Pennsylvania Superior Court Holds That Under AIA Contract Requiring Owner to Purchase Builders Risk Insurance, Contractor Not Liable for Fire Damage Caused By Subcontractor’s Negligence Despite Owner’s Failure to Purchase the Insurance

Jalapenos, LLC v. GRC General Contractor, Inc.,
2007 PA Super 391, 2007 Pa. Super. LEXIS 4411 (Dec. 19, 2007)

Jalapenos, LLC, hired GRC General Contractor, Inc. to remodel a restaurant. The parties signed standard American Institute of Architects contracts (AIA Forms A101 and A201 – 1997). Under the contract, Jalapenos was required to obtain Builder’s Risk “all-risk” property insurance or equivalent, or inform the contractor in writing before the work began if it did not intend to purchase such insurance. Furthermore, if GRC was damaged by Jalapenos’ failure to maintain the required insurance without notifying GRC, then Jalapenos would be liable for all reasonable costs attributable to such failure.

In addition, the AIA contract included standard waiver of liability provisions. Specifically, the contract provided that because Jalapenos could purchase and maintain insurance to protect against loss of use of the property, Jalapenos waived its rights against GRC for any such losses, however caused. The waiver of subrogation provision provided that the parties waived all rights against each other and any of their subcontractors for damages, to the extent such damages were covered by property insurance obtained pursuant to the contract.

Soon after the work began, a fire caused significant damages to the premises, which prevented GRC from completing the renovations. Jalapenos sued GRC for breach of contract and negligence, alleging that one of GRC’s subcontractors caused the fire. It was undisputed that Jalapenos failed to purchase the all-risk property insurance without notifying GRC in writing. Accordingly, the lower court granted GRC’s motion for summary judgment. The questions on appeal were 1) whether the contract required Jalapenos to insure against the negligence of GRC, and 2) even if it did, whether Pennsylvania common law permits enforcement of such a contract.

With regard to the first issue, Jalapenos argued that the contract’s indemnification provision should control, and, accordingly, that GRC should be liable since the provision imposed responsibility on GRC for any damages caused by its own negligence or that of its subcontractors. The court, however, held that the contract’s insurance procurement and waiver of subrogation provisions were controlling and that the indemnification provision was not applicable. The court relied on cases from Montana and California for its rationale that the indemnification related only to third-party claims; not losses arising from damage to the Work.

Further, the court held that the insurance procurement and waiver of subrogation provisions precluded Jalapenos’ claims against GRC. Relying on a Missouri case, the court reasoned that the inclusion of an insurance procurement clause evidences the parties’ intent to shift the risk of property loss from one another to the insurance company. Further, the damages complained of should have been covered by property insurance that Jalapenos failed to obtain, triggering the waiver of subrogation clause.

Turning to the second issue, Jalapenos argued that if the contract required Jalapenos to purchase the insurance, it was contrary to public policy to the extent it would exculpate GRC from liability for negligence. The court, however, distinguished between exculpatory provisions and allocation of risk provisions. The court explained that exculpatory provisions allow one party to unilaterally contract away any potential liability for its own negligence, thereby foreclosing another party’s avenue of recovery. However, allocation of risk provisions ensure that damages incurred during construction projects are covered by the appropriate types of insurance and that the cost of such insurance is allocated among the parties. Since the court found that the waiver of subrogation clause contained in the contract at issue was an allocation of risk provision, it held that enforcement of the contract did not violate Pennsylvania’s common law.

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

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