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.”