... IMPAIRMENT OF SUBROGATION TOO?
When a Policyholder makes an agreement in setting up a Construction Project, by which the Policyholder waives its rights against the other party in the event that the construction results in damage to the Policyholder, does this pre-loss waiver of the Policyholder's rights and remedies also automatically impair the Subrogation Rights of the Insurance Company?
In two recently decided cases in two different States, involving two different sets of construction contract documents, two Courts answered this question the same way.
In the case of Federal Insurance Co. v. Woodruff Constr., Inc., 2012 WL 594588 *2 (Iowa Ct. App. November 29, 2012), the Court construed "standard boilerplate provisions concerning property insurance from the American Institute of Architects (AIA) Document A201." This case presents an issue confronted by many Courts called upon to interpret this standard construction contract language, and the Court in this case used decidedly nonstandard language to describe that issue: "The fighting issue before us is the extent of the waiver set forth in the construction contract." Federal Insurance Co. v. Woodruff Constr., Inc., 2012 WL 594588 *1 (Iowa Ct. App. November 29, 2012). [Emphasis added.]
More precisely, the question before this Court is a recurring one:
Does the waiver language apply only to damages to "the Work" or to any damages covered by insurance "applicable to the Work"?
Federal Insurance Co. v. Woodruff Constr., Inc., 2012 WL 594588 *1 (Iowa Ct. App. November 29, 2012).
The waiver-of-subrogation language is expressly set forth in the standard AIA Document, and it was quoted by the Court in this case:
The Owner and Contractor waive all rights against (1) each other and any of their subcontractors, sub-subcontractors, agents and employees, each of the other, and (2) the Architect, Architects' consultants, separate contractors described in article 6, if any, and any of their subcontractors, sub-subcontractors, agents and employees, for damages caused by fire or other causes of loss to the extent covered by property insurance obtained pursuant to this Section 11.4 or other property insurance applicable to the Work, except such rights as they shall have to proceeds of such insurance held by the Owner as fiduciary.... The policies shall provide such waivers of subrogation by endorsement or otherwise. A waiver of subrogation shall be effective as to a person or entity even though that person or entity would otherwise have a duty of indemnification, contractual or otherwise, did not pay the insurance premium directly or indirectly, and whether or not the person or entity had an insurable interest in the property damaged.
Federal Insurance Co. v. Woodruff Constr., Inc., 2012 WL 594588 *1 (Iowa Ct. App. November 29, 2012). [Emphasis by the Court.] The Iowa Court of Appeals joined the majority view of this language and held that this language contains a waiver which applies to damages covered by "other property insurance applicable to the Work".
Federal sued certain contractors in Subrogation over damages on this construction project and its Property Insurance Policy was "other property insurance applicable to the work." The contractors were granted Summary Judgment against Federal's Subrogation Claims by the Trial Court in this case accordingly, and the Appellate Court affirmed.
In the second such recent case, a Florida Appellate Court also confronted a pre-loss waiver of rights by the Policyholder-Insured in a construction contract. In that case, the rights were waived concerning repairs to a condominium: Landmark American Insurance Co. v. Santa Rosa Beach Development Corp. I, 2012 WL 5971204 *1 (Fla. 1st DCA November 30, 2012). Although the Insurance Company referred to the pre-loss agreements as a "release" and the Court used the same word in its opinion in this case, the agreements pretty clearly outlined a pre-loss waiver and not a post-loss release. Whether a "waiver" or a "release," however, the language was the same and was treated the same in both the Trial Court and Appellate Court.
Two Hurricanes, Ivan in 2004 and Dennis in 2005, struck the Condominium. Beach Colony claimed both times that its damages were covered under its Landmark Policy. Both times, Landmark denied the Claims on the ground that "the water damage was caused" by the repair of "stucco exterior siding" on Condominium buildings. Landmark American Insurance Co. v. Santa Rosa Beach Development Corp. I, 2012 WL 5971204 *1 (Fla. 1st DCA November 30, 2012). Apparently weary of making Insurance Claims, Beach Colony sued Landmark for alleged Breach of the Insurance Contract. In turn, Landmark filed third-party claims against the repair contractors.
The Trial Court granted the Contractors' Motions for Summary Judgment based on the following language quoted by the Appellate Court from the repair construction contract:
4.... Upon the execution and delivery of such warranties, Association, either for itself or in any representative capacity, shall proceed directly against the manufacturer and applicator in the event any claim arises with respect to the sufficiency or adequacy of such repairs, or otherwise arising out of or relating to such repairs in any way, and shall make no claim against Developer or Contractor with respect thereto.
* * *
7. Subject to Developer's compliance with the requirements of this Agreement ... Association, either for itself or in any representative capacity will not sue or seek any relief whatsoever against Developer or Contractor ... for the conditions which Developer undertakes herein to correct, provided that the repairs undertaken herein by Developer brings such conditions into full compliance with the statutory warranties of Developer and Contractor [.] (Emphasis added).
Landmark American Insurance Co. v. Santa Rosa Beach Development Corp. I, 2012 WL 5971204 *2 (Fla. 1st DCA November 30, 2012). [Emphasis added by the Court.] As Landmark's third-party Subrogation Claims were based on defects in the repairs of the Condominium, and as the language of the contract documents quoted above "covered the same matters that were the subject of Landmark's third party action," the Florida Appellate Court affirmed the Trial Court's Summary Judgments entered in favor of the repair contractors against Landmark's Subrogation Claims. Landmark American Insurance Co. v. Santa Rosa Beach Development Corp. I, 2012 WL 5971204 *3 (Fla. 1st DCA November 30, 2012).
Two cases presented two different sets of construction documents, but the same issue: Did the Policyholder's-Insured's waiver of rights and remedies in the construction documents also waive the Insurance Carrier's Subrogation rights? The Courts in both cases effectively answered the same way, which is that the Insurance Carrier had no rights of Subrogation under the circumstances. Only one of the Judges, however, expressly noted that this ruling has implications for the Insurance Coverage Issue of whether this apparent impairment-of-Subrogation rights "may have breached" the Insurance Contract and possibly bar Coverage. See Landmark American Insurance Co. v. Santa Rosa Beach Development Corp. I, 2012 WL 5971204 *3 (Fla. 1st DCA November 30, 2012)(Makar, J., specially concurring).
Emily Holbrook linked to Insurance Claims and Issues Blog last week in the Cavalcade of Risk #171 on her Risk Management Monitor Blog. Here is a link to the November 7, 2012, post, "Computer Models Doing Good After Hurricane Sandy? Not so Much."
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