In a recent summary judgment case, Corcoran Management Company, Inc. et al. v. Fireguard Automatic Sprinkler Company, Inc. et al., Judge Paul Wilson of the Norfolk Superior Court summed up the benefits of construction contract waiver of subrogation. Judge Wilson stated:
waivers of subrogation can reduce the cost of construction projects by eliminating the need for the contracting parties and their subcontractors to secure multiple insurance policies with overlapping coverage. In the context of a complicated construction project and the related contracts, waivers of subrogation are particularly effective in deterring future litigation.”
Ironically, the salutary statement about the benefits of subrogation waivers arose in a lawsuit brought by three insurers, Lexington Insurance Company; Certain Underwriters at Lloyd’s of London; and Sirius International Insurance Corporation UK Branch (“insurers”). In the lawsuit spawning the summary judgment decision, the insurers tried to subrogate against a sub-subcontractor, notwithstanding the waivers of subrogation.
The construction contract and the subcontract for the fire suppression system
The waiver of subrogation resulted from construction contracts for the building of Southfield Commons (“Commons”), an apartment building owned by the “Corcoran Companies,” consisting of Corcoran Management Company, Inc., and Southfield Commons LLC.
Southfield Commons LLC entered into an AIA standard form construction contract with Plumb House, Inc., a well-known apartment builder, in 2011, to construct the Commons, an apartment building located in South Weymouth, Massachusetts.
Plumb House, as the general contractor, hired a subcontractor to install a dry fire sprinkler suppression system at the Commons. That subcontractor, in turn, hired J. B. Engineering (“J.B.E”), under an oral contract to provide professional fire suppression system design and construction administration services for the Commons.
The general construction contract for the apartment building contained a subrogation waiver provision barring the Corcoran Companies and their insurers, as subrogees, from pursuing the contractor, subcontractors, and sub-subcontractors for amounts paid by insurers for damages caused by the contractor, subcontractors, or sub-subcontractors.
The subrogation waiver provision of the construction contract
Section 11.3.7 of the General Conditions states (broken up for readability):
§ 11.3.7. WAIVERS OF SUBROGATION
The Corcoran Companies and Contractor waive all rights against:
(1) each other and any of their subcontractors, sub-subcontractors, agents, and employees, each of the other, and
(2) the Architect, Architect’s consultants, separate contractors described in Article 6, if any, 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 Section 11.3 or other property insurance applicable to the Work, except such rights as they have to proceeds of such insurance held by the Corcoran Companies as fiduciary.
The Corcoran Companies or Contractor, as appropriate, shall require of the Architect, Architect’s consultants, separate contractors described in Article 6, if any, and the subcontractors, sub-subcontractors, agents and employees of any of them, by appropriate agreements, written where legally required for validity, similar waivers each in favor of other parties enumerated herein.
The policies shall provide such waivers of subrogation by endorsement or otherwise.
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 million-dollar loss from the fire suppression line freezing
On March 5, 2017, the dry fire suppression line froze because of water in the line, causing a pipe rupture and the activation of the fire suppression system. The water from the sprinkler system flooded multiple apartments causing over one million dollars damage. The Corcoran Companies filed a claim for $1,013,650.90 with their insurers. The insurers paid the Corcoran Companies $918,285.54 under their insurance policies. The $95,365.36 difference between the claimed damages and the insurance payment included a deductible of $25,000 and $70,365.36 in depreciation.
The lawsuit by the insurers and the Corcoran Companies against J.B.E and two other subcontractors
On March 7, 2018, The Corcoran Companies, and the insurers, as subrogees, sued J.B.E. and the two other subcontractors involved in the design, installation, inspection, and maintenance of the fire suppression system that failed. The complaint alleged J.B.E. and the other defendants were guilty of negligence, gross negligence, breach of contract, and breach of warranty concerning the failed fire suppression system.
The insurers sought subrogation against J.B.E. and the other two defendants for their $918,285.54 payment to the Corcoran Companies. The Corcoran Companies, for their part, sought to recover the $95,365.36 of their loss that insurance did not cover.
J.B.E.’s summary judgment motion for protection under the insurers’ waivers of subrogation
After discovery and other pretrial proceedings, J.B.E filed for summary judgment on December 18, 2019, alleging that the waivers of subrogation in the standard AIA construction contract at issue prevented the insurers from recovering damages from J.B.E.
In opposing the motion for summary judgment, the subrogating insurers argued that the Court should deny J.B.E.’s motion because:
(1) the waiver of subrogation did not cover the post-construction damages, such as those in this case.
(2) The waiver of subrogation did not protect J.B.E. because it did not perform Work at the Commons site.
(3) J.B.E. was not a sub-subcontractor covered by the waiver of subrogation.
(4) the waiver of subrogation was not enforceable where J.B.E.’s conduct amounted to gross negligence.
Independently of the insurers’ arguments, the Corcoran Companies argued that:
(5) they had suffered uncompensated damages outside the scope of the waivers of subrogation for which J.B.E. was liable even if the waiver of subrogation applied to J.B.E.
The Judge dealt with each of the insurers’ four contentions before dealing with the fifth contention that dealt solely with the Corcoran Companies’ right to recover for losses uncompensated by insurance.
1. The insurers’ claim their waivers of subrogation did not apply to post-construction events
In the first instance, the insurers argued that the waiver of subrogation did not apply to this case because the damages resulted after the completion of the construction project.
Judge Wilson disposed of that argument by expounding on a 2010 Massachusetts Appeals Court case, MiddleOak Ins. Co. v. Tri-State Sprinkler Corp.
In MiddleOak, after a fire damaged an apartment complex, the insurance company paid the owner more than $4 million under an insurance policy issued approximately two years after the completion of the apartment complex. The insurance company then initiated a subrogation action against the contractor and the fire suppression subcontractor involved in building the complex. The insurance company alleged negligence by the contractor and subcontractor during the construction phase that resulted in damage well after they had completed construction, and the apartment complex occupied.
The Appeals Court held, in that case, that “the contractual provision for waiver of subrogation applies to post-construction losses as well as to losses during construction. The pertinent contractual language reflects the parties’ expressed intent to extend the applicability of waiver of subrogation to postconstruction loss.”
The “pertinent contractual language” that was important to the Appeals Court in the MiddleOak case included in that construction contract’s “General Conditions” that: “if after final payment property insurance was 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 [the waiver of subrogation provisions].”
Judge Wilson noted that the Commons’ construction contract had this same language. Therefore, based on the Appeals Court decision, he ruled the waiver of subrogation applied not only to property insurance obtained during construction but also “to property insurance obtained by the [Corcoran Companies] after completion of the project.”
2. The insurers claim the subrogation waivers did not apply to J.B.E. because it did not work at the Commons’ site
The insurers’ waivers of subrogation only exempted “property insurance applicable to the Work,” where the “Work” refers to the construction project at the Commons’ worksite. The insurers argued, in opposition to J.B.E.’s summary judgment motion, that there were material issues of fact as to whether their waiver of subrogation applied to J.B.E. They claimed that J.B.E. had admitted in an interrogatory answer that it had not performed “any work on the site” as required for the subrogation waiver to apply.
However, the Court noted in response that in the same answer, J.B.E. also stated that “JB does not perform ‘work’ but instead `services,'” and then answered in detail about the specific services it provided in connection with the Commons.
The Judge quoted Section 1.1.3 of the General Conditions that defined the “Work” as:
the construction and services required by the Contract Documents…and includes all other labor, materials, equipment, and services provided or to be provided…”
Based on this definition, the Judge found that the construction contract did not require that J.B.E. provide its services at the Commons’ construction site. Since the insurers did not dispute that J.B.E. rendered services in connection with the Commons’ construction project, the Judge found that J.B.E. had, in fact, performed “Work” within the meaning of the AIA contract.
3. The insurers claim that the waivers of subrogation did not apply because J.B.E. did not have subcontractor status
Next, the insurers contended that there were material issues of fact as to whether J.B.E. was a sub-subcontractor to Plumb House, a status required for the waivers of subrogation to apply.
Under Section 5.1.2 of the General Conditions of the AIA contract, “a Sub-subcontractor was a person or entity who has a direct or indirect contract with a Subcontractor to perform a portion of the Work at the site.”
Because of the definition, the determination of J.B.E.’s sub-subcontractor status was a question of law determined by whether J.B.E. (1) had a contract with a subcontractor of Plumb House, and (2) was obligated by the contract to perform a portion of the Work at the site.
Although the insurers claimed that neither condition applied to J.B.E., the Court disagreed.
First, the Court noted that the definition of sub-subcontractor in the General Conditions of the AIA contract did not require that the contract between the subcontractor and the sub-subcontractor be in writing. In J.B.E.’s case, there was evidence in the summary judgment record that J.B.E. had a verbal contract with a subcontractor of Plumb House to render services in connection with the Commons. Since the insurers presented no evidence to the contrary that the Court accepted, the Court found that J.B.E. was a sub-subcontractor within the scope of the waivers of subrogation.
4. The insurers’ claim that J.B.E.’s alleged gross negligence made the waivers of subrogation unenforceable
Finally, the insurers argued that were material issues of fact as to whether J.B.E.’s alleged acts and omissions were grossly negligent. If so, the insurers argued that, under Massachusetts law, J.B.E could not enforce the insurers’ subrogation waivers.
Judge Wilson did acknowledge that under Massachusetts law, an exculpatory clause would not bar a claim for gross negligence.
He furthered acknowledged that some courts had seen a similarity between subrogation waivers clauses and exculpatory clauses. However, he noted that in the more recent cases, Massachusetts courts and federal courts had seen differences between the two clauses, and “because of the positive public interest served by subrogation waivers, have enforced such waivers even in cases alleging gross negligence.”
He pointed out that “[T]he salutary purposes of the subrogation waiver would be undone if a plaintiff could evade the effect of the waiver simply by saying the words ‘gross negligence’ in its complaint.”
Based on this reasoning, he ruled that “the waiver of subrogation at issue is enforceable even assuming that [J.B.E.]’s misconduct amounts to gross negligence, as alleged but not yet proven.”
The Corcoran Companies’ Uncompensated Damages
Also, as part of its summary judgment motion, J.B.E. had contended that the waiver of subrogation besides barring any recovery for the insurers, also included the Corcoran Companies’ claim for alleged uncompensated damages.
The Court noted the waiver of subrogation only prohibited subrogation actions “to the extent covered by property insurance …” J.B.E. did not offer any evidence that the Corcoran Companies received any payments beyond the $918,285.54 insurance payout.
Based on the difference between the $1,013,650.90 in total damages claimed by the Corcoran Companies and the payment by the insurers, the Judge found the Corcoran Companies were not fully compensated by insurance for their damages by $95,365.36. This difference consisted of a $25,000 policy deductible and a $70,365.36 deduction for depreciation.
Based on the amount uncompensated by insurance, Judge Wilson denied J.B.E.’s summary judgment motion as to the Corcoran Companies’ $95,365.36 claim.
Conclusion and Order
The final order on the J.B.E summary judgment by the Judge was:
For the foregoing reasons, Defendant J.B.E.’s Motion for Summary Judgment, Paper No. 16, was ALLOWED IN PART, as to the $918,285.54 payment made by the Subrogees, and was DENIED IN PART, as to the Corcoran Companies’ uncompensated damages.” (Emphasis in original).
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Owen is an experienced insurance litigator as well as a certified mediator and arbitrator who specializes in insurance industry disputes. His interest and affinity for insurance began at a young age working the counter at his father’s assigned risk agency in Roxbury.
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