Indiana Court of Appeals Holds Waiver of Subrogation Clause in Standard AIA Contract Not Limited to Damage to Contractor’s “Work”

Bd. of Comm’rs v. Teton Corp., 3 N.E.3d 556, 2014 Ind. App. LEXIS 43 (Ind. Ct. App. 2014)

This action arose out of a repair and renovation project to the Jefferson County Courthouse in Madison, Indiana (the “Project”). The Jefferson County Board of Commissioners (the “Owner”) contracted with Teton Corporation (the “Contractor”) for the work. The parties’ agreement incorporated a form construction contract prepared by the American Institute of Architects (the “AIA Contract”). The AIA Contract required the Owner to provide builder’s risk insurance for the Project, or to notify the Contractor so that the Contractor could procure the insurance and pass the cost on to the Owner through a change order. The AIA Contract also provided for a mutual waiver of the right to subrogation between and among the Owner, Contractor, and all subcontractors. The Owner did not obtain separate property (or builder’s risk) insurance for the Project, instead relying on its existing property and casualty insurance policy. And, the Owner also did not inform the Contractor that it was not securing separate insurance for the Project.

During the renovations, a fire broke out, causing over $6 million in damage to the property, including damage beyond the scope of the Contractor’s “Work” as defined in the AIA Contract. After the Owner’s insurance company paid under the terms of its policy, the Owner sued the Contractor and its subcontractors for the damages. The Contractor moved for summary judgment. The Contractor argued that the Owner agreed to provide insurance for the Project, and the Owner waived its subrogation rights against the Contractor; therefore, the Owner was not entitled to recover damages from the Contractor that were caused by the fire. The trial court agreed with the Contractor and granted summary judgment. The Owner appealed.

On appeal, the Owner conceded that pursuant to the terms of the AIA Contract, subrogation is barred when a property owner seeks to recover damages to its insured “Work” property, but maintained that “this case involves damage to non-Work property.” And therefore, the Owner argued that under the AIA Contract, the Contractor was responsible for procuring the insurance to cover damages for claims “other than the Work.”

The appellate court disagreed and affirmed summary judgment in favor of the Contractor. The court held that a waiver of subrogation clause in a construction contract serves to waive all claims for damage, where those damages are covered—or should be covered—by the contractually required insurance to be procured by the Owner. In so holding, the court analyzed prior Indiana decisions and concluded that Indiana’s application of the Work vs. non-Work distinction when deciding the scope of the subrogation waiver was the minority approach. Without any Indiana Supreme Court case addressing the issue, the court considered cases from other jurisdictions which did not apply the distinction, such as California, Massachusetts, Nebraska, Ohio and Texas. The court found that the “majority of courts that have addressed the waiver of subrogation issue under AIA contract documentation ha[ve] rejected the ‘Work’ v “non-Work’ approach.” Ultimately, the court concluded that this “majority” view was the better approach because it turns on both the standardized language of the AIA Contract and the public policy behind it.

Specifically, the court determined that the “unambiguous contract language instructed [the Owner] not only to have in force or even just maintain insurance on the project, but rather, to both ‘purchase and maintain’ the insurance.” It found that this was in accord with the public policy underlying the AIA Contract, which “has long been recognized as having as a central tenet its intention to liquidate and settle construction-related claims through non-subrogated insurance coverage purchased specifically for the project.” The court noted that the non-Work distinction is inconsistent with the principal of allocating insurance risk so as to minimize or avoid litigation over losses. It reasoned that “[w]aiver of subrogation is useful in construction contracts because it avoids disrupting the project and eliminates the need for lawsuits because it offers certainty as to the liability of the parties…[B]y applying the waiver to all losses covered by the owner’s property insurance, the parties avoid the predictable litigation over liability issues and whether the claimed loss was damage to Work or non-Work property.”

Therefore, the Court settled on what it deemed to be the clear intent of the AIA waiver of subrogation clause—to waive all claims for damages, where those damages were covered by property insurance, without requiring proof of whether the damages were to the “Work” or to other property.

To view the full text of this decision, courtesy of Lexis ®, click here.

Jeffery R. Mullen

This entry was posted in AIA Contracts, Insurance, Subrogation. Bookmark the permalink.