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Commercial Property |
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Waiver Of Subrogation |
MiddleOak insurance Company
(MiddleOak) insured an apartment complex designed by David O'Sullivan
Architects, Inc. (O'Sullivan) and constructed by the general contractor, Plumb
House, Inc. (Plumb House). Tri-State Sprinkler Corp. (Tri-State) was the
sprinkler sub-contractor on the project. After a 2007 fire damaged one of the
buildings, MiddleOak, as subrogee of the owner, Longview Apartments of
Georgetown (Longview), brought claims of negligence and breach of contract
against O'Sullivan, Plumb House and Tri-State. MiddleOak paid Longview
$4,774,150.14 under the insurance policy Longview purchased on May 14, 2006,
approximately two years after the complex was completed and occupied.
The trial court determined
that a waiver of subrogation provision in the construction contract documents
barred MiddleOak's action. On appeal, MiddleOak argued that the trial court
erred because the waiver provision did not extend to the Longview coverage that
was obtained after construction was complete. It also stated that the waiver
provision was unenforceable because the defendants could not waive liability
for the violation of a statutory duty. The appellate court disagreed with both
arguments. Unlike provisions that completely clear a wrongdoer and leave
victims without recourse, a waiver of subrogation does not prevent an injured
party from being compensated. It serves to allocate risk among parties and
reflects their intentions to relieve each other of liability and to look to
only one insurance company to bear the risks of the fire.
The central dispute was
whether the contract's provisions with respect to waiver of subrogation applied
only to property insurance obtained during construction or to property
insurance the owner obtained after the project was completed. Previous case law
in many jurisdictions held that the provisions involving waiver of subrogation
in the two standard forms of the American Institute for Architects (AIA)
utilized in this case were not limited to losses that occurred during the
construction period but also applied to post-construction losses covered by
insurance.
The appellate court agreed
with the reasoning of previous case law that held that the contractual
provision for waiver of subrogation applied to post-construction losses as well
as to losses during construction. The pertinent contractual language reflected
the parties' expressed intent to extend the application of waiver of
subrogation to post-construction losses. Viewed in context, this provision
allocates risks among insurance companies and is not a surrender of rights by
the insured against the contractor. Such allocation corresponds to a strong
public policy that encourages parties to anticipate risks and arrange insurance
against them, resulting in avoiding litigation. The waiver of subrogation
provisions in the AIA standard forms express this allocation and extend to
insurance policies the owner obtains after construction is complete as well.
The court also stated that
insurance companies have many ways to protect themselves against unknown
subrogation waivers, such as exclusions, higher premiums, requiring warranties
from insureds, or obtaining reinsurance to cover subrogation waivers. It
affirmed the trial court's finding that the construction documents waiver of
subrogation barred MiddleOak's action.
Appeals Court of
Massachusetts, Essex. MiddleOak Insurance Company v. Tri-State Sprinkler Corp.,
David O'Sullivan Architects, Inc, and Plumb House, Inc. No. 09-P-1265. Argued
May 6, 2010. Decided Aug. 5, 2010. 77 Mass.App.Ct. 336, 931 N.E.2d 470 Ba