Where a fire destroyed a building on the first day that the contractor began work, the owner recovered its loss from its insurance company (CNA) which in turn sued the contractor to recover what was paid to the owner. Pursuant to the AIA contract used on this project however, the court held that the right of CNA to bring a subrogation action against the contractor had been waived.

AIA Document A201 (1987 edition) was used in this case. The general conditions require that the project owner insure the interests of all parties for the full value of “the work.” The Agreement goes on to provide that each party waives any claim against the other for the casualty loss of insured property.

The fire started during or immediately after lunch break on the first day of work. Investigations by the police and fire departments concluded that it was probably caused by the improper use of welding torches that were used for the removal of metal fire escapes from the existing building structure to which the contract was to build an addition. The contractor, however, denied any responsibility, and no responsibility was determined. When CNA sued the contractor for subrogation, the contractor asserted that the project owner had waived its claim for an insured property loss pursuant to the AIA Agreement. CNA’s response was that the building was destroyed by fire prior to “work” being performed and before tangible property had been created by the contractor under the contract. This would mean that the reciprocal waiver would not apply.

In rejecting CNA’s argument, the court concluded that the definition of “the work” was not as restrictive as argued. As explained by the court, “Work” includes everything within the scope of the Agreement, whether it is completely or partially completed. Since the work had commenced on the existing structure, the renovation of which was within the scope of the Agreement, the owner’s waiver of the claim defeated CNA’s subrogation right. Mu Chapter of the Sigma Pi Fraternity of the U.S. Inc. v. Northeast Construction Services, Inc. 684 N.Y.S.2d 872 (N.Y.Supp. 1999).

Article Copyright 1999, ConstructionRisk.com, LLC – Virginia

About the author: Article written by J. Kent Holland, Jr.,  a construction lawyer located in Tysons Corner, Virginia,  with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners.  He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects.  He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk.com Report, Vol. 1, No. 5 (Aug 1999).