By Tom Kendall, Attorney
Construction contracts commonly include language by which the property owner, architect, and contractors waive subrogation rights among themselves. The intent of such a clause is to shift the risk of a loss during construction to insurance, and to reduce the likelihood of lawsuits between owners and contractors. Widely used standard construction contract forms require the property owner to obtain insurance to cover fire and other losses during the construction period.
Courts in the various states have differed on the extent of the effect of these clauses. Some have held that the right is waived only to the extent the loss impacts the area under construction (“work property”), and not to related damage to other parts of the property (“non-work property”). By contrast, others have held that subrogation is waived to the full extent of losses covered under any applicable insurance policy. These approaches are termed “work versus non-work” and “any insurance”, respectively.
In May 2009, the Jefferson County courthouse was largely destroyed by fire. The fire was allegedly ignited by a contractor who had been soldering copper downspouts near the wood frame of the building. The work was governed by an American Institute of Architects construction contract.
To satisfy its obligation under the contract to obtain insurance, the County relied upon an existing “all-risk” property insurance policy. The contractor had a separate liability insurance policy. The industry standard AIA contract also contained a subrogation-waiver clause, which read as follows:
“11.3.7 Waivers of Subrogation. The Owner and Contractor waive all rights…for damages caused by fire or other perils to the extent covered by property insurance obtained pursuant to this Paragraph 11.3 or other property insurance applicable to the Work…”
After the fire, the County sued the contractor in an effort to force the contractor’s liability carrier to pay for the damage to the building which was outside the scope of the work. In prior cases, the state’s appeals court had variously employed the work versus non-work and any insurance approaches, thus fueling the litigation. The case culminated in the Indiana Supreme Court’s May 2015 decision in Board of Commissioners of Jefferson County v. Teton Corp.
The Court held that the inclusion of the word “covered” in the waiver clause defines the scope of the waiver in terms of the extent of insurance coverage. The County, as owner, relied upon its “all-risk” insurance policy, and that policy covered losses to work and non-work parts of the courthouse. Therefore, the Court held the County had waived subrogation as to both work and non-work property.
The Court held that the contractor’s liability insurance was not implicated, because the extent of the waiver depends only upon the extent of property insurance coverage, not liability insurance. And because the County’s existing policy covered all of the damages to the courthouse, the right to subrogation was waived as to all damages. This decision places Indiana among a growing number of jurisdictions which adhere to the “any insurance” interpretation of standard construction contract subrogation-waiver clauses.