Association Construction Contracts – What Are Risks Of That Waiver Of Subrogation Term

Daniel Miske | Husch Blackwell | September 19, 2019

Summary

The US Court of Appeals for the 4th Circuit held that a subrogation waiver provision in a construction contract barred an association’s insurance company from seeking to recover from an allegedly negligent contractor.

Facts

United National Insurance Company v. Peninsula Roofing Company, Inc.:  Pelican Beach Condominium (“Association”) needed a new roof. The Board, after obtaining specifications from an engineer, entered into a contract with Peninsula Roofing (“Contractor”).  The contract was a standard form AIA contract that is widely used throughout the country.  Peninsula Roofing placed a generator in the Association’s parking garage from which the contractor ran extension lines to power its tools. The generator caught fire and caused about $3 million dollars in property damage. The contract specifically prohibited Peninsula Roofing from using the parking garage without the Association’s permission, which it did not obtain. It was undisputed that one of the Contractor’s trucks and the generator were in the parking garage when the fire broke out. The Association’s insurer, United National, covered the losses and then brought suit against the Contractor for negligence, gross negligence, and breach of contract.

Peninsula Roofing moved for summary judgment, on the grounds that the contract it had with the Association included the following language “[t]he Owner and Contractor waive all rights against [ ] each other … for damages caused by fire or other causes of loss to the extent covered by property insurance obtained pursuant to this [contract] or other property insurance applicable to the Work….” This is the subrogation waiver language. Peninsula Roofing argued that since the Association could not sue it because of the waiver of subrogation language in the contract, the Association’s insurer also could not sue it.

United National argued that the Contractor’s arguments to bar its claims were wrong because: (1) the waiver only applied to damage caused by contractually authorized work, and the placing of the generator in the garage was not authorized. “Therefore, the fire damage was not caused by contractually authorized work, and the subrogation waiver does not apply;” (2) Maryland public policy prohibits subrogation waivers in construction contracts if there is gross negligence; and (3) “Maryland law renders subrogation waivers void to the extent that they would bar recovery for a contractor’s sole negligence.”

Trial Court

The trial court agreed with Peninsula Roofing finding the subrogation waiver applicable and enforceable. United National appealed.

4th Circuit Court of Appeals

The appeals court affirmed the decision of the trial court finding:

  1. The contract did not require the Work to be authorized for the waiver of subrogation provision to apply, instead by its “plain text” it only required two things:
    a.     That the Association had property insurance applicable to the Work; and
    b.     The insurance policy covered the fire damage.
    Since both of these items were uncontested, the contract did not support the insurer’s argument and the Contractor was entitled to have the suit dismissed.
  2. Although the law prohibits an exculpatory clause from protecting a party from gross negligence, that is not true relative to subrogation clauses in construction clauses, which is true in other states as well; and
  3. The subrogation waiver did not operate as an indemnification covenant, as United National argued, “rendering it void as against public policy.” In fact the Court found that to do so “would conjure brand-new Maryland law that sits in acute tension with a recent decision of Maryland’s highest court.”
Lessons Learned
  1. Waiver of subrogation clauses in your construction contracts could/will protect your negligent contractor from its actions if you have sufficient property insurance;
  2. In Wisconsin, Sections 703.17 and 703.02(14) require your association to have full replacement coverage, and therefore you should have sufficient property insurance;
  3. Your insurance company, if unable to recover losses from your negligent contractor, may raise your premium; and
  4. Your association should have an insurance committee that deals with all insurance issues, including those in construction contracts, so you know what you are putting at risk.

Subrogation Waiver in Construction Contract Upheld by Wisconsin Court

Claims Journal | June 21, 2019

A subrogation waiver in a construction contract blocks an insurer’s claim against a contractor whose alleged shoddy construction caused the collapse of a barn that cost more than $600,000 to replace, the Wisconsin Supreme Court ruled in a split decision.

The high court, ruling 3-2, found that the subrogation waiver was not an “unenforceable exulpatory contract” that runs contrary to Wisconsin public policy. The decision in Rural Mutual Insurance Co. v. Lester Buildings and the Phoenix Insurance Co. means that Rural cannot collect in its subrogation suit against Phoenix, an Oklahoma-based Travelers’ unit.

Rural, a Wisconsin-based carrier, argued that the subrogation waiver in a contract signed by Jim Herman Inc. violated Wisconsin statute 895.447, which states that provision of a construction contract that eliminates tort liability “is against public policy and void.”

“Rural Mutual received a benefit, in the form of premium payments, for expressly allowing its insured to allocate risk in this way,” the majority opinion written by Justice Rebecca Frank Dallet states.”We will not rewrite Rural Mutual’s policy to exonerate it from a risk that it contemplated and for which it received a premium.”

Justices Daniel Kelly and Ann Walsh Bradley dissented. Kelly said in a dissenting opinion that it has been longstanding precedent in Wisconsin that “an individual is personally liable for his own tortious conduct.” He said the Supreme Court’s decision effectively transferred tort liability from the contractor, Lester Buildings LLC, to Rural Mutual.

The dispute stems from the collapse of a barn on a Jim Herman Inc. farm in May 2013. Herman had contracted with Lester Buildings to construct the structure in 2010. That contract contained the subrogation waiver in question.

High winds sheared the top of the barn off, scattering lumber and killing and injuring Herman’s cattle. Rural paid $607,000 to rebuild the bar and $51,000 to replace the cattle.

Rural Mutual filed suit against Lester Buildings and its insurer, Phoenix, alleging that Lester had improperly installed rebar cages in the concrete piers that supported the roof. Lester Buildings and Phoenix filed cross claims against Van Wyks, a company that was subcontracted to pour the concrete.

Both the trial court in Dane County and the Court of Appeals, however, found that the subrogation waiver is enforceable and Rural Mutual could not collect. The Supreme Court narrowly upheld those rulings.

“The dissent improperly equates collection of damages with liability and asserts that if Herman cannot collect all of its damages from the contractors, then the contractors’ liability is limited,” the court said. “However, the contractors could be 100 percent liable for wrongful conduct but, based on the subrogation waiver expressly allowed by Rural Mutual’s policy, Rural Mutual could be responsible for paying damages to Herman for property loss.”

Kelly’s dissent counters: “Where the Legislature said that a contract may not limit a tortfeasor’s liability, the court heard that a contract may not limit the victim’s right to be made whole. These are not the same things. Because the court said they are, I respectfully dissent.”