“I Didn’t Sign That!” – Applicability of Waivers of Subrogation to Non-Signatory Third Parties

Rahul Gogineni | The Subrogation Strategist | June 27, 2019

In Gables Construction v. Red Coats, 2019 Md. App. LEXIS 419, Maryland’s Court of Special Appeals considered whether a contractual waiver of subrogation in the prime contract for a construction project barred a third party – a fire watch vendor hired to guard the worksite – from pursuing a contribution claim against the general contractor. The court concluded that the general contractor could not rely on the waiver of subrogation clause to defeat the contribution claim of the vendor, who was not a party to the prime contract. As noted by the court, holding that a waiver of subrogation clause bars the contribution claims of an entity that was not a party to the contract would violate the intent of the Maryland Uniform Contribution Among Tortfeasors Act (UCATA).

When dealing with claims involving construction projects, there may exist multiple contracts between various parties that contain waivers of subrogation. The enforceability of such waivers can be limited by several factors, including the jurisdiction of the loss, the language of the waiver and the parties to the contract.

In Gables Construction, Upper Rock, Inc. (Upper Rock), the owner, contracted with a general contractor, Gables Construction (GCI) (hereinafter referred to as the “prime contract”), to construct an apartment complex. After someone stole a bobcat tractor from the jobsite, Gables Residential Services Incorporated (GRSI), GCI’s parent company, signed a vendor services agreement (VSA) with Red Coats to provide a fire watch and other security services for the project.

Within the prime contract, there was a waiver of subrogation clause. The waiver of subrogation clause barred subrogation claims between Upper Rock, GCI and their subcontractors with respect to insurance applicable to the work. Within the VSA, there was also a waiver of subrogation clause. This waiver of subrogation clause barred subrogation claims between GRSI (as well as its affiliates, including GCI) and Red Coats.

Approximately one month prior to completion of the project, a fire occurred within Building G of the project causing significant damage to the property. Subsequent to the fire, Upper Rock sued Red Coats and its security guard, Tamika Shelton. After settling with Upper Rock for $14 million (Red Coats paid $4 million of the settlement directly with the other $10 million being paid by insurance), Red Coats sued GCI for contribution. GCI, relying on the waivers of subrogation clause in the prime contract, filed a motion for summary judgment seeking dismissal of Red Coat’s contribution claim. The trial court denied GCI’s the motion, and after a trial, the jury awarded Red Coats $7 million in damages, GCI’s pro rata share of the settlement amount.

GCI appealed the lower court’s decision on its motion for summary judgment. Discussing the waiver of subrogation clause in the prime contract, the Maryland Court of Special Appeals held that, because Red Coats was not a party to the contract and could not enforce its terms, the waiver of subrogation did not extinguish Red Coats’ right of contribution. With respect to the waiver of subrogation clause in the VSA, the court held that it applied to Red Coats’ claims against GCI and barred Red Coats’ insurer from recovering the $10 million it contributed to the settlement. Accordingly, the court reduced the verdict to $2 million, which constituted half of Red Coats’ out-of-pocket expense.

Based upon the court’s reading of the contract in conjunction with the UCATA, it is arguable that the court has left an opening for pursuing subrogation claims against parties not specifically named within a prime contract. If that was not the court’s intent, then in the alternative, it is implicit in the court’s holding that Red Coats was not a subcontractor within the meaning of the waiver of subrogation clause in the prime contract. Presumably, this was because Red Coats was hired after the fact by GRSI and not to perform any of the construction work related to the project.

This case serves as a good reminder that contribution claims may be governed not only by a different subset of laws within respective jurisdictions but also by the terms of any applicable contracts. As such, practitioners should be aware that the mere presence of a waiver of subrogation clause may not preclude pursuit of a contribution claim.

Deconstructing Construction Claims – Issues to Consider When Handling Construction Defect Subrogation

William L. Doerler and Victoria Phillips | CLM | May 3, 2018

Construction defect claims often are complicated by a variety of issues, including those related to the statute of repose and contractual bars to recovery. In order to maximize the subrogation potential for these claims, you should deconstruct any potential subrogation barriers and, upon identifying a potential target, avoid procedural barriers that impact the pursuit of subrogation claims.

Initial Investigation

When you receive a construction-related claim, you should immediately identify potential subrogation targets, such as the architect, general contractor, subcontractors, the developer, and material suppliers. As part of the identification process, first attempt to procure copies of all of associated contracts, subcontracts, and purchase orders. These documents are important because they often contain contractual barriers to recovery, including indemnification clauses, waivers of subrogation, insurance clauses, caps on liability, and contractual statutes of limitations.

In addition to securing copies of the applicable construction documents, you should also try to secure information that will help you identify when the accident occurred during the construction cycle. This information can impact the potential subrogation recovery because subrogation waivers and insurance clauses often refer to dates such as the substantial completion date or final payment date, gearing the applicability of these clauses to those dates.

Statutes of Limitations and Repose

In addition to gathering the documents identified above, you should consider whether claims against potential targets are barred by the applicable statutes of limitations or repose. If either bars the claim, then the claim has no true subrogation potential. Although the defendant can waive a statute of limitations defense by not asserting it in a timely fashion, the defendant cannot, generally, waive a statute of repose defense because this statute creates substantive, rather than procedural, barriers to pursuing a claim. If a statute of repose applies, then no cause of action arises after the repose date and, thus, after the repose date—say, 10 years after the date of substantial completion—there is no cause of action to pursue.

When considering the impact of any statute of limitations or repose, you should also review the applicable contract terms to ensure that the contract does not have a contractual statute of limitations clause or an accrual clause. Courts generally enforce these clauses as long as they are reasonable. Thus, if applicable, a contractual statute of limitations or accrual clause may bar your claim. For example, the American Institute of Architects (AIA) contract form A201-1997 has an accrual clause, §13.7.1, stating that claims accrue on a certain date, such as the date of substantial completion. If applicable, the clause bars any discovery rule that may otherwise apply and, effectively, turns the otherwise applicable statute of limitations into a statute of repose.

Of note is that some states, in addition to having a construction defect-related statute of repose, also have a statute of repose related to products liability claims. As such, to the extent that your potential target is a company that provided a product incorporated into the construction project, you may need to analyze the impact of both the construction defect statute of repose and the products liability statute.

Waiver of Subrogation

The most common contractual barrier to pursuing subrogation targets involved in construction losses is a waiver of subrogation clause. If you find such a clause in your construction contracts, then you should analyze the scope of the waiver clause to determine whether it applies.

To analyze the scope of the clause, determine whether the property damage at issue is covered by the clause. This analysis generally focuses on the meaning of the term “work” in the contract, as waiver of subrogation clauses typically apply to the proceeds of insurance applicable to the work. Thus, if the damage at issue relates to personal property or to parts of a building that were not the subject of the contract, then you may be able to pursue subrogation for damage to this non-work property.

However, the success of your subrogation claim may depend on whether the applicable jurisdiction follows the source-of-coverage approach to defining the scope of a waiver clause (based on whether the insurance policy that covered the work also covered the non-work property) or the nature of the damage approach. Although courts often refer to the source of the coverage approach as the “majority” approach, the U.S. District Court, Northern District of Mississippi, recently applied the nature of the damage approach in Liberty Mut. Fire Ins. Co. v. Fowlkes Plumbing. Thus, when analyzing the scope of a waiver of subrogation clause, your analysis should include an analysis of how the applicable jurisdiction interprets such clauses.

With respect to the AIA contract forms, the most recent version of the AIA General Conditions, A201-2017, includes a waiver of subrogation clause, §11.3.1, that references the term “project,” rather than the term “work.” Under this version of the waiver clause, owners and contractors waive all rights against each other and their subcontractors “for damages caused by fire or other causes of loss, to the extent those losses are covered by property insurance…applicable to the project, except such rights as they have to proceeds of such insurance.” The term “project” is defined in §1.1.4 as “the total construction of which the work performed…may be the whole or a part….” Arguably, this change clarifies that the waiver of subrogation clause refers only to the construction work itself. However, it remains to be seen how courts will interpret this change in the wording of the AIA waiver of subrogation clause.

Right to Repair Acts

As part of the process of identifying subrogation targets, claims professionals should be aware of the fact that many states have Right to Repair Acts. These acts generally require that the homeowner, and possibly the insurer, give notice of construction defect claims to the contractor or builder. Thus, to the extent that you identify a subrogation target, you should review the applicable Act to determine whether, as a subrogating insurer, your claims notice needs to comply with the terms of the applicable Act.

The issues discussed here offer only a partial review of some of the issues that subrogation claims professionals need to consider when handling a construction defect claim. The issues identified, however, should highlight the importance of analyzing the subrogation potential for construction-related claims during the early part of the claims investigation. When the issues you identify are complicated or warrant additional analysis, it is equally important to involve subrogation counsel early.

Waiver of Subrogation Provisions in Construction Contracts

James T. Dixon, P. Wesley Lambert and Amanda M. Leffler | Brouse McDowell | May 6, 2017

Despite the potential financial significance to the contracting parties, the drafting, review, and approval of insurance provisions in construction contracts is frequently delegated to non-lawyers or simply ignored. Other times, the parties insert boilerplate language, such as the language found in an AIA Form, without considering how that language might impact the particular project. As with other construction contract provisions, while the AIA forms can provide a good starting point, the parties should not accept insurance provisions without an understanding of how these clauses will operate.

One clause that may frequently be overlooked is the Waiver of Subrogation provision. The AIA version of the provision states as follows:

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.

AIA Document A201 – 2007, §11.3.7 (emphasis added).

Fundamentally, this provision is simply an agreement of the parties to waive their rights to sue each other for losses covered by their insurance. Though it might seem relatively straightforward, there are several potential pitfalls that parties should consider when negotiating their contract:

  1. Insurer Consent. Waiver of Subrogation clauses often require that the parties obtain their insurers’ consent, and they should – many insurance policies provide that a policyholder may not waive the insurer’s subrogation rights and, if the policyholder has done so, the insurer may deny the claim.
  2. Scope of the Waiver. In the AIA A201-2007 form, the waiver applies only to property or builders risk losses. Section 11.3.7 limits the waivers to “property insurance obtained pursuant to [section 11.3] or other property insurance applicable to the Work.” Under this wording, an owner or contractor could still be subject to a subrogation claim brought by another party’s liability insurers, such as general liability, auto, or workers’ compensation, in the event of an injury or loss that is paid by one of those policies. If the parties want the waiver to apply more broadly to other types of losses, they should modify the standard form language to make that clear by expressly waiving all rights against one another for losses that are covered by any insurance policy.
  3. Definition of “the Work.” Another area of contention relates to the definition of the term “the Work.” The waiver is limited to “insurance applicable to the Work.” The “Work” generally means “the construction and services required by the Contract Documents.” (§1.1.3). Where a project involves repair or renovation of an existing structure, a dispute can arise as to whether damage to existing or adjacent property is part of the Work.

Nationally, courts take two general approaches. Some courts draw a distinction between the Work and non-Work property, and hold that only the Work is within the scope of the waiver. Other courts limit the waiver to the proceeds of the insurance policy—if the policy is broad enough to cover Work and non-Work property, the waiver would apply to both.

  1. Deductibles and Self-Insured Retentions. Another area of contention is whether the waiver applies to deductibles and selfinsured retentions (SIRs). As written, the waiver only applies “to the extent covered by property insurance.” A party might argue that it did not waive a significant SIR, leaving a large gap in the waiver. To avoid the issue, you can expand the waiver of subrogation to include insured losses as well as losses within the waiving party’s deductible or retention.

These potential pitfalls highlight why contracting parties should not…

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200 Million Reasons Why Waivers of Subrogation Matter

David P. Hattery – October 2, 2012

When negotiating contracts with a client, sometimes their eyes roll when we come to the section on insurance, particularly that awkward phrase, “waiver of subrogation.” What is subrogation and what does it mean to waive it? Simply put, subrogation is the right of a party, typically an insurance company, to pay a loss then sue the party or parties who are liable for the loss. A waiver of subrogation precludes an insurer from such an action.

A recent case in Connecticut illustrates the importance of the subrogation waiver. On February 7, 2010 a natural gas explosion killed five, injured a dozen more and caused extensive damage to a power plant under construction.

The accident occurred during a “gas blow,” which is a commissioning procedure whereby natural gas is forced through the plant piping at a high rate in an effort to clean out the gas supply lines to the gas turbine. These operations are perilous because any spark from such debris or from static electricity can ignite the gas. Here, the gas was discharged into a confined area, where workers were engaged in welding and other activities.

Not surprisingly, lawsuits followed. The facility owner’s insurance carrier ultimately paid approximately $200 million in settlement of claims. The carrier then sued the subcontractors, the gas turbine manufacturer, and the sellers and transporters of the natural gas. The defendants denied liability and moved for dismissal based in part on language in the contract that explicitly waived the carrier’s right of subrogation. Among other theories, the carrier argued that the accident was caused by the recklessness of the subcontractors, which rendered the waiver of subrogation void as against public policy. Last Friday, the U.S. District Court for the District of Connecticut ruled on the motions to dismiss.

In language that must have given the subcontractors pause, the court found that the plaintiffs’ allegations supported a finding of recklessness. The court based this finding on allegations that, despite knowing that the gas blow process was inherently dangerous, the subcontractors designed the gas blows for discharge into a confined space with numerous sources of ignition. They also failed to follow their own commissioning procedures, lacked experience and expertise regarding the gas blow process, failed to modify the process after being warned of the dangers associated with discharge into a confined space, and discharged an employee because he attempted to develop a safer procedure.

The court found that the waiver of subrogation was valid and enforceable, and then had to squarely address the issue of whether public policy requires a different result in cases of recklessness and strict liability. Drawing a distinction between claims in a setting that would leave tort victims without compensation and situations like this that would leave an insurance carrier without reimbursement from a third party for an otherwise covered loss, the court found no public policy in favor of the carrier: “[T]he plaintiffs knowingly agreed to insure the construction of the Kleen Plant and neither the construction contract nor the insurance policy provided an exception or exclusion for reckless or ultrahazardous conduct.” The carrier’s claims against the subcontractor for subrogation were dismissed.

via 200 million reasons why waivers of subrogation matter – Lexology.