Ninth Circuit Enforces Waiver of Subrogation Clause in Design/Build Agreement Against Post-Construction Property Insurer

Travelers Indem. Co. v. Crown Corr, Inc., 2014 U.S. App. LEXIS 21101 (9th Cir. 2014)

This action arose out of the construction of the University of Phoenix Stadium (the “Stadium”), home of the Arizona Cardinals.  Tourism and Sports Authority (the “Owner”) entered into a Design/Build Agreement with the Arizona Cardinals and Hunt Construction Group (the “Contractor”) for the design and construction of the Stadium (the “Prime Contract”).  The Contractor then entered into a subcontract with Crown Corr, Inc. (the “Subcontractor”) for the design of the Stadium’s exterior enclosure system (the “Subcontract”).

Construction was completed and the Stadium opened in August 2006.  Nearly four years later, a storm moving through Glendale, Arizona caused metal panels to fall from the Stadium, resulting in an estimated $1.5 million in damages to its façade, retractable roofs and the sound system.  The Owner submitted the claim to its post-construction property insurer, Travelers Indemnity Co. (the “Insurer”), who in turn brought suit as subrogee of the Owner against the Subcontractor.  The Insurer’s complaint alleged that the failure of the panels and the subsequent damage caused by that failure were a direct result of the Subcontractor’s negligent construction. The Subcontractor responded by filing a motion to dismiss on the basis of the following waiver of subrogation clause contained in the Prime Contract (the “Waiver”):

“The Parties waive subrogation against one another, the Design/Builder, Design Consultants, Subcontractors, and their respective agents and employees on all property and consequential loss policies that may be carried by any of them on adjacent properties and under property and consequential loss policies purchased for the Facility.”

The district court dismissed the action after concluding that the Waiver operated to preclude the Insurer’s claims, and the Insurer appealed to the Ninth Circuit.   On appeal, the Court addressed three challenges raised by the Insurer to the findings below.

First, the Insurer argued that the district court erred in interpreting the term “Facility” as used in the Waiver to mean “the Stadium after it is fully operational.”  The Insurer argued that the term “Facility” referred to the structure during construction and not the completed Stadium.  Thus, the Insurer asserted that the Waiver had expired upon substantial completion of the project, and did not apply to its post-construction claims.  In rejecting the Insurer’s temporal argument, the Court found that the Insurer failed to put forth a persuasive reading that showed that “Facility” refers only to the Stadium before substantial completion.  The Court cited to other uses of the term in the Prime Contract referring to “Facility” in a way that describes a post-completion Stadium.  For example, the Court noted a provision forecasting that the Arizona Cardinals will play “at the Facility for thirty (30) years.”  Thus, the Court reasoned, that even if “Facility” could possibly refer to pre-completion as the Insurer argued, at most, it only established that the term refers to the Stadium both before and after substantial completion.  The Court held that the Waiver was therefore still applicable and not “reasonably susceptible” to the Insurer’s more restrictive view.

Second, the Insurer challenged the district court’s determination that the Owner could waive the subrogation rights of a property insurer providing insurance years after the property in question was completed.  In rejecting this argument, the Ninth Circuit noted that Arizona courts recognize the right of an insured, when the insured is waiving its own rights, to waive its insurer’s subrogation rights.  The Court pointed to the insurance provision in the Prime Contract wherein the parties waived their own subrogation rights with respect to the property insurance the Owner was required to carry, and a similarly broad release contained in the Subcontract having the same effect.  Because these provisions also waived the Owner’s rights to subrogation, the Court concluded that the Waiver applied to the Insurer and barred its contract claims against the Subcontractor.

Third, the Insurer argued that, in any event, the Waiver should not apply to its negligence claim on the grounds that exculpatory clauses are disfavored and construed strictly in Arizona.  The Court disagreed, finding that a subrogation waiver is different from a true exculpatory clause. The Court reasoned that subrogation waivers do not present the same dangers as exculpatory clauses, because no risk exists that the injured party will be left without compensation.  The Court also highlighted the important policy goals served by subrogation waivers as a matter of risk allocation.  While acknowledging that Arizona did not appear to have ruled explicitly on whether a subrogation waiver applies to a tort claim, the Court found no reason that Arizona would depart from the general rule that subrogation waivers apply regardless of the nature of the claim.  Thus, because the Court concluded that the Owner waived its rights against the Contractor and Subcontractors and that the Waiver applied against the Insurer as to its contract claims, the Court also concluded that the Waiver applied to the Insurer’s tort claim.

Consequently, the Court affirmed the district court’s decision to enforce the Waiver and dismiss the Insurer’s action for recovery.

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

Jeffery R. Mullen

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