This case decided last week by the Court of Appeals of Iowa is a good reminder that courts do not uniformly interpret or apply the scope of waivers of subrogation clauses, a typical provision in most construction contracts. Such waivers are typically enforceable and serve to reduce duplicative insurance expenses and to avoid litigation between the participants of a project as to the cause of a loss covered by insurance. However, not all waiver of subrogation clauses are the same. Nor are identical clauses interpreted identically by all courts. In particular, waiver of subrogation provisions are not always interpreted to extend to losses to property than the defined “work” subject to the construction contract.
The issue arises most frequently in construction to or in existing buildings. The recently decided Iowa case involved the question whether a hospital’s property insurer could seek recovery from the contractors when, during a project to improve the hospital building, the sprinklers were activated and damaged both the portion of the building being improved and the contents of a storage room unrelated to the construction. The court concluded that it could not. The court evaluated the waiver of subrogation in section 11.4.7 of the AIA A201 (which is in section 11.3.7 of the 2007 version of the AIA form) and concluded that it extended to not just damage to the “work,” but also to damages covered by insurance “applicable to the work.” The court refused to interpret insurance “applicable to the work” to be mean only insurance ”to the extent applicable to the work.” In short, the court concluded, “the waiver looks to whether the loss was covered by insurance, not whether the loss was to ‘the work.’”
In reaching this result, the Iowa court specifically noted that courts from different states have reached different results on issues relating to the scope of subrogation clauses identical or similar to this. The court suggested it was following what it considered to be the majority rule, but pointed out that several courts have limited the waiver to damage to “the work.”
Although not cited within the list of majority or minority court positions in the Iowa court’s decision, Washington courts have confronted this issue in the past. So far, the Washington courts have applied the minority rule — looking at the property damaged rather than the type of insurance — and the results have varied. For instance, in Public Employees Mutual Insurance Co. v. Sellen Construction Co., 740 P.2d 913 (Wash. Ct. App. 1987), the court held that records stored away from the construction site were not part of the contemplated “work” and thus the waiver of subrogation did not extend to damages to those files. However, in Anderson Hay & Grain Co. v. United Dominion Industries, Inc., 76 P.3d 1205 (Wash. Ct. App. 2003), the court concluded that hay placed in a constructed hay storage building “was unquestionably at the work site” and that the waiver of subrogation did extend to the damage to that hay. The facts of the recently decided Iowa case fall somewhere in between these two fact scenarios, raising uncertainty how that case would be decided in Washington.
The breadth of a waiver of subrogation can be controlled by contract language. The clearer the language in this regard the better. This will avoid later fights, but it also will allow all parties to more accurately determine what insurance they need. Otherwise, all parties are likely to feel compelled to buy insurance to cover their risks even though also covered by property insurance, potentially resulting in duplicative costs being incurred on the project.
