US District Court in New Jersey Holds Waiver of Subrogation in AIA General Conditions Applies to Post-Construction Policies and Losses

Argonaut Great Cent. Ins. Co. v. DiTocco Konstruction, Inc.
2007 U.S. Dist. LEXIS 93846 (D.N.J. Dec. 21, 2007)

After a fire destroyed a T.G.I. Friday’s restaurant and all of its equipment, the meaning of the subrogation continuation clause contained in the contract between the owner and the contractor who had performed renovations and remodeling of the restaurant five years earlier became the focal point of ensuing dispute.

The parties had entered into a standard American Institute of Architects form of contract for construction, AIA A101-1997. The construction contract incorporated by reference the AIA A201-1991 general conditions to the contract for construction. Section 11.4.7 of the general conditions was a waiver of subrogation provision, stating:

“The Owner and Contractor waive all rights against (1) each other and any of their subcontractors, sub-subcontractors, agents and employees . . . for damages caused by fire, or other causes of loss to the extent covered by property insurance obtained pursuant to this paragraph 11.4 or other property insurance applicable to the Work. . . . A waiver of subrogation shall be effective as to a person or entity even though that person or entity would otherwise have a duty of indemnification, contractual or otherwise, did not pay the insurance premium directly or indirectly, and whether or not the person or entity had an insurable interest in the property damaged.”

The general conditions also included a subrogation continuation clause for damages suffered after work is completed, Section 11.4.5, providing in pertinent part:

“If . . . after final payment property insurance is to be provided on the completed Project through a policy or policies other than those insuring the Project during the construction period, the Owner shall waive all rights in accordance with the terms of Section 11.4.7 for damages caused by fire or other causes of loss covered by this separate property insurance. All separate policies shall provide this waiver of subrogation by endorsement or otherwise.”

At the time of the fire, the restaurant was insured through a policy issued to the owners by Argonaut. After Argonaut paid the owner approximately $3.2 million on its claims for the repair and replacement of the restaurant, lost profit and expenses, it filed a complaint against the contractor and its subcontractors. According to the fire marshal, the fire had been caused when an accumulation of grease inside the wall behind the kitchen broiler ignited. Negligent installation of the broiler had allowed the grease to accumulate. The defendants moved for summary judgment.

The defendants argued, first, that Argonaut’s claims were barred by a contractual waiver of subrogation and, second, that the waiver was applicable in the context of post-construction damage. In addressing the first issue, the court determined that the language of Section 11.4.7 of the general conditions precluded the owners from asserting subrogation claims against either the general contractor or any subcontractor and that since Argonaut in asserting subrogation claims was “stepping into the shoes” of the insured, Argonaut had only as many rights as its insured. Additionally, the court noted that the purpose of waivers of subrogation is to place the risk of loss on the insurer, regardless of the relative fault of the parties.

The court next turned to the more complex issue of whether the waiver contained in the general conditions was applicable in the context of post-construction losses, which had not been previously addressed by New Jersey state or federal courts. The defendants argued the plain language of the waiver stated that it applies to post-construction damages, pointing to out-of-state case law for support. Citing to the recent District of Massachusetts case of Lumbermens Mut. Cas. Co. v. Grinnell Corp., 477 F. Supp. 2d 327 (D. Mass 2007), Argonaut argued that the defendants’ cited case law was distinguishable and the waiver was inapplicable because after construction of the restaurant, a new policy had been put in place by the owner, rather than the policy obtained for construction being extended by agreement of the parties as contemplated by Section 11.4.5. Argonaut further argued that the waiver only applied to losses occurring during construction of the project, and that the fire had occurred almost five years after the “Work” contemplated by the contract was complete, when the primary policy justification for the waiver of subrogation — to avoid protracted disputes during the project’s construction — was no longer implicated.

In analyzing the AIA language, the court found that Section 11.4.5 unambiguously extended the waiver of subrogation to post-construction losses suffered by the owner and specifically contemplated that the owner might obtain a different insurance policy after construction was completed. Accordingly, the court rejected Argonaut’s arguments and declined to follow Lumbermens, noting that under New Jersey law, a court must begin its analysis by interpreting the contract and determining its plain meaning and should only turn to the intent of the parties or policy concerns should the contract be ambiguous. Thus, the court’s finding that the language of the general conditions clearly applied to post-construction losses concluded its analysis. Indeed, the court found itself unable to discern any other possible meaning for Section 11.4.5. than to extend the applicability of the waiver to post-construction losses.

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

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