Expert Commentary

Building Owner Not Barred by "Waiver of Subrogation" Clause from Seeking Damages Against Contractors for Diesel Leak Harming "Nonwork" Property

In Allen Cnty. Pub. Library v. Shambaugh & Son LP, 997 N.E.2d 48 (Ind. Ct. App. 2013), an Indiana appeals court found that a library could pursue damages against its construction contractors for a diesel leak, despite a standard American Institute of Architects (AIA) waiver of subrogation clause in the contract. The installation of a leaking diesel tank in the basement of the library caused extensive damage to the ground surrounding the building, which the court characterized as damage outside of the project's construction and services (or using the AIA terms of art, damage to "nonwork" as opposed to "work").


Environmental
April 2014

The court found that the waiver of subrogation clause only applied to insurance coverage for the work, as opposed to damages for nonwork. Accordingly, the library was not contractually barred from seeking recovery from the contractors for the pollution remediation, which the court reasoned was appropriate based on the balancing of insurance responsibilities under the contract.

The Insurance Dispute

Allen County in Indiana sought to renovate and expand its main library branch in 2004. The library entered into direct contracts with a construction project manager, a project architect, a concrete contractor, and another contractor tasked with mechanical and electrical work. All of the agreements used a form contract issued by the AIA that is prevalent in the construction industry.

Of particular interest in this case are the AIA provisions on waiver of subrogation and requirements of the parties to obtain certain insurance coverage. The contract required that the library obtain liability insurance for "the work," a term of art defined as the construction and services required by the agreement. In contrast, the contractors were required to obtain insurance coverage for various types of claims that could arise out of their performance, including claims for damages "other than to the work itself."

Under the waiver of subrogation provision, each party waived the rights of its insurers to seek recovery from the other contractual parties (i.e., a subrogation) for its responsibility for damages paid by an insurer under a policy purchased for or applicable to "the work."

The library obtained a builders risk insurance policy for the renovation. The policy had over a $50 million coverage limit, though it specifically excluded coverage for the land and water on and around the project site. However, the policy also contained a "coverage extension" for "Pollutant Clean Up and Removal," which carried its own policy limit of $5,000.

The project required the mechanical and electrical contractor, Shambaugh, to install two diesel tanks to fuel an emergency generator in the library's basement. The concrete contractor, Hamilton Hunter, poured concrete that supported the generator and covered some of the copper piping that connected the tanks to the generator.

Toward the end of 2007, the library discovered that a hole in the copper piping had resulted in around 3,000 gallons of diesel fuel leaking into the ground surrounding the building. The library believed that the hole was caused by the concrete contractor when it drove steel stakes into the ground during the process.

The library filed a claim with its insurer and received the $5,000 maximum pursuant to the policy's coverage extension for pollution cleanup. The library sued the concrete contractor and the mechanical contractor in 2010 for compensation for the extensive cleanup effort, which it claimed had cost the library almost $500,000 at that time, with additional costs expected.

The contractors asked the court for summary judgment, arguing that the library had waived its ability to recover the cleanup costs through the waiver of subrogation provision and the sublimited pollution cleanup coverage extension to the policy.

The Decisions

The trial court agreed and entered a judgment in favor of the contractors, from which the library appealed to the Indiana Court of Appeals. The trial court also found that the diesel leak was a "consequential damage" from the project work.

The appeals court reversed, agreeing with the library that the waiver of subrogation did not serve as a bar on the claim against the contractors for the diesel cleanup. The court discussed that the AIA contract provisions required the library only to insure the replacement costs of "the work" itself, while the fuel leak represents damage that spread beyond the building project. The court found that the library had no contractual obligation to obtain insurance to cover "damage to property surrounding the jobsite or to property outside of the building project itself."

On the other hand, the contractors were required to obtain insurance that would cover harm outside "the work." Building off precedent from other jurisdictions, the court reasoned that allowing the contractor to avoid liability through the "waiver of subrogation" would "upset the balancing of insurance responsibilities set forth by the contract, effectively transforming the property owner's insurer into the insurer of the contractor."

The court also rejected the contractors' argument that they would have sought additional insurance coverage if they had known that the library only had a small amount of coverage for pollution cleanup. The court explained that the library's own limited coverage was not relevant because the contract clearly obligated the contractors to obtain insurance to cover such damages outside of "the work."

The court noted that some jurisdictions, notably California, have held that an owner is precluded from recovery any time the owner is reimbursed by an insurer for a loss, even if it is for damages outside of the work. But the court here cited to precedents in Colorado and New York to follow the apparent majority rule that a standard AIA waiver of subrogation does not limit the owner's right to seek recovery for contractors' damage to nonwork.

Conclusion

This case highlights that a waiver of subrogation provision, depending on its wording, may be limited in scope to the project work. If so, the waiver likely will not bar a subrogation action for various damages that could occur to property outside the confines of the work performed in the project. The case also shows that, in understanding a waiver of subrogation provision, one should be mindful of the contract's underlying insurance obligations, which are typically different for owners and contractors.


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