium, an underwriter refused to modify any of the policy's language, even language that made no sense. His response was something like this: "why do you care about the language? It's just boilerplate. We always pay our claims – I'll give you the names of three insureds who will back me up on this. No one ever asks to do this. The language doesn't mean anything." (Or perhaps the underwriter had been reading Borges. See Tlön, Uqbar, Orbis Tertius, by Jorge Luis Borges ("Things became duplicated in Tlön; they also tend to become effaced and lose their details when they are forgotten."))
Boilerplate is an odd concept – it suggests that the language is formulaic, fixed and unchangeable and, as this underwriter used the word, not worth very much. But if the contract language has no value or "doesn't mean anything", why one would pay so much for it particularly where, as was the case in the negotiation above, there were other options? And while one might genuinely trust the people on the other side of the table, there is no way to predict whether they will be on the other side of the table when there is a claim and the boilerplate is read by a lawyer. In short, why would someone pay $1 million for words that mean nothing?
The negotiation above was neither the first time we have heard someone refer to an insurance policy as "boilerplate" and it likely won't be the last. As usual, in that negotiation, common sense and commercial considerations ultimately prevailed – some changes were made, others weren't. There are some practical limitations in policy negotiation – how much leeway an underwriter may have can depend on things as varied as reinsurance contracts, state regulatory requirements, market capacity for certain types of coverage, home office approval, or how much premium is at issue, to name a few. We don't mean to suggest that everything is always negotiable. However, the concept that something is "just boilerplate" is at least worthy of polite response. In most cases, boilerplate can sometimes be reduced or, if nothing else, its flaw or limitations examined at the outset.
It was apparently fashionable at one point for insurance lawyers to quote Alice in Wonderland, for obvious reasons, which is why we begin with the quote at the outset. At the risk of stating the obvious, Insurance policies and related agreements – like the imagined example at the outset (with language taken from several different proposed agreements) – sometimes contain the strangest contortions, sometimes in the name of boilerplate. Whether one represents insurers or insureds, making "brillig" mean "four o'clock in the afternoon" is no mean feat, but sometimes that's where boilerplate will get you.
More on Subrogation Waivers
Speaking of boilerplate: construction contract subrogation waivers were at issue in a September 2011 opinion issued by the Appeals Court of Massachusetts. N. Am. Spec. Ins. Co. v. Payton Constr. Corp., 953 N.E.2d 233 (Mass. App. Ct. 2011). The basic facts follow:
- The Owner and General Contractor entered into construction agreement incorporating standard AIA A201 General Conditions [PDF].
- The General Conditions contained a mutual waiver of subrogation and specified that the General Contractor would require subcontractors of all tiers to sign similar waivers of subrogation.
- The Contractor failed to secure a waiver from one of its subcontractors.
- There was a $1.2 million loss, during the course of construction.
- The insurer paid the Owner.
- The insurer sued the General Contractor and two subcontractors in a subrogation action.
- The insurer argued that the General Contractor's failure to secure subrogation waivers from its subcontractors was a material breach of contract and the prime contract's subrogation waiver was thus no longer valid.
The trial court dismissed the insurer's claims and the Appeals Court affirmed. It agreed that without the subrogation waiver the insurer would "stand in the shoes of the insured owner" and have the same rights as the owner with respect to the three allegedly culpable parties. And there was no dispute that one subcontractor had not agreed to a waiver. But the Court said that this was not a "material breach." Looking to logic from Vermont and Connecticut Courts, the Court reasoned as follows: (1) the A201 does not make obtaining subcontractor waivers a condition precedent to application of the prime contract waiver, (2) the insurer was bound by the parties' intention to have the insurer "bear the risk of property damage resulting from fire or other perils" and (3) the insurer presumably set its rates and premium based on this knowledge. Therefore, the prime contract subrogation waiver was valid and enforceable, and the insurer's claims were properly dismissed.
The simpler argument – perhaps more widely accepted – may be that the insurer's rights are no greater than those of the insureds. Without a well-developed record, it is less certain that a Court would agree that an insurance carrier is independently bound by the intentions of parties to a separate contract.
Outside of the litigation context, we also note with interest Steve Coomb's February 12, 2012 post on the IRMI web-site, "Builders Risk: Naming of Insureds Reloaded." Mr. Combs responds here to a thought-provoking September 2012 Construction Lawyer article authored by Chris Dunn, Mark Bell and James Costner. See "Confronting Conventional Wisdom on Builders Risk: From Named-Insured Status to Concurrent Causation," The Construction Lawyer (Fall 2011). The authors of the two publications differ on whether a construction contract subrogation waiver is enough to prevent insurance company subrogation against project participants, or if naming parties as insureds is the best protection. Rather than joining the fray, we commend the two articles to your attention and consideration. (That edition of The Construction Lawyer also contains a separate article on subrogation waivers, co-authored by Mr. Palley and Arlan Lewis).
Choice of LawStandard form insurance policies frequently lack boilerplate choice of law clauses. But choice of law can be a critical consideration in an insurance dispute. As a simple example, consider the different impact Texas and Pennsylvania law might have in a construction defect dispute where insurance coverage is at issue. See and Compare Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.3d 1, 4 (Tex. 2007) (unintended construction defects may constitute "accident" or "occurrence" sufficient to trigger duty to defend under CGL policy), with Kvaerner Metals Div. of Kvaerner U.S., Inc. v. Commercial Union Ins. Co., 908 A.2d 888, 900 (Pa. 2006) (insurer had no duty to defend or indemnify based on faulty workmanship, because faulty workmanship was not "accident" that constituted an occurrence for purposes of CGL coverage).
While project location can be key to an insurance related choice of law analysis, this is not always so, particularly where a lex loci contractus analysis is used. For example, in American Home Assurance Co. v. Peninsula II Developers, Inc., No. 09- CV-23691 (S.D.Fla. Dec. 11, 2009), the Court was asked to decide which state's law applied to a standard CGL policy form at issue in an underlying Chinese Drywall case. Per the opinion, this was a Florida construction project, the underlying claimants were located there, and most of the parties were based in Florida. The Court found that as a federal court sitting in diversity, it was bound by Florida precedent applying lex loci to contract disputes, including those related to insurance coverage. Although a second restatement "most significant relationship" analysis would have led to Florida law applying, lex loci applied and under that analysis California law applied.
Michael Aylward's September 2011 blog-posting is a good resource for other recent cases on the topic, and concludes with an observation worth sharing: "If there is a takeaway from this brief survey of recent case law, it is that the choice of laws is a crazy quilt of different theories, often result-oriented, that may result in the application of the law of states whose relationship to an insured and policy are hardly intuitive." See "A Tangled Tale of Choice of Law Cases", September 24, 2011. (The reader will also find more on choice of law in Chapter One of the Forum publication Construction Insurance: A Guide for Attorneys and Other Professionals).