Summary

The US Court of Appeals for the 4^th Circuit held that a subrogation waiver provision in a construction contract barred an association’s insurance company from seeking to recover from an allegedly negligent contractor.

Facts

United National Insurance Company v. Peninsula Roofing Company, Inc.: Pelican Beach Condominium (“Association”) needed a new roof. The Board, after obtaining specifications from an engineer, entered into a contract with Peninsula Roofing (“Contractor”).  The contract was a standard form AIA contract that is widely used throughout the country.  Peninsula Roofing placed a generator in the Association’s parking garage from which the contractor ran extension lines to power its tools. The generator caught fire and caused about $3 million dollars in property damage. The contract specifically prohibited Peninsula Roofing from using the parking garage without the Association’s permission, which it did not obtain. It was undisputed that one of the Contractor’s trucks and the generator were in the parking garage when the fire broke out. The Association’s insurer, United National, covered the losses and then brought suit against the Contractor for negligence, gross negligence, and breach of contract.

Peninsula Roofing moved for summary judgment, on the grounds that the contract it had with the Association included the following language “[t]he Owner and Contractor waive all rights against [ ] each other … for damages caused by fire or other causes of loss to the extent covered by property insurance obtained pursuant to this [contract] or other property insurance applicable to the Work….” This is the subrogation waiver language. Peninsula Roofing argued that since the Association could not sue it because of the waiver of subrogation language in the contract, the Association’s insurer also could not sue it.

United National argued that the Contractor’s arguments to bar its claims were wrong because: (1) the waiver only applied to damage caused by contractually authorized work, and the placing of the generator in the garage was not authorized. “Therefore, the fire damage was not caused by contractually authorized work, and the subrogation waiver does not apply;” (2) Maryland public policy prohibits subrogation waivers in construction contracts if there is gross negligence; and (3) “Maryland law renders subrogation waivers void to the extent that they would bar recovery for a contractor’s sole negligence.”

Trial Court

The trial court agreed with Peninsula Roofing finding the subrogation waiver applicable and enforceable. United National appealed.

4^th Circuit Court of Appeals

The appeals court affirmed the decision of the trial court finding:

1. The contract did not require the Work to be authorized for the waiver of subrogation provision to apply, instead by its “plain text” it only required two things:
   a.     That the Association had property insurance applicable to the Work; and
   b.     The insurance policy covered the fire damage.
   Since both of these items were uncontested, the contract did not support the insurer’s argument and the Contractor was entitled to have the suit dismissed.
2. Although the law prohibits an exculpatory clause from protecting a party from gross negligence, that is not true relative to subrogation clauses in construction clauses, which is true in other states as well; and
3. The subrogation waiver did not operate as an indemnification covenant, as United National argued, “rendering it void as against public policy.” In fact the Court found that to do so “would conjure brand-new Maryland law that sits in acute tension with a recent decision of Maryland’s highest court.”

Lessons Learned

1. Waiver of subrogation clauses in your construction contracts could/will protect your negligent contractor from its actions if you have sufficient property insurance;
2. In Wisconsin, Sections 703.17 and 703.02(14) require your association to have full replacement coverage, and therefore you should have sufficient property insurance;
3. Your insurance company, if unable to recover losses from your negligent contractor, may raise your premium; and
4. Your association should have an insurance committee that deals with all insurance issues, including those in construction contracts, so you know what you are putting at risk.