Tuesday, November 25, 2014

UNDERSTANDING WAIVERS OF SUBROGATION AS THEY APPLY TO THE CONSTRUCTION INDUSTRY




Understanding Waivers of Subrogation as they apply to the Construction Industry


 



Suppose an air conditioning contractor, while installing a system for a new industrial building, has an accident. Another contractor’s employee on the job site suffers injuries when the AC contractor’s scaffolding collapses and falls on top of him.  The injured worker sues the AC contractor and the project owner.  The project’s contract included a requirement that the contractor assume the owner’s liability for any accidents arising out of the contractor’s work.  Consequently, the contractor’s general liability insurance company pays the injured worker for both the contractor and owner’s shares of the damages.  The insurance company, however, has determined that the owner was twenty percent responsible for the accident. It files a claim with the owner demanding some of its money back.
The insurance company’s action is entirely legal. Many project owners and general contractors, wanting to avoid this situation, insist that their subcontractors agree to a waiver of subrogation.
Subrogation is a legal principle in which a person who has paid another’s expenses or debt assumes the other's rights to recover from the person responsible for the expenses or debt. For example, if someone hits your car in a parking lot and causes significant damage, your insurance company will pay you for the damage (assuming you bought collision insurance,) then recover the amount of its payment (subrogate) from the other driver (or, more commonly, from the driver’s insurance company.) Subrogation holds ultimately responsible the person who should pay for the damage.
Owners and general contractors want to transfer their liability to subcontractors, to the extent that they can. Therefore, contracts often include a waiver of subrogation agreement. In such an agreement, the subcontractor promises not to pursue recovery from the other party. That agreement might bind the subcontractor’s insurance company, depending on the type of policy and its terms.
A standard commercial general liability policy forbids the policyholder from doing anything to impair the insurance company’s rights after the loss occurs. This implies that a waiver of subrogation agreed to before a loss binds the company. Also, the sub’s policy may protect the other party if it names him as an additional insured. Under common law, an insurance company may not subrogate against its own insured. To remove any doubt, the sub should ask the company to add an endorsement applying a waiver of subrogation to the person or organization named in it. Insurance companies vary on the amount of premium they charge for this; some make no charge at all.

The standard business auto insurance policy has language similar to the general liability policy. Unlike GL insurance, there is no standard waiver of subrogation endorsement for auto insurance. Some insurance companies may offer their own versions of such an endorsement. Again, premium charges will vary.
Workers’ compensation policies require an endorsement whenever a waiver of subrogation is desired. This endorsement may apply on a blanket basis to all parties with whom the insured has written contracts requiring waivers. Alternatively, it can apply only to the party listed on its schedule. The insurance company may charge up to two percent of the policy premium for blanket coverage or two to five percent of the project’s premium for individual coverage.
Commercial property and inland marine insurance policies vary as to whether they permit waivers of subrogation even before a loss.
In all cases, a contractor or building tenant who is required by contract to provide such a waiver should check the relevant insurance policies. Policy changes should be requested if it is unclear whether they permit pre-loss waivers. The firm should consult with an insurance agent on all insurance-related contractual matters to ensure that the proper coverage is in place.



WHAT LANGUAGE AND/OR ENDORSEMENTS TO USE 


One of the most common contractual requirements your commercial insureds face is a requirement to waive a right of subrogation. Most often, these waivers are one-sided when it comes to general liability, but mutual with regard to property damage under lease agreements. They can also arise under business auto, workers compensation, marine, umbrella, and other exposures.  Contracts will often stipulate that the right of subrogation must be waived.  The CGL only restricts waivers of subrogation after a loss. It does not restrict waiving subrogation before a loss (written, oral, or implied). Specifically, the policy language in the 2004 CGL says:
Transfer Of Rights Of Recovery Against Others To Us
If the insured has rights to recover all or part of any payment we have made under this Coverage Part, those rights are transferred to us. The insured must do nothing after loss to impair them. At our request, the insured will bring "suit" or transfer those rights to us and help us enforce them.
In addition, it is generally accepted that insurers cannot subrogate against their own insureds except in rare instances such as intentional losses. Thus, additional insured status possibly grants some degree of insulation from subrogation after loss. However, to fully comply with some contractual requirements, it may be necessary to attach ISO form CG 20 04 10 94 – Waiver of Transfer of Rights of Recovery
Against Others To Us which amends the condition above by adding the following language:
We waive any right of recovery we may have against the person or organization shown in the Schedule above because of payments we make for injury or damage arising out of your ongoing operations or "your work" done under a contract with that person or organization and included in the "products-completed operations hazard". This waiver applies only to the person or organization shown in the Schedule above.
Workers compensation waivers typically must be endorsed to the policy and they must be in writing according to the workers compensation endorsement (e.g., the NCCI WC 00 03 13, Workers Compensation Waiver of Our Right to Recover From Others endorsement).
If a contract requires a full waiver of subrogation, it is advisable that the agent not indicate compliance on the certificate of insurance unless authorized to do so in advance by the insurer based on policy language. In addition, some state statutes require the attachment of an endorsement even though the policy grants waivers prior to loss.






RECENT CASE LAW UPHOLDS THE WAIVERS OF SUBROGATION CLAUSES


Travelers Indem. Co. v. Crown Corr, Inc., 2014 U.S. App. LEXIS 21101 (9th Cir. 2014)

This action arose out of the construction of the University of Phoenix Stadium (the “Stadium”), home of the Arizona Cardinals.  Tourism and Sports Authority (the “Owner”) entered into a Design/Build Agreement with the Arizona Cardinals and Hunt Construction Group (the “Contractor”) for the design and construction of the Stadium (the “Prime Contract”).  The Contractor then entered into a subcontract with Crown Corr, Inc. (the “Subcontractor”) for the design of the Stadium’s exterior enclosure system (the “Subcontract”).

Construction was completed and the Stadium opened in August 2006.  Nearly four years later, a storm moving through Glendale, Arizona caused metal panels to fall from the Stadium, resulting in an estimated $1.5 million in damages to its façade, retractable roofs and the sound system.  The Owner submitted the claim to its post-construction property insurer, Travelers Indemnity Co. (the “Insurer”), who in turn brought suit as subrogee of the Owner against the Subcontractor.  The Insurer’s complaint alleged that the failure of the panels and the subsequent damage caused by that failure were a direct result of the Subcontractor’s negligent construction. The Subcontractor responded by filing a motion to dismiss on the basis of the following waiver of subrogation clause contained in the Prime Contract (the “Waiver”):

“The Parties waive subrogation against one another, the Design/Builder, Design Consultants, Subcontractors, and their respective agents and employees on all property and consequential loss policies that may be carried by any of them on adjacent properties and under property and consequential loss policies purchased for the Facility.”

The district court dismissed the action after concluding that the Waiver operated to preclude the Insurer’s claims, and the Insurer appealed to the Ninth Circuit.   On appeal, the Court addressed three challenges raised by the Insurer to the findings below.

First, the Insurer argued that the district court erred in interpreting the term “Facility” as used in the Waiver to mean “the Stadium after it is fully operational.”  The Insurer argued that the term “Facility” referred to the structure during construction and not the completed Stadium.  Thus, the Insurer asserted that the Waiver had expired upon substantial completion of the project, and did not apply to its post-construction claims.  In rejecting the Insurer’s temporal argument, the Court found that the Insurer failed to put forth a persuasive reading that showed that “Facility” refers only to the Stadium before substantial completion.  The Court cited to other uses of the term in the Prime Contract referring to “Facility” in a way that describes a post-completion Stadium.  For example, the Court noted a provision forecasting that the Arizona Cardinals will play “at the Facility for thirty (30) years.”  Thus, the Court reasoned, that even if “Facility” could possibly refer to pre-completion as the Insurer argued, at most, it only established that the term refers to the Stadium bothbefore and after substantial completion.  The Court held that the Waiver was therefore still applicable and not “reasonably susceptible” to the Insurer’s more restrictive view.

Second, the Insurer challenged the district court’s determination that the Owner could waive the subrogation rights of a property insurer providing insurance years after the property in question was completed.  In rejecting this argument, the Ninth Circuit noted that Arizona courts recognize the right of an insured, when the insured is waiving its own rights, to waive its insurer’s subrogation rights.  The Court pointed to the insurance provision in the Prime Contract wherein the parties waived their own subrogation rights with respect to the property insurance the Owner was required to carry, and a similarly broad release contained in the Subcontract having the same effect.  Because these provisions also waived the Owner’s rights to subrogation, the Court concluded that the Waiver applied to the Insurer and barred its contract claims against the Subcontractor.

Third, the Insurer argued that, in any event, the Waiver should not apply to its negligence claim on the grounds that exculpatory clauses are disfavored and construed strictly in Arizona.  The Court disagreed, finding that a subrogation waiver is different from a true exculpatory clause. The Court reasoned that subrogation waivers do not present the same dangers as exculpatory clauses, because no risk exists that the injured party will be left without compensation.  The Court also highlighted the important policy goals served by subrogation waivers as a matter of risk allocation.  While acknowledging that Arizona did not appear to have ruled explicitly on whether a subrogation waiver applies to a tort claim, the Court found no reason that Arizona would depart from the general rule that subrogation waivers apply regardless of the nature of the claim.  Thus, because the Court concluded that the Owner waived its rights against the Contractor and Subcontractors and that the Waiver applied against the Insurer as to its contract claims, the Court also concluded that the Waiver applied to the Insurer’s tort claim.

Consequently, the Court affirmed the district court’s decision to enforce the Waiver and dismiss the Insurer’s action for recovery.



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