COURT CONSIDERS APPLICABILITY OF WAIVER OF SUBROGATION

Commercial Property

Waiver Of Subrogation

Action Steel (Action) entered into a contract with general contractor Systems Builders (Systems) to construct an addition to a commercial building designed and manufactured by Varco-Pruden Building (Varco). The building addition was completed in the summer of 1995, with Systems as the general contractor and Varco as subcontractor. The building addition construction contract required Action to obtain property insurance covering its own interests as well as those of contractors and subcontractors. The contract also contained a waiver of subrogation clause.

A snowstorm hit the area on January 26, 1996. Snow accumulated on the roof of the addition, causing a partial collapse. Action's insurance company, Midwestern Indemnity Company (Midwestern), paid Action $1,391,819 for the loss. $44,971 of that total was for damage to the building's contents. The remaining amount was for loss to the building and loss of business income.

Midwestern filed a subrogation claim against Varco. The trial court barred all claims because of the waiver of subrogation in the contract so Midwestern appealed.

The court of appeals addressed four separate issues. Three of them related to the waiver of subrogation provision of the construction contract. Midwestern argued the provision did not apply to insurance acquired after the project was completed and, even if it did apply, Varco was not entitled to enforce it because Varco was not a party to the contract.

The relevant language of the contract provided, in part that, "If during the Project construction period the Owner insures properties,...or if after final payment property insurance is to be provided on the completed Project through a policy or policies other than those insuring the Project during the construction period, the Owner shall waive all rights in accordance with the terms of Subparagraph 11.3.7 for damages caused by fire or other perils covered by this separate property insurance."

The court of appeals found that Action and Midwestern were bound to waive all rights against Varco for damages that the insurance covered.

The court next evaluated the waiver of insurance and subrogation provisions of the construction contract and determined that the waiver of subrogation barred recovery for negligence.

The court then evaluated the same provision and found that recovery for amounts paid for damages to the building's contents were permitted. This was because the waiver was limited to only the value of the work performed under the contract. Therefore the waiver of subrogation did not preclude the claim for the $44,971 loss to the building's contents.

Midwestern Indemnity Company v. Systems Builders, Inc.-No. 49A02-0304-CV-287-Court of Appeals of Indiana-January 14, 2004-801 North Eastern Reporter 2d 661