Originally posted Tuesday, 30 October 2012

Written by John Sier

Buried in the insurance clauses of the industry-form contracts is the concept of a waiver of subrogation. Generally speaking, the waiver of subrogation clause is intended to avoid litigation to assess fault for an insured loss on a construction project. However, simply including a waiver of subrogation provision in the contract may not preclude litigation involving certain claims for damage to property not covered by the waiver.

In Brotherhood Mutual Insurance Company v Michiana Contracting, the Owner hired the contractor to construct an addition, including a gymnasium with a concrete subfloor. While the contractor offered an addition to the contract for the installation of wood flooring, the Owner installed the wood flooring itself without the assistance of the contractor. Roughly 10 months after substantial completion, a frozen sprinkler pipe burst above the gymnasium and ruined the wood floor. The parties had used AIA contract documents, including AIA A201, General Conditions, which includes a waiver of subrogation at paragraph 11.4.7. [Note: similar language is contained in the ConsensusDOCS 200 at par. 10.3.1, ConsensusDOCS 500 at par. 11.3.1 and ConsensusDOCS 410 at par. 11.3.1] After the insurance company paid to repair the damage, the insurance company brought a subrogation action against the contractor for negligent construction in allowing the sprinkler line to freeze and burst.

The trial court found that the waiver of subrogation precluded the insurance carrier from bringing this claim because the waiver applied to any damage to the work of the contractor, but the Indiana Court of Appeals reversed finding that the wood floor was not part of the contractor’s work. In reading AIA A201 section 1.1.3, the Court of Appeals found that “Work” only included the construction and services required by the contract to be provided by the contractor. Since the wood floor of the gymnasium was not required to be installed by the contractor and, in fact, was not installed by the contractor, the damage to the wood floor was not subject to the waiver of subrogation.

If there are adjacent items or additional finishes or equipment that are installed outside of the scope of the work of the underlying contract, the waiver of subrogation provision in the construction contract may not apply. This is a topic that Owners should review as a part of the overall risk-management program.

John Sier, with the firm of Kitch Drutchas Wagner Valitutti & Sherborook in Detroit, Michigan, is Associate Counsel to COAA.