IN CoA revisits and revises waiver of subrogation in AIA contracts

Not three months after the decision in Allen County Pub. Library v. Shambaugh & Son, L.P., 997 N.E.2d 48 (Ind. Ct. App. 2013) (published on Oct. 22, 2013 and authored by J. Barnes with Pyle and Crone concurring; reaffirmed on rehearing on 1-28-14), a different panel of the IN CoA revisits the waiver of subrogation clause in standard AIA contracts and comes to a far different conclusion.

To provide some background, since AIA contracts are rather standard nationwide, there has developed a majority and minority view on how to interpret the relevant provisions therein, including waiver of subrogation clauses. Indiana has long subscribed to the minority view. In Allen County Pub. Library, this view was reaffirmed and in the rehearing opinion, Judge Barnes opined that even if the majority view had applied, the result would have been the same. See Allen County Pub. Library v. Shambaugh & Son, L.P., 2014 Ind. App. LEXIS 26 (Ind. Ct. App. Jan. 28, 2014).

The contract language at issue in both cases is as follows:

Waivers of Subrogation. The Owner and Contractor waive all rights against each other and against the Construction Manager, Architect, Owner’s other Contractors and own forces described in Article 6, if any, and the subcontractors, sub-subcontractors, consultants, agents and employees of any of them, 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, except such rights as the Owner and Contractor may have to the proceeds of such insurance held by the Owner as fiduciary . . . . (Sec. 11.3.7)

With respect to waiving subrogation, Indiana has used the “work v. non-work” approach. That is, this section “is limited to the work performed under the contract and, therefore, if a contractor causes damage to property other than the Work to be performed under the contract, the property owner (or its insurer through subrogation) may seek recovery from the contractor for that damage, regardless of whether the damage was covered by insurance.” Midwestern Indem. Co. v. Sys. Builders, Inc., 801 N.E.2d 661, 672-673 (Ind. Ct. App. 2004).

The majority view  as viewed by the Allen County Pub. Library decision considers “whether the insurance policy was broad enough to cover damages to work and non-work property and whether the policy paid for the damages. If the answer to both questions is yes, the waiver applies.” Allen County Pub. Library, 2014 Ind. App. LEXIS 26, 7 (Ind. Ct. App. Jan. 28, 2014) (citing Federal Ins. Co. v. Woodruff Const., 826 N.W.2d 516, 2012 WL 5954588, *2 (Iowa Ct. App. 2012)).

To put it in more simple terms, the minority view is that damage to property outside of the scope of “the work” is not subject to the standard AIA waiver of subrogation, regardless of whether the owner obtained insurance for all damage. The majority view is that if you have insurance on non-work items and that insurance pays, then the waiver applies to the extent insurance pays for it.

In Allen County Pub. Library, Judge Barnes noted in the rehearing opinion that the owner procured a “builder’s risk plus” policy which only provided for $5,000 in cleanup costs. The library did not therefore waive any claims for damages above and beyond what it received from insurance since the cases in the majority view allowed for recovery above what insurance provided. Thus, even applying the majority view, the AIA contract did not avail the contractor of the subrogation waiver protections.

By contrast, today’s opinion in Board of Commissioner of County of Jefferson v. Teton Corp., et al. rejects the minority view of  the AIA subrogation waiver provision as well as Judge Barnes’s interpretation of the majority view.

In this case, the owner opted to use its own existing liability policy instead of procuring a builder’s risk policy under the contract. Under those same terms, the owner was obligated to inform the contractor of its decision in writing, which the owner did not do. During the related renovations to the Jefferson County courthouse, a fire broke out and caused over $6,000,000 in damages, some of which was covered by the liability insurance and some of which fell to Jefferson County.

In adopting with the majority view, the Court focused on two sections of the AIA contract.

Section 11.3.1.2 provides that “[i]f the Contractor is damaged by the failure or neglect of the Owner to purchase or maintain insurance as described above, without so notifying the Contractor, then the Owner shall bear all reasonable costs properly attributable thereto.”

Section 11.3.7 further provides that “[a] waiver of subrogation shall be effective as to a person or entity even though that person or entity would otherwise have a duty of indemnification, contractual or otherwise, did not pay the insurance premium directly or indirectly, and whether or not the person or entity had an insurable interest in the property damaged.

The Court read these provisions and the majority view to limit subrogation rights altogether, placing the entire onus on the Owner to obtain adequate insurance:

Section 11.3.1 of the AIA contract therefore requires owners to insure their interests in the construction project at least to the value of the underlying contract. The AIA contract expressly requires property owners to separately insure these interests and, in order to facilitate the completion of the project without delaying and debilitating litigation, to obtain an “all-risk” insurance policy that waives the carrier’s rights to be subrogated to any loss arising within the extremely broad coverage described in the contract. If the owner does not secure such insurance, then it still waives its subrogation rights for any loss described within the AIA contract that it sustains.

In so holding, the Court rejected the notion there could be any recovery above and beyond the insurance coverage secured by Jefferson County. The Court even noted that the recovery in Allen County Pub. Library should have been barred as the owner opted to insure its risk at  $5,000.

What does it mean? Two decisions reaching two very different conclusions as to what the “majority view” even means. Judge Barnes reaches the conclusion that losses beyond what was insured would still be recoverable under the majority view whereas today’s decision reads the AIA contract to put all of the risk, and the onus of obtaining adequate insurance, on the owner. Additionally, the Court’s opinion comes close to converting the waiver of subrogation section into a hold harmless agreement where the owner is left without any recourse to recover for property damage resulting from a contractor’s negligence. Obviously, there are several nuances to this issue. I would highly recommend reading the entire opinion as well as Judge Barnes’s concurring opinion referenced herein.

www.in.gov/judiciary/opinions/pdf/02041404pdm.pdf.

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About Matt Anderson

I am civil trial attorney in South Bend, Indiana and have practiced on both sides of insurance and personal injury law in Illinois and Indiana for the better part of ten years. I created this blog as a way for other Indiana civil litigation and trial attorneys to get meaningful updates on cases ad issues that affect their practice. (I'll admit that there is some self-interest involved since it's also a handy way to summarize and file my own research.)

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