According to the recent decision of the U.S. Court of Appeals for the First Circuit in Pacific Indemnity Company v. Deming, 2016 WL 3607028, 2016 U.S. App. LEXIS 12374 (July 5, 2016) common contractual provisions that defendants frequently assume amount to waivers of subrogation are actually insufficient to establish the existence of a waiver.
In Pacific Indemnity, the plaintiff’s policyholder, who owned a condominium unit in a high-rise building in Boston, suffered a water damage loss as a result of the stipulated negligence of a tenant (not the owner) of an upstairs unit. The defendant tenant claimed that the plaintiff’s subrogation claim was barred by a provision in the condominium bylaws. That provision required unit owners to procure insurance policies covering their personal property and liability, and further provided that “all such policies shall contain waivers of subrogation,” without stating who, specifically, was to be protected by the subrogation waiver. The plaintiff contended that the requirement for a subrogation waiver in the unit owners’ policies would protect only the condominium trust (the functional equivalent of a condominium association) and other unit owners, but not the tenants of other unit owners. This position was supported by a provision in the bylaws pertaining to the scope of the subrogation waiver that was required for the master insurance policy purchased by the condominium trust to cover the real property. The required scope of the subro waiver in the master property policy was specifically limited to “the Trustees, their agents and employees, [and] Unit Owners, their respective employees, agents and guests,” and therefore excluded tenants from its protection.
The trial court, in a decision reported at 140 F. Supp. 3d 152, granted summary judgment in favor of the tenant, reasoning that the subrogation waiver in the portion of the bylaws pertaining to unit owners’ policies was a “covenant running with the land” that benefited all parties who held a legal interest in the condominium, including tenants. The Court of Appeals reversed. The appellate decision expressed agreement with the plaintiff’s reasoning that the apparent intent of the condominium bylaws was to limit the protection of the subrogation waiver in unit owners’ policies to other unit owners and to the condominium trust. The court cited with approval Community Association Underwriters v. McGillick, 2010 WL 5467673 (D.N.J. 2010) that reached a similar conclusion based upon a similar provision in condominium bylaws. However, rather than resolve the case on that basis, the Court of Appeals instead concluded that the issue regarding the scope of the subrogation waiver that was required for the unit owners’ policies under the bylaws was irrelevant under the specific facts of the case, because there was no subrogation waiver to be found in any of the relevant documents, regardless of whether the documents were viewed separately or in conjunction with one another. The court reasoned that the provision in the bylaws stating that the unit owners’ policies “shall contain waivers of subrogation” was not, itself, a waiver of subrogation, but rather only a requirement that the unit owner obtain a policy containing a waiver of subrogation. This language contrasts with explicit waiver provisions, such as those typically contained in A.I.A. construction contracts, to the effect that “the Owner and Contractor hereby waive subrogation against each other.” In other words, the First Circuit did not consider a contractual requirement that a party obtain a subrogation waiver, by itself, to have the effect of a subrogation waiver.
Similarly, the insurance policy that plaintiff had issued to its unit owner policyholder contained standard language that authorized policyholders to enter into pre-loss subrogation waivers, but which was not, by itself, a “self-effectuating” waiver. Specifically, the policy authorized the insured to “waive any rights of recovery from another person or organization for a covered loss in writing before the loss occurs.” Thus, the Court of Appeals concluded, the contractual provision requiring unit owners to obtain subrogation waivers from their insurance companies, taken in conjunction with a provision in the policy authorizing the policyholder to waive subrogation, simply did not add up to a subrogation waiver.
The Pacific Indemnity case serves as a reminder to subrogation professionals to carefully scrutinize provisions relating to waivers of subrogation in contracts and insurance policies to determine whether such provisions are actually effective to waive subrogation, or merely represent unfulfilled directives to obtain such waivers. From a practical standpoint, however, even if it can be established that a requirement for a subrogation waiver protecting a target defendant was not fulfilled, that would not necessarily mean that there is a clear path to recovery. If time and circumstances permit, the defendant might pursue a counterclaim or third-party claim against the policyholder for failing to obtain a waiver. If successful, such a claim could effectively negate any recovery. Under the specific facts of the Pacific Indemnity v. Deming case, however, such a counterclaim would have been futile, because the Court of Appeals made it clear that the “missing” subrogation waiver would not have applied to claims against tenants, in any event.