Insurance Contract’s Waiver of Subrogation by Insured Defeats Suit
The American Institute of Architects construction contract is, like almost all construction contracts, a contract with the goal to transfer the risk of construction-related losses to insurers and preclude lawsuits among contracting parties. Regardless of the basic intent of the contract ACE American Insurance Company (ACE) asked the New Jersey Appellate Division to interpret the waiver-of-subrogation provisions of the American Institute of Architects (AIA) form A201 – 2007 General Conditions of the Contract for Construction (A201). ACE appealed from summary judgment dismissing its subrogation action against defendant American Medical Plumbing, Inc. (American).
In ACE American Insurance Company v. American Medical Plumbing, Inc., Docket No. A-5395-16T4, Superior Court of New Jersey Appellate Division (April 4, 2019) the Appellate Division of the Superior Court of New Jersey was asked to allow an insurer to subrogate against a contractor responsible for property damage and not enforce the waiver of subrogation provision in the ACE policy and the AIA Construction contract.
ACE’s insured, Equinox Development Corporation (Equinox Development), contracted in March 2012 with Grace Construction Management Company, LLC (Grace Construction), to build the “core and shell” of a new health club in Summit. American was a plumbing subcontractor. Sometime in April 2013, after the work under the contract was completed, a water main failed and flooded the health club.
When the flood occurred, ACE provided Equinox Holdings and its subsidiaries, including Equinox Development, with blanket all-risk insurance including multiple forms of coverage for its operations in the United States. Regarding subrogation, the policy stated, “In the event of any payment under this policy, except where subrogation rights have been waived, the Insurer shall be subrogated to the extent of such payment to all the Insured’s rights of recovery therefore.”
ACE paid Equinox almost $1.2 million for the net damages to its real and personal property. Less than $8,000 was for repairs to the “core and shell” construction covered by the A201 contract. The rest was apparently for damage to internal construction, furnishings and equipment. ACE lost at summary judgment based on the subrogation waiver and appealed.
Absent an ambiguity arising from disputed facts, interpretation of A201, like of any contract, involves a question of law. To fulfill the court’s interpretative mission, it determines “the reasonably certain meaning of the language used, taken as an entirety, considering the situation of the parties, the attendant circumstances, the operative usages and practices, and the objects the parties were striving to achieve.” A basic principle of contract interpretation is to read the document as a whole in a fair and common sense manner. It is the intent expressed or apparent in the writing that controls.
A201 requires the owner and contractor to procure, respectively, property and liability insurance; and requires the owner and contractor and its subcontractors (and sub-subcontractors, agents and employees) to waive all rights against each other for damages covered by the required property insurance policy.
The insurance required of the owner must cover the interests of the Owner, the Contractor, Subcontractors, and Sub-subcontractors in the Project. The owner’s insurance obligation subsists as long as contractors are unpaid or have an insurable interest in the Project. Equinox satisfied the mandate of the contract through its pre-existing blanket all-risk policy from ACE, which included builder’s risk coverage for all Equinox construction sites across the United States.
A201 requires the contractor to obtain insurance to protect itself from claims arising out of its operations or those of its subcontractors, agents or employees. The waiver-of-subrogation clause bars recovery of damages from the owner, contractor, and subcontractors “to the extent” the damages are covered by two forms of property insurance.
The waiver of subrogation provision provides, as follows: “The Owner and Contractor waive all rights against . . . each other and any of their subcontractors, sub-subcontractors, agents and employees, each of the other . . . 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.” (Emphasis added)
The contractor must obtain similar waivers from its subcontractors.
THE ACE POLICY
ACE argued that its claim against American is not the kind that A201 subjects to a subrogation waiver. ACE contended that the subrogation waiver under section 11.3.7 has a spatial limit, applying only to claims for damage to the Work itself but not adjacent property, as well as a temporal limit, applying only to claims arising before construction is complete. Since the bulk of the water damage affected not the health club’s “core and shell” but its internal construction and furnishings, and since the claim here arose after the Work was completed, ACE argued that section 11.3.7 does not restrict it from suing American.
The court concluded that ACE misconstrued the basic structure of the two subrogation-waiver provisions. The waiver applies if during the Project construction period the Owner insures properties, real or personal or both, at or adjacent to the site by property insurance under policies separate from those insuring the Project. The waiver also applies if after final payment, property insurance is to be provided on the completed Project through a policy or policies other than those insuring the Project during the construction period.
ACE’s blanket all-risk policy fell within both categories of coverage subject to section 11.3.7. Inasmuch as the ACE policy exceeded the coverage required by section 11.3.1, it was also “other property insurance applicable to the Work.”
The New Jersey court’s interpretation is consistent with the majority view of other courts that have rejected the argument, pressed here by ACE, that the section 11.3.7 subrogation waiver is limited to damage to the Work. The waived claims are not defined by what property is harmed but the scope of waived claims is delimited by the source of any insurance proceeds paying for the loss (i.e. whether the loss was paid by a policy ‘applicable to the Work).
Reading section 11.3.7 as waiving subrogation for non-Work damage is also consistent with the waiver’s general purpose, to avoid post-insurance-claim litigation. As the AIA’s commentary to section 11.3.7 explains: “The purpose of the required property insurance is to transfer the risk of insured losses from the owner and contractor to the insurance company. It would defeat this purpose if the insurance company were allowed to sue either party to recover such losses.” [AIA Commentary to A201, at 46.]
The contractor’s liability insurance serves an important purpose by providing an additional layer of coverage for damage that the owner’s property insurance may not reach. The liability insurance would also provide a source of compensation to injured third parties, who might otherwise seek remedies from the owner.
Notwithstanding that most of the damage affected non-Work property and occurred after construction was completed, the subrogation waiver barred ACE’s action against American, since its blanket all-risk insurance satisfied A201’s requirements and covered the Work.
Insurance companies who wish to avoid having all risks of a project transferred to it can write an insurance policy that does not agree to waivers of subrogation. It might be unsaleable and if purchased by a contractor would breach the terms of the AIA contract, it would have the right to subrogate. Failing to write a contract that does not allow the insured to waive subrogation deprives the insurer of the right to subrogate and it must be assumed the insurer charged sufficient premium for waiving its right to subrogation.
© 2019 – Barry Zalma
This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States. The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and email@example.com.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
Over the last 51 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.
Passover Seder for Americans
Passover is one of the many holidays Jewish people celebrate to help them remember the importance of G_d in their lives. We see the animals, the oceans, the rivers, the mountains, the rain, sun, the planets, the stars, and the people and wonder how did all these wonderful things come into being?
All Jewish fathers are required to teach their children, at least once a year at the Passover holiday, about the exodus from slavery in Egypt. For American Jews who have difficulty understanding Hebrew and complicated books describing the Exodus, my wife and I wrote this book to use for our own Seder where each member of the family reads part of the book.