A recent Maryland appellate decision arising from an insurance company’s exercise of subrogation rights against negligent subcontractors in connection with tornado damage to a warehouse illustrates the pitfalls of waiver of subrogation clauses in construction contracts.
In XL Insurance America, Inc. v. Lithko Contracting, LLC, et al., WL 6784245 (Md. 2023) , the Appellate Court of Maryland recently overturned a trial court decision granting summary judgment to three subcontractors (together, the “Subcontractors”). As the all-risk insurer for the owner of the damaged warehouse (the “Owner”), XL Insurance America, Inc. (“XL”) had paid the Owner in a property insurance claim, then filed a subrogation claim against the subcontractors to recover its payment to the Owner.
The Subcontractors argued (and prevailed) in the trial court that XL’s claims were barred by contractual waivers of subrogation for two reasons. First, the Subcontractors put forward a textual argument that they were “intended third-party beneficiaries” of the subrogation waiver in the underlying development agreement between the “General Contractor” and the Owner (the “General Contract”). The General Contractor’s subrogation waiver, which was not derived from standard AIA contract language, stated “Neither party shall be liable to the other party or to any insurance company for any … damage to its property….This waiver applies whether or not the loss is due to the negligent acts or omissions of General Contractor or Owner, or their respective … contractors.” In overturning the lower court’s decision, the appellate court rejected the Subcontractors’ argument and interpretation of the language. Instead, the appellate court held that the first sentence unambiguously waives subrogation rights with respect to only the Owner and General Contractor on the basis that the choice of the word “neither” was meant to indicate the waiver related to specifically two parties (i.e., the Owner and General Contractor), not to multiple parties, thereby excluding the Subcontractors. The appellate court also held that the purpose of the second sentence was limited to defining the types of losses to which the waiver applies, thereby limiting the effect of the “respective … contractors” language. The appellate court similarly rejected the Subcontractors’ argument regarding the parties’ intent, unable to point to any admissible evidence as to what the Owner actually knew or intended.
The appellate court also rejected the Subcontractors’ second argument. The Subcontractors had argued that language in the subcontracts between the General Contractor and the Subcontractors that was nearly identical to the waiver language in the General Contract was enforceable against the Owner. The appellate court held that although the General Contract obligated the General Contractor to include this specific waiver language in its subcontracts, and therefore the Owner tangentially exerted influence over the provisions in the subcontracts, it did not make the Owner a party to the subcontracts. Therefore, the appellate court ruled, the waiver of subrogation in the subcontracts applied only to disputes between the General Contractor and the Subcontractors, not the Owner, and therefore not the Owner’s insurer, XL.
Importantly, standard AIA contract language in owner-contractor documents explicitly includes subcontractors as third-party beneficiaries. This holding highlights the risks involved when drafting waiver language and serves as a reminder to clearly and unambiguously set forth all intended beneficiaries in each relevant contract in a project.
[1] This is an unreported opinion. It may not be cited as precedent within the rule of stare decisis, but may be cited for its persuasive value and serves as an illustrative guide for the issues discussed.
