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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