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A condominium sustained $3 million in fire damage when a portable electric generator on a truck owned by its roofing repair contractor malfunctioned. The truck was parked in the condo garage despite contract language expressly prohibiting that. The condo property insurance (“United National”) paid the damages and then filed a subrogation action against the contractor for negligence, gross negligence and breach of contract. The contractor was entitled to summary judgment due to a waiver of subrogation clause in its contract. United National Insurance Company v. Peninsula Roofing, 777 Fed Appx. 639 (2019).

The waiver of subrogation clause of the contract provided, “[t]he Owner and Contractor waive all rights against [ ] each other … for damages caused by fire or other causes of loss to the extent covered by property insurance obtained pursuant to this Section 11.3 or other property insurance applicable to the Work….”

To the extent that fire damages were covered under the condo association’s policy, the contractor successfully argued that the condo association agreed to waive the right to sue the contractor to recover those costs. And because the condo association could not sue the contractor, its carrier likewise could not sue the contractor in subrogation. The trial judged granted the contractor’s motion for summary judgment and this was affirmed on appeal.

United National argued that the subrogation waiver was applicable only to damage caused by authorize activities of the contractor, and that the contractor was in breach of contract by parking its truck in the garage, which led to the fire and damages. In rejecting the carrier’s argument that the subrogation waiver is applicable only to damage caused by activities that Peninsula was authorized to perform under the contract, the court stated:

To accept United National’s reading of the subrogation waiver—that it applies only to damage that is both covered by property insurance and caused by activity falling within the scope of Work—we would need to insert new language into the waiver’s text. That is, we would need to rewrite the waiver along roughly these lines: ‘the Owner and Contractor waive all rights against each other for damages caused by fire or other causes of loss, to the extent covered by property insurance obtained pursuant to this section or other property insurance applicable to the Work, unless said damages were caused by the Contractor’s non-Work conduct.’

Even if the terms of the subrogation waiver made it applicable to this case, as the court concluded it was, United National argued that the waiver would be unenforceable because it was contrary to public policy. It argued that the waiver constituted an exculpatory clause that could be allowed to bar gross negligence claims. It also argued that it violated the state’s anti-indemnity statute prohibiting indemnity for damages arising out of sole negligence of the Indemnitee. The court rejected both arguments, its analysis being the following:

“[M]”multiple state courts of last resort facing the same question have concluded that even though public policy generally prevents the enforcement of exculpatory clauses against claims of gross negligence, the same is not true of subrogation waivers in construction contracts like the one at issue here. [citations omitted]. United National does not explain why Maryland law requires a different result; nor does United National identify any state court of last resort, which supports its own position.

Three additional factors, all of which the district court addressed, weigh against United National. (1) There is a significant difference between exculpatory clauses in general and the subrogation waiver at issue here…. [T]he subrogation waiver at issue here contains no express agreement relieving either party of its duty of care. the subrogation waiver at issue here contains no express agreement relieving either party of its duty of care. (2) Unlike exculpatory clauses in general, the subrogation waiver at issue here specifically contemplates that the injured party will be able to recover for its losses. (3) Making subrogation waivers in construction contracts unenforceable against claims of gross negligence would undercut one of the well-recognized purposes of such waivers: to reduce litigation over insured losses sustained during construction projects.”

Allegations of gross negligence were, therefore, not a reason to circumvent the subrogation waiver.

An Alternative argument by United National was that the subrogation waiver was unenforceable as contrary to the Maryland anti-indemnity statute, which provides:

[“A] ‘covenant’ in a contract ‘relating to … the construction, alteration, repair, or maintenance of a building’ is ‘against public policy’ and therefore ‘void and unenforceable’ if it ‘purport[s] to indemnify the promisee against liability for damages arising out of bodily injury to any person or damage to property caused by or resulting from the sole negligence of the promise or indemnitee.’

The court disagreed with United National’s argument that this statute makes subrogation waivers unenforceable where the prevent contractors from being held liable for their sole negligence. The court noted that subrogation waivers are actually serve a good purpose in that “’[a]s a matter of policy,’ subrogation waivers ‘encourage parties to a construction contract to anticipate risks and to procure insurance covering those risks and also facilitate and preserve economic relations and activity’…. In this way, subrogation waivers serve ‘to cut down the amount of litigation that might otherwise arise due to the existence of an insured loss.’”

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 ConstructionRisk 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. 21, No. 9 (Oct 2019).

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