Pennsylvania Court Holds Waiver Of Subrogation Provision Contained In AIA General Conditions Bars Insurer’s Claim Even Though It Did Not Consent To Or Have Notice Of The Waiver

Universal Underwriters Insurance Co. v. A. Richard Kacin, Inc.
916 A.2d 686 (Pa. Super. Ct. 2007)

The Superior Court of Pennsylvania held that the American Institute of Architects’ (“AIA”) form waiver of subrogation clause barred a subrogation claim even where the loss was created by the contractor’s own negligence. Relying on Penn Avenue Place Assoc., L.P. v. Century Steel Erectors, Inc., 798 A.2d 256 (Pa. Super. Ct. 2002), the court held that a warranty provision did not invalidate the waiver of subrogation and opined that the warranty provision provided a remedy only to the extent that losses were not covered by insurance. The court further held that an insurer does not need to be party to the contract containing the waiver of subrogation clause nor does the insurer need to consent to or have notice of the waiver of subrogation clause in order for it to be enforceable.

A. Richard Kacin, Inc. and Bassett Masonry, Inc. (collectively, the “Contractors”) were the general contractor and a subcontractor respectively on a construction project for Watson Chevrolet Oldsmobile (“Watson”). The Contractors’ work was performed in accordance with a standard AIA construction contract executed in 1999. In 2002, a rainstorm hit the project and a wall collapsed. Following the collapse, Watson received payment under its property insurance policy for the property damage and the insurer, Universal Underwriters Insurance, Co. (“Universal”), instituted a subrogation action against the Contractors and others alleging breach of contract and negligence seeking reimbursements for amounts paid to Watson. Universal alleged that the Contractors’ deficient construction caused the collapse. The trial court granted the Contractors’ motions for partial summary judgment, concluding that the waiver of subrogation provisions contained in the contract barred Universal’s claims.

Universal appealed the trial court’s ruling, first arguing that the warranty provisions of the contract would be superfluous or ambiguous if the waiver of subrogation provision was given effect. The Superior Court rejected this argument concluding that a clause waiving subrogation for “damages caused by fire or other perils to the extent covered by property insurance obtained pursuant to” the contract was enforceable regardless of whether the damages were caused in any way by the contractor’s own negligence. To the extent that Watson’s damages were not covered by property insurance and hence subject to the waiver of subrogation provisions, the court opined that the warranty provisions afforded Watson with a means by which to pursue the Contractors for uninsured losses. The court based its decision on the basic contract principle requiring that various contract provision be harmonized with one another and not be read as to render any clause meaningless.

With respect to Universal’s second argument – that the waiver provisions were not enforceable against Universal because it was not a party to the contract nor did it have notice of or give consent to the waiver – the court found that neither notice nor consent were necessary to give effect to a waiver of subrogation provision. In rendering its decision on this issue of first impression in Superior Court of Pennsylvania, the court noted that there is a split among other state appellate courts as to whether notice and/or consent was required for a waiver of subrogation clause to be enforceable. The court first determined that the parties were free to agree to share the burden of either’s negligence by requiring the purchase of insurance and giving waivers of subrogation. The court next reasoned that in Pennsylvania “subrogation is a contingent and derivative right” thus an insurer can only recover the type of damages the insured could assert. Simply put, the waiver of subrogation served as a wavier by Watson of recovering any damages that were covered by the insurance policy, thereby extinguishing Watson’s cause of action against the Contractors and, in turn, Universal’s derivative claim.

The Court explained that its ruling allows for parties to contract as they wish. It noted, however, that, among other things, insurers can protect themselves from such waivers of subrogation by writing exclusions into their insurance policies denying coverage in the face of a subrogation waiver, by increasing premiums to offset loss of subrogation rights, by ascertaining whether their insured has waived subrogation rights prior to issuing an insurance policy, by obligating its insured not to waive subrogation, or by obtaining reinsurance.

Click here to view full opinion as PDF (provided with the permission of LexisNexis).

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