Stanley A. Martin – February 5, 2014
Diesel fuel is spilled during renovation of a library, damaging both the work in progress and the surrounding building or land. Damages may exceed $500,000, but the owner’s pollution coverage is apparently limited to $5,000. Is the owner barred from pursuing the contractor and others based on the waiver of subrogation language in the contract? The Indiana Court of Appeals focused on one issue in its analysis:[1] that the waiver of subrogation applies only to claims paid relative to the “Work”, and not to other surrounding elements that were damaged. A second issue seems to an outsider to be equally if not more important: the waiver does not apply if the insurance policy has not covered the damage.
The focus of the recent decision is whether the contractor had preserved in prior filings its position that the damage was limited to the “Work” and thus within the waiver of subrogation. The Indiana court followed what it characterizes as the majority position, that AIA A201 § 11.3.7 does not bar claims against the contractor for damage to “non-Work” areas. Thus, any damage to “non-Work” areas would be outside the waiver of subrogation, and not barred by that waiver, in any event. That is the first reminder – to be mindful of the scope of the waiver.
The Indiana court discusses the second point only when it cites a New York appellate decision[2] supporting its position. In the NY case, the court held that the owner had not waived claims against the contractor if such claims were not covered by the owner’s property insurance. That would appear to be the more important factor here. If the owner’s insurance covers only a small portion of the damage, then a waiver that applies only “to the extent covered by property insurance” (per A201 § 11.3.7) would not extend beyond what has been covered; subrogation has been waived by the library only as to the $5,000 in damages covered by insurance. The second reminder is that the waiver of subrogation does not come into play if the damage is not covered by insurance, when following the standard AIA waiver language.