First-party property insurers for minimal or no additional premium will allow their insureds to waive the insurer's right to subrogation against persons responsible for damage to the property if done before a loss or by a contract. In so doing, the insurer gives up a right to recover money paid to its insured in accordance with the terms and conditions of its insurance policy.
In Rural Mut. Ins. Co. v. Lester Bldgs. LLC, 2019 WI 70 (June 18, 2019), Rural Mutual Insurance Company sought protection by the Wisconsin Supreme Court from its agreement to waive subrogation and allow it to recover from the entity responsible for the damage.
The circuit court determined that Rural Mutual's claims against Lester Buildings, LLC, Phoenix Insurance Company, Van Wyks, Inc., and West Bend Mutual Insurance Company were barred pursuant to a subrogation waiver contained in a Lester Buildings' contract with Rural Mutual's insured, Jim Herman, Inc. ("Herman").
Facts of the Case
In 2009, Herman entered into a contract with Lester Buildings for the design and construction of a barn on its property. The contract included the following language.
Both parties waive all rights against each other and any of their respective contractors, subcontractors and suppliers of any tier and any design professional engaged with respect to the Project, for recovery of any damages caused by casualty or other perils to the extent covered by property insurance applicable to the Work or the Project, except such rights as they have to the proceeds of such property insurance and to the extent necessary to recover amounts relating to deductibles of self-insured retentions applicable to insured losses…. This waiver of subrogation shall be effective notwithstanding allegations of fault, negligence, or indemnity obligation of any party seeking the benefit or production of such waiver.
The barn that Lester Buildings and Van Wyks constructed was covered by Herman's insurance policy with Rural Mutual. In that policy, Rural Mutual explicitly allowed its insured, Herman, to waive its rights without interfering with Rural Mutual's insurance coverage.
The barn was completed in June 2010. In May 2013, one-half of the barn collapsed due to strong winds, killing or causing catastrophic injuries to a large number of Herman's cattle. Rural Mutual asserts that the barn collapsed due to the improper installation of steel rebar cages in the concrete piers supporting the barn's roof. Rural Mutual paid approximately $607,000 to rebuild Herman's barn and approximately $51,000 for the losses related to cattle and other miscellaneous damages.
In 2014, Rural Mutual brought a subrogation action against Lester Buildings and its insurer, Phoenix, alleging that Lester Buildings had breached its contract with Herman and had been negligent in placing the rebar cages lower than where the specifications required. The circuit court, affirmed by the court of appeal, granted summary judgment to the contractors on all of Rural Mutual's claims, reasoning that the subrogation waiver was enforceable and precluded Rural Mutual's claims.
Analysis by the Court
Rural Mutual asserted that Wis. Stat. § 895.447 voided the subrogation waiver. In the alternative, Rural Mutual asserted that the subrogation waiver was an unenforceable exculpatory contract contrary to public policy.
Wisconsin Stat. § 895.447 Does Not Void the Subrogation Waiver
The plain language of Wis. Stat. § 895.447 states the following.
Any provision to limit or eliminate tort liability as a part of or in connection with any contract, covenant or agreement relating to the construction, alteration, repair or maintenance of a building, structure, or other work related to construction, including any moving, demolition or excavation, is against public policy and void.
The dispute, in this case, lay in whether the subrogation waiver involved limited or eliminated "tort liability" and was, therefore, void. A "tort" is defined as a civil wrong for which a remedy may be obtained. "Liability" is defined as the quality, state, or condition of being legally obligated or accountable; legal responsibility to another or to society, enforceable by civil remedy or criminal punishment. Taken together, "tort liability" is the legal obligation or responsibility to another resulting from a civil wrong or injury for which a remedy may be obtained.
The court said that the subrogation waiver must be read in its entirety to understand exactly what is being waived. The subrogation waiver does not limit or eliminate the legal responsibility of the contractors to Herman for the collapse of Herman's barn. The contractors and any other subcontractors or suppliers who constructed the barn were still liable to Herman for their negligent acts. Instead, the subrogation waiver waived Herman's right to recover damages from the contractors for their wrongful acts to the extent those damages were covered by a property insurance policy such as the one between Herman and Rural Mutual. Responsibility for payment of damages, the remedy for tort liability, shifted from the contractors to Rural Mutual.
The contractors could be 100 percent liable for wrongful conduct but, based on the subrogation waiver expressly allowed by Rural Mutual's policy, Rural Mutual could be responsible for paying damages to Herman for property loss.
Moreover, the remedy that may be obtained as a result of the contractors' civil wrong was not limited because Herman could still recover damages that were not covered by its policy with Rural Mutual, and, in fact, Herman pursued and ultimately resolved its claims against the contractors for uncovered losses they allegedly caused.
The Subrogation Waiver Is Not an Unenforceable Exculpatory Contract
Rural Mutual asserted that the subrogation waiver was an unenforceable exculpatory contract that was contrary to public policy. The subrogation waiver, in this case, did not exculpate the contractors from liability; it merely shifted the responsibility for payment of damages. If the contractors were negligent or otherwise at fault, the subrogation waiver shifted recovery of damages for property loss to Herman's insurer, Rural Mutual, only to the extent covered by Herman's policy with Rural Mutual. Herman could still recover damages not covered by its policy with Rural Mutual from the contractors, including any deductibles.
The subrogation waiver, in this case, did not immunize the allegedly negligent parties from liability or require the injured party to go uncompensated, and thus, it was not an unenforceable exculpatory contract contrary to public policy.
Wis. Stat. § 895.447 does not void the subrogation waiver in Lester Buildings' contract because the waiver did not limit or eliminate tort liability.
The Wisconsin Supreme Court also concluded that the subrogation waiver was not an unenforceable exculpatory contract contrary to public policy, and it, therefore, affirmed the court of appeals and upheld the grant of summary judgment.
Subrogation is an equitable remedy available to every first-party property insurer to reduce its eventual loss if the damage is caused by a third party or the insured has a contractual right to indemnity from another. To help sell insurance contracts, an insurer will waive that right. It makes no sense, regardless of the amount of the loss, for an insurer to seek a court ruling that it didn't mean what it said when it agreed to waive subrogation and accuse itself of doing an illegal act when it agreed to waive subrogation. The Wisconsin Supreme Court read the contracts and ruled intelligently and made the insurer live up to its promise.
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