Do you really understand the waiver of subrogation provision contained in most
form agreements used in the industry, why it is there, and how it helps you
manage the risk of your business? This article will help clear up some of the
confusion.
Anytime you sign a contract for professional services, you should understand
the consequences of each clause in the agreement. This may sound like simple
common sense, but do you really understand the waiver of subrogation provision
contained in most form agreements used in the industry, why it is there, and
how it helps you manage the risk of your business? This article will help clear
up some of the confusion.
Common Waiver Clause
The most commonly used "family" of form documents is that
promulgated by the American Institute of Architects (AIA). The AIA Standard
Form of Agreement between Owner and Architect, B101–2017, Article 8.1.2,
contains the following clause.
To the extent damages are covered by property insurance, the Owner and
Architect waive all rights against each other and against the contractors,
consultants, agents, and employees of the other for damages, except such
rights as they may have to the proceeds of such insurance as set forth in AIA
Document A201–2017, General Conditions of the Contract for Construction. The
Owner or the Architect, as appropriate, shall require of the contractors,
consultants, agents, and employees of any of them, similar waivers in favor
of the other parties enumerated herein.
What Is Subrogation?
Subrogation means, in a legal sense, one party has the right to "step
into the shoes" of another party to bring a claim for damages. Not all
types of claims may be subrogated. The most common type that can be subrogated
is property damage claims.
For example, if you are involved in an auto accident where no one is
injured, but the vehicles are damaged, and you are free of fault, your insurer
will pay to have your vehicle damage repaired. If your insurer pays for the
"property damage" to your vehicle, in most states, your insurer then
becomes "subrogated" to your rights for that property damage. In
other words, your insurer can "step into your shoes" and make a claim
against the other driver in your auto accident that caused the damage to your
vehicle for which your insurer had to pay the repair cost. If the other driver
does not voluntarily pay for the damage, your insurer may even bring a lawsuit
against the other driver, and by "stepping into your shoes," your
insurer may bring that claim in your name—just as if you were bringing the suit
yourself. In most states, the suit would be brought in your name or your
company name.
A waiver of subrogation clause is placed in the professional services
contract to minimize lawsuits and claims among the parties. The result is that
the risk of loss is agreed among the parties to lie with the insurers, and the
cost of the insurance coverage is contractually allocated among the parties as
they may agree. The risk, once assigned to the insurers by the parties, is
determined to stop there, without allowing the insurer to seek redress from the
party "at fault."
In our auto accident example, if you and the other driver had an enforceable
"waiver of subrogation" agreement at the time of your accident, even
though the insurer for the innocent party—you—must pay for the loss, that
insurer would not be allowed to seek damages from the party "at
fault"—the other driver. The reason is because the parties had agreed to
waive the right of subrogation, and the insurer's rights can be no greater
than the insured's rights.
In the professional services setting, the clause usually provides that the
owner and design professional waive all rights against each other and against
others for damages covered by any property insurance in place during
construction. To insure the effectiveness of the waiver of subrogation clause,
the owner and design professional generally require the same type of waivers
from the contractors, other consultants, and agents. Most form contract
documents assign the responsibility for procuring the applicable insurance, for
demonstrating the coverage is in place (e.g., certificates of insurance), and
for the cost.
These clauses are intended to minimize the potential for lawsuits,
cross-suits, and counter-suits arising from property loss that may occur during
the project. An effective waiver will prevent the various insurers involved
from suing the parties to the construction contracts. One reason to use the
available form contracts is that the entire network of the waiver of
subrogation provisions has already been thought through, drafted, is in place
ready to use, and has been tested in the courts to a greater or lesser extent.
The clause quoted above from AIA B141, the Standard Form of Agreement between
Owner and Architect, has a sister provision in the AIA Owner and Contractor
Agreements and general conditions.
Subrogation in the Real World
Does the clause have real world application or does it only exist in the
tangled netherworld of insurance? Not too long ago in Missouri, an owner had
purchased a building to be used as an office and warehouse. After property
damage was encountered, the owner's insurer encountered the effects of a
waiver of subrogation clause. See generally, Butler v. Mitchell-Hugeback,
Inc., et al., 895 SW2d 15 (Mo. 1995).
The owner had contracted with an architect, engineer, and a contractor to
retrofit an existing building. The owner and the architect had entered into the
AIA B141-1987 edition, agreement. The owner and construction contractor had
also used the AIA standard form agreement, which incorporated the General
Conditions for Construction, A201-1987 edition.
During the retrofit process, a portion of the roof collapsed, which resulted
from insufficient steel reinforcing bars being placed in the hollow core of
certain pilasters, from the reinforcing steel that was installed being
improperly spliced, and from certain girders being improperly cut during
construction. The owner's property insurer paid the owner for the loss. The
owner's insurer in turn claimed that it was entitled to be
"subrogated" to the rights the owner would have otherwise had against
the parties responsible for the collapse. In other words, the insurer wanted to
"step into the shoes" of the building owner and pursue damages
against the parties it believed were "at fault" for the collapse.
Suit was filed against the architect, among others. The owner alleged that
the architect had breached its contract with the owner and also was negligent
in its provision of professional services. The owner had found in the
postcollapse investigation that the roof had failed due to the defects
mentioned above and some other defects in the original construction, which
should have been corrected.
At the trial court level, the court ruled that the owner had
"waived" its claims against the architect and granted the architect
judgment in its favor before the lawsuit went to trial. The owner appealed.
On appeal, the Missouri Supreme Court was called on to determine what the
parties had really intended and agreed to by the use of the form agreements.
The court said as follows.
In order to determine the intent of the parties, it is often necessary to
consider not only the contract between the parties, but "subsidiary
agreements, the relationship of the parties, the subject matter of the
contract, the facts and circumstances surrounding the execution of the
contract, the practical construction the parties themselves have placed on
the contract by their acts and deeds, and other external circumstances that
cast light on the intent of the parties."
In light of this guiding principle, the court concluded that all the
contract documents of the owner/architect, owner/contractor, and the general
conditions must be read together to capture what was intended by the
parties.
Though the opinion dealt with waivers in the 1987 family of AIA documents, a
similar clause remains in the newest 2017 AIA documents. Section 11.3 of the
General Conditions of the Contract for Construction, A201-2017, still requires
the entities to procure insurance and waive subrogation: "Owner and
Contractor waive all rights against … each other and any of their
subcontractors, sub-subcontractors, agents, and employees, each of the other; …
the Architect and Architect's consultants; and … Separate Contractors … and
any of their subcontractors … for damages caused by fire, or other causes of
loss, to the extent those losses are covered by property insurance required by
the Agreement or other property insurance.…"
Conclusion
A waiver of subrogation may allow you to avoid becoming engaged in the
complexities of lawsuits and insurance claims, while managing the risk and
associated expenses. The Mitchell-Hugeback case helps to demonstrate
the importance of keeping the "family" of documents in place. As the
Missouri Supreme Court noted, the agreements had to be read together. No one
could predict the result if part of the "family" is missing or if the
clauses are edited without attention to the ripple effect throughout the
"family."