Federal District Court in Illinois Holds “All Risk” Insurer’s Claim Against Contractor For Breach Of Contract And Negligence Defeated By A Waiver Of Subrogation With Respect To “[Insurance] Carried Or Required To Be Carried Pursuant To This Agreement” – Rejects Insurer’s Interpretation As To Scope Of Waiver As Too Restrictive – Indemnity Claim Survives

Federated Dep’t Stores, Inc. v. M.J. Clark, Inc.
2007 U.S. Dist. LEXIS 51826 (N.D. Ill. July 17, 2007)

After a flood caused by a leak in the sprinkler system during remodeling at a Bloomingdale’s store in Chicago damaged the first five floors of the store, plaintiffs, Bloomingdale’s and its owner Federated, sued defendant contractor, subcontractor, and building manager for breach of contract, negligence, and indemnification.

The agreement between the contractor and owner provided the contractor agreed to indemnify the owner. It further provided that each party waived all rights against the other for any loss or damage “for which property insurance is carried or required to be carried pursuant to [the parties’] Agreement.” Specifically excepted from the waiver were the contractor’s indemnification responsibilities. During the time of the flood, the owner was covered by an “all risk” insurance policy. Among other things, the policy excluded ordinary wear and tear and errors in design or faulty workmanship.

The contractor had previously moved for summary judgment based on these agreements, arguing that the plaintiffs’ claims against it had been waived. However, the motion was denied by the court in part because the “all risk” insurance agreement had been absent from the record. Upon production of the agreement at issue, the court reconsidered the motion.

The court’s initial ruling had noted that the purpose of a waiver of subrogation was to enable the parties to a contract exculpate each other from liability in the event of a loss to the extent each party is covered by insurance and that Illinois courts had enforced such waivers. However, it had not been clear as a matter of law that the loss at issue was a loss “for which property in insurance is carried or required to be carried pursuant to [the parties] Agreement.”

In effort to defeat the motion, plaintiffs argued that the court had misinterpreted the phrase “carried or required to be carried pursuant to this Agreement.” Plaintiffs argued that it should have been interpreted to mean (1) insurance carried pursuant to the agreement, or (2) insurance required to be carried pursuant to the agreement, rather than (1) insurance carried, or (2) insurance carried pursuant to the agreement. The court rejected plaintiffs’ proffered interpretation stating that it was not an interpretation at all, but rather a removal of the words “carried or” from the contract language, which the court refused to do.

The court went on to determine that a flood was a risk covered by the plain language of the “all risk” insurance agreement carried by the owner at the time of the flood to which neither the “faulty workmanship,” nor the “[o]rdinary wear and tear” exclusions applied and therefore that plaintiffs’ breach of contract and negligence claims for losses caused by flood had been waived. Accordingly, the court granted summary judgment with respect to the breach of contract and negligence claims, but because the waiver specifically excepted the contractor’s indemnification responsibilities, the plaintiffs’ indemnification claim survived summary judgment.

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