Widely used construction form barred insurance subrogation claim, court confirms
A N.J. appellate court has ruled that a form construction contract precluded insurers’ subrogation actions.
An appellate court in New Jersey, affirming a trial court’s decision, has ruled that the waiver-of-subrogation provisions of a widely used form construction contract — the American Institute of Architects (AIA) form A201 — 2007 General Conditions of the Contract for Construction (A201) — were intended to transfer the risk of construction-related losses to insurers and to preclude insurers’ subrogation actions against contracting parties.
Subrogation waiver provisions
Equinox Development Corporation contracted in March 2012 with Grace Construction Management Company, LLC, to build the “core and shell” of a new health club in Summit, New Jersey. American Medical Plumbing, Inc., was a plumbing subcontractor.
Sometime in April 2013, a water main failed and flooded the health club.
After Equinox’s insurer, ACE American Insurance Company, paid Equinox almost $1.2 million for the damage to its real and personal property, ACE sued American, claiming that it was at fault for the water main break and seeking to recover its payments to Equinox.
American answered, invoking the subrogation waiver provisions of form A201.
The trial court granted summary judgment in favor of American, and ACE appealed.
ACE argued that its claim against American was not the kind that A201 subjected to a subrogation waiver. It contended that the subrogation waiver applied only to claims for damage to the construction and services covered by the contract itself (the “Work”) but not to claims for damage to adjacent property, and only to claims arising before construction was complete.
ACE argued that because the bulk of the water damage did not affect the health club’s “core and shell” but, rather, its internal construction and furnishings, and because the claim arose after the work was completed, A201 did not restrict it from suing American.
The ACE policy
The ACE policy stated:
In the event of any payment under this policy, except where subrogation rights have been waived, the Insurer shall be subrogated to the extent of such payment to all the Insured’s rights of recovery therefore.
Appellate court: A201 precludes lawsuits among contracting parties
The appellate court affirmed, finding that the goal of A201 was “to transfer the risk of construction-related losses to insurers and preclude lawsuits among contracting parties.”
In its decision, the appellate court explained that A201 required the owner and contractor to procure, respectively, property and liability insurance, and required the owner and contractor and its subcontractors (and sub-subcontractors, agents, and employees) to waive all rights against each other for damages covered by the required property insurance policy. A201, the appellate court added, also extended the subrogation waiver to certain other forms of insurance that the owner might obtain at its own option for losses during and after construction.
The appellate court then stated that ACE “misconstrue[d] the basic structure” of A201’s subrogation-waiver provisions, finding that they applied “to any insured damage, whether occurring during or after construction” and whether occurring to the Work or to other insured property — as long as the insurance policy covering the damage fell within one of two specified categories of coverage.
In the appellate court’s opinion, ACE’s blanket all-risk policy fell within both categories of coverage and, therefore, A201 waived ACE’s subrogation rights.
Subrogation waiver took precedence
The appellate court rejected ACE’s argument that applying the subrogation waiver in this case was inconsistent with the contractor’s obligation to obtain liability insurance, reasoning that A201 expressly recognized that the subrogation waiver took precedence over the contractor’s insurance obligation by stating that the “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. . . .”
The appellate court concluded that, notwithstanding that most of the damage affected non-Work property and occurred after construction was completed, the subrogation waiver in A201 barred ACE’s action against American.
The case is Ace American Ins. Co. v. American Medical Plumbing, Inc., No. A-5395-16T4 (N.J. App. Div. April 4, 2019).
Steven A. Meyerowitz, Esq., is director of the Insurance Coverage Law Center (formerly FC&S Legal). He can be reached at smeyerowitz@meyerowitzcommunications.com.
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