K.B.K., Inc. (K.B.K.) and John L. Mattingly Construction Co., Inc. (Mattingly) contracted to build an Arby's Restaurant (Restaurant) in October 2002. Mattingly hired Wilma L. Phoebus d/b/a Wilma Phoebus Electric Company (Phoebus) to do the electrical work. Construction was completed in October 2003 and the Restaurant opened for business. K.B.K. made the final payment on the construction contract on January 30, 2004 after which it purchased property insurance on the restaurant from Hartford Underwriters Insurance Company (Hartford) for the period October 1, 2004 to October 1, 2005. A fire at the Restaurant on May 8, 2005 caused $1,117,711.26 in damages that Hartford paid, minus a $1,000 deductible that K.B.K. paid.
As subrogee of K.B.K., Hartford sued Mattingly and Phoebus on theories of negligence, breach of contract and breach of warranties, alleging that defective electrical wiring, components and equipment installed during construction caused the fire loss. Mattingly and Phoebus moved for summary judgment, asserting that the "Waivers of Subrogation" clause in the construction contract barred Hartford from pursuing liability claims against them. Their specific argument was that K.B.K. had agreed in the contract to look only to its own property insurance to cover perils like fire and that Hartford had no subrogation rights to enforce. Hartford opposed the motion and cross-motioned, stating that the waivers cited did not apply because the loss occurred after construction was complete and final payment was made. The circuit court granted summary judgment in favor of Mattingly and Phoebus and denied Hartford's. Hartford appealed.
Hartford's appeal asserted that the temporal scope of the Waivers of Subrogation clause compared with losses to the completed Restaurant covered by owner-obtained insurance was ambiguous at best and that its meaning was a genuine dispute of material fact that barred summary judgment. Hartford alternately argued that if the clause was not ambiguous, its only reasonable reading was that it did not apply to the completed Restaurant, that K.B.K.'s right of recovery against Mattingly and Phoebus for the fire loss remained intact, and that Hartford was subrogated to that right. Hartford also asserted that the language of the waivers clause was unclear as to whether they were in effect after construction was complete and the Restaurant was covered by property insurance and that the circuit court's interpretation of "Work" was inconsistent with the definition in the construction contract. It argued that public policy considerations underlying subrogation waivers in construction contracts apply only during construction, not afterwards.
While the circuit court had ruled that the language was clear and that the waivers still governed the legal relationship between K.B.K. and Mattingly and its subcontractors with respect to this fire loss, the appellate court saw it completely differently. It agreed with Hartford's argument concerning public policy considerations in construction contracts and that they apply only during the construction period, not for an unlimited period of time after construction is complete, the structure is being used as intended, and the parties to the contract are no longer working together to accomplish the goals stated in the construction contract. The primary policy consideration was to eliminate disruptions during construction that would result if losses that occurred during that time were subject to litigation. When construction was complete and the structure was operating as intended, avoiding construction delays was no longer a goal and became moot.
For these reasons, the appellate court concluded that the construction contract could not be interpreted to mean that, after the Restaurant was built and paid for, K.B.K. continued to waive its liability rights against Mattingly and its subcontractors as long as K.B.K. maintained property insurance on the Restaurant. It reversed the judgment and remanded the case to the circuit court for further proceedings consistent with this opinion.
Court of Special Appeals of Maryland. Hartford Underwriters Insurance Company v. Wilma l. Phoebus, et al. No 758, Sept. Term, 2008. Aug 31, 2009. 187 Md.App. 668, 979 A.2d 299