Waiver of Subrogation and Allocation of Risk in Construction Contracts

Article excerpt

SUPPOSE an insurer issues a policy to an owner or general contractor covering a building under construction and subsequently pays the insured under the policy for damages caused by the alleged negligent acts of a contractor, or a subcontractor or a consultant providing architectural or engineering services. Does the insurer have the right to recover its payout in a subrogation action when the insured expressly waived a right of such action? This article collects state and federal cases on this question.

SUBROGATION AND WAIVER

As a general rule, on payment of a loss, an insurer is entitled to be subrogated to any right of action the insured may have against a third person whose negligence or wrongful act caused the loss. Subrogation is the substitution of one person in the place of another with reference to a lawful claim or right, and the insurer is subrogated only to those rights that the insured possesses. As a result, any defense the allegedly negligent contractor, subcontractor or design professional has against the insured is good against the insurer. One defense may be an express waiver of subrogation against the allegedly negligent party.

The American Institute of Architects publishes several standard agreements, which are available and used throughout the construction industry. AIA Document A201 (1987 edition), "General Conditions of the Contract for Construction," contains a waiver of subrogation clause, Paragraph 11.3.7, which provides in part:

11.3.7 Waivers of Subrogation. The owner and contractor waive all rights against (1) each other and any of their subcontractors, sub-contractors, agents and employees, each of the other, and (2) the architect, architect's consultants, separate contractors described in Article 6 (referring to construction by owner or by separate contractors), if any, and any of their subcontractors, sub-subcontractors, agents and employees, for damages caused by fire or other perils to the extent covered by property insurance obtained pursuant to this Paragraph 11.3 or other property insurance applicable to the work. . . . 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 can stand alone, or it often is incorporated by reference in a separate agreement.

CASE SURVEY

There has been no hesitancy in upholding and enforcing the AIA's and similar waiver provisions in both federal and state courts throughout the United States. The courts also have applied the waiver provisions to all parties identified in the clause.

A. Subrogation Not Permitted

In some cases, an insurer had paid its named insured for damages to a construction project caused by the alleged negligent conduct of another, but the courts held that, pursuant to the contract terms, the insurer could not bring a subrogation action.

One of the first state cases to recognize and enforce the waiver of subrogation provision was E.C. Long Inc. v. Brennan's of Atlanta Inc.,(1) in which, pursuant to a contractual agreement, the owner took out a builder's risk insurance policy on behalf of himself, the general contractor and subcontractors. Following an explosion and fire at the construction site, the Georgia Court of Appeals held that the insurer, which paid the owner for damages, could not recover in a subrogation action against the general contractor.

The court explained its decision by way of analogy to the U.S. Supreme Court case, Luckenbach v. W. J. McCahan Sugar Refining Co.(2) In that case, a shipper insured his goods for transportation, and the bill of lading with the carrier contained the following clause: "In case of any loss, detriment or damage done to or sustained by said goods or any part thereof for which the carrier shall be liable to the shipper . …