Waiver of subrogation provisions in construction contracts – Part 2 – Real estate and construction
United States: Waiver of subrogation provisions in construction contracts – Part 2
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In Part One, I discussed the general purpose and benefits of subrogation and considerations for determining whether a waiver of subrogation may be beneficial or detrimental to certain contracting parties to a construction contract. Even where contracting parties agree to include a waiver of subrogation, some form of waiver of subrogation may not be appropriate in a given situation. For example, the waiver form contained in American Institute of Architects (AIA) document A201, General Conditions of Construction Contract, is one of the most commonly used form provisions in construction contracts and is probably also one of the most contentious. As a result, changes in technical provisions are often warranted, or contracting parties are free to draft and define the scope of a waiver of subrogation provision as they see fit for their project.
When drafting or assessing the scope of a waiver of subrogation provision, the following questions should be analyzed:
- If the waiver extends to losses after completion. While it may be appropriate to have a general waiver provision in effect during construction to avoid disruption and preserve other economic efficiency gains, this same rationale may not apply to post-completion losses. After completion, the owner is usually the only party that remains with an insurable interest in the property, and it may no longer be practical for the owner and his insurer to continue to bear the risk that work performed by others will fail. have not been completed in a correct and professional manner or in accordance with applicable codes. A waiver that applies to post-completion losses may also prejudice the owner in at least two specific ways: (1) As noted in Part One, such a loss could be declared without recovery by subrogation on the loss history. of the owner and result in a future increase. bonuses; and (2) the owner may be liable and not have the capacity to recover any applicable deductible or self-insured retention from the party responsible for the loss.
The question of whether a given waiver precludes subrogation claims for losses occurring after completion of work has been frequently debated and discussed in case law across the country. When a contract includes an extension of subrogation clause such as that found in section 11.3.2 of AIA document A2017,1 courts generally extend exemptions from subrogation to post-completion losses. In contrast, when a continuation of subrogation clause is not included in the construction contract, courts have been more willing to limit the temporal scope of waivers of subrogation to losses occurring during construction. Accordingly, owners should consider the potential implications of accepting an extension of subrogation clause and obtaining additional insurance coverage or separate policies beyond those specifically covering the project during construction. , not only in terms of the cost of future insurability.
- If the waiver applies only to the property insurance policy specifically required by the parties’ agreement rather than to other property insurance applicable to the work or project / if the waiver excludes claims for damages to goods not related to the works. Another frequently debated question is whether a waiver clause prevents subrogation claims for damage to property unrelated to the work, such as damage to pre-existing parts of a building when a fire occurs during a renovation project or damage to personal property of the owner stored in the building. Many courts disagree on the scope of the standard AIA Document-A201 subrogation waiver clause in this regard.
One view, which is followed in Texas, is that the scope of the waiver is based on whether the homeowner’s insurance policy provides coverage for losses resulting from damage to the property. This approach focuses on the extent and source of coverage and is referred to as the âall insuranceâ or âsource of coverageâ approach. Under the âall insuranceâ approach, the courts have concluded that the owner waives subrogation for all losses covered by the owner’s insurance policy âapplicable to the workâ, whether the damage is caused by work or property unrelated to the work.
The other point of view examines whether the injury is a “job” or “non-job” good. Courts in jurisdictions that have taken this view focus on the nature of damaged property and it is predictably referred to as the âwork versus non-workâ or âtype of damageâ approach. Under the âwork versus non-workâ approach, the owner waives subrogation only for losses related to âworkâ, ie construction and subcontracted services.
- If the waiver excludes claims against subcontractors, suppliers and manufacturers. When drafting or amending a waiver of subrogation provision, it is also important to consider which parts should be covered by the provision. It may not be advantageous for an owner to include all subcontractors, subcontractors or suppliers and manufacturers of equipment and materials within the scope of the waiver, particularly if the waiver is extends to losses occurring after completion.
- Whether the waiver applies to claims against design professionals for damages resulting from the provision of professional services. The general waiver provisions generally extend to these types of claims, while the builder’s risk policy for the project may not allow a waiver of these claims. Unnecessary disagreements or litigation can be avoided if the waiver policies and provisions are consistent from the start of the project.
- Whether the waiver applies to liability insurance policies. Many general waiver provisions apply to âproperty insurance as required by the agreementâ or âany other property insurance applicable to the workâ. If a liability insurer pays to settle a claim for property damage because its insured is legally obligated by contract to pay the claimant and the liability insurer pursues subrogation action against a third party determined to be primarily responsible for the damage, a there may be a problem with the viability of the subrogation claim – is liability insurance “contractually required property insurance” or “other property insurance applicable to the works”?
- If the waiver excludes claims for deductible or self-insured retention. As noted above in the post-completion loss discussion, this may cause the owner to incur costs that cannot be recovered from the violator.
- If the waiver excludes claims for damages caused by the gross negligence of a party or violation of applicable codes. Waivers are generally applied to avoid covered losses caused by ordinary negligence. Where the conduct of the party responsible for the loss goes beyond ordinary negligence – where the claim is based on gross negligence, willful misconduct, or a violation of applicable codes, questions may arise as to whether a waiver of subrogation should be made. be applied. The question may also arise as to whether a waiver prevents a request for subrogation when the party responsible for the loss breaches the contract or breaches an obligation outside the contract.
- Whether the waiver is conditional on the parties obtaining waivers from their subcontractors or consultants or any other contractual commitment.
These problems can all be resolved with careful drafting. While courts can vary on their interpretations of contract wording, courts should generally apply clear and specific wording.
Reviewing and revising the general form of waiver of subrogation provisions can help ensure that contracting parties effectively allocate risks to affected parties and insurers during construction and after completion. If a waiver of subrogation clause is changed in a model contract, it is important to consider the implications that the change may have on other provisions of the contract documents and other agreements or policies applicable to the project. When modifying a waiver provision on a form, it may be necessary to modify other provisions to ensure that the intent of the modification is consistent throughout the agreement and in all applicable documents. .
1. Â§ 11.3.2 If, during the construction period of the project, the owner insures the properties, real or personal or both, on or adjacent to the site by property insurance under policies separate from those insuring the project , or if, after final payment, property insurance is to be provided on the completed project by any policy or policies other than those insuring the project during the construction period, to the extent permitted by such policies, the owner waives to all its rights under the terms of section 11.3.1 for damage caused by fire or other causes of loss covered by this separate home insurance.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought on your particular situation.
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