Construction Risk

The Catastrophe and Waiver of Subrogation

The project was proceeding well. Suddenly, one night the structure inexplicably burns down. As usual, everyone says it was not their fault. Now what?

If the construction contract contains a typical insurance clause, the owner’s property insurer pays the claim and the insurance proceeds can be used to fund the cost of demolition and reconstruction.

(A) If the construction contract contains a waiver of subrogation clause, then this is typically the end of the matter. The property insurer agreed to insure against the risk and it must pay. Subrogation usually refers to the situation where a property insurer who has paid the loss attempts to recoup its loss from some party other than the owner (e.g. general contractor, subcontractors’ A/E’s , etc.). Waiver of subrogation clauses typically prevents the property insurer from pursuing such parties. Although the owner’s property insurer is ordinarily not mentioned in waiver of subrogation clauses, the property insurer who pays a loss steps into the shoes of the owner. If the owner has given up (i.e., waived) the right to pursue certain claims in the contracts, the legal effect is that the property insurer is bound by that waiver.

A typical waiver of subrogation reads as follows: “The owner and Contractor waive all rights against (1) each other and any of the subcontractors, sub-subcontractors, agent and employees, each of the other, [and] (2) the architect, architect’s consultants, . . . for damage caused by fire or other perils to the extent covered by property insurance obtained pursuant to this contract.

(B) If the contracts do not contain express waiver of subrogation clauses, then typically the property insurer will pursue claims (i.e., lawsuits) against the contractor, subcontractors and/or the A/Es, contenting that their negligence or other fault caused the fire or other catastrophe. Missouri law allows the insurer to file suit in the name of the owner (a definite advantage if the case is tried before a jury).

Limitations of Waiver of Subrogation Clauses

1. Typically, they apply “only to the extent covered by property insurance” obtained pursuant to the contract. Thus, if there is not coverage under the property insurance for any reason (exclusions, etc.), the waiver of subrogation clause does not apply, and the owner is free to pursue claims against anyone who allegedly caused or contributed to cause the event.

2. If the amount of the loss exceeds the amount of the property insurance limits of coverage, then the owner is free to pursue claims for all losses which exceed the amount of property insurance.

Implied Waiver of Subrogation Claims

Some courts outside of Missouri have held that when the contract requires the owner to purchase property insurance, there is an implied waiver of subrogation claims, even where the contract contains no express waiver of subrogation clauses. Although the Missouri Courts have repeatedly upheld express waiver of subrogation clauses in construction cases, they have not yet directly addressed the issue of implied waiver of subrogation in any construction cases. Implied waiver of subrogation has been found in Missouri in landlord-tenant cases.

Why Waiver of Subrogation Clauses Are Valuable, Even For Owners

They can prevent the great delay in the completion of the project which otherwise often ensues. The liability insurers for the general contractor, subcontractors and A/E’s frequently deny that their insureds are liable for the catastrophe. Litigation or arbitration is frequently needed to determine whose fault, if anyone’s, caused the accident. This takes time. In the meantime, the structure is not completed and the owner cannot begin to reap the economic benefits of the construction.

About the Author: William Kacerovskis is with the law firm of Brown and James, 705 Olive Street, Suite 1100, St. Louis, MO 63101; Phone (314) 421-3400. Article copyright ã 1999, Brown and James, first published in the firm’s Summer 1999 issue of their “Fault Line” newsletter. Reprinted by with permission.

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