The U.S. Court of Appeals for the Fifth Circuit has asked the Supreme Court of Mississippi to interpret the subrogation waiver in a common form contracting agreement.
The Case
The Chickasaw County School District contracted with Sullivan Enterprises, Inc., to restore windows at one of its schools over a summer break.
During the work on the windows, a fire broke out that destroyed the entire school. The school district’s insurer, Liberty Mutual Fire Insurance Company, paid $4.3 million after the fire.
Liberty Mutual then brought a subrogation claim against Sullivan and two subcontractors, claiming that they had negligently caused the fire.
The U.S. District Court for the Northern District of Mississippi bifurcated the case so it could first determine whether there was a waiver of subrogation in the contract between the school district and Sullivan.
The subrogation controversy centered around the meaning of American Institute of Architects Document A201-2007, titled “General Conditions of the Contract for Construction,” a widely-used form contract that was part of the district’s contracting agreement with Sullivan.
The key provision was Section 11.3.7. The district court noted the deep division about how to interpret this provision’s subrogation waiver. It opted for the minority view and then certified an interlocutory appeal to the Fifth Circuit, which the circuit court accepted.
Form A201-2007
The waiver of subrogation provision in Section 11.3.7 of Form A201-2007 requires that:
The Owner and Contractor waive all rights against [ ] each other and any of their subcontractors, sub-subcontractors, agents and employees, each of the other . . . for damage caused by fire . . . to the extent covered by property insurance obtained pursuant to this Section 11.3 or any other property insurance applicable to the Work. . . .
The form defines the “Work” as:
the construction and services required by the Contract Documents, whether completed or partially completed.
The Fifth Circuit’s Decision
In its decision, the Fifth Circuit explained that courts have interpreted the waiver in Section 11.3.7 in two ways.
The circuit court pointed out that the majority interpretation looked to the source of the insurance proceeds. If the insurance bought or maintained under Section 11.3.1 covered the damage, then the waiver reached the full extent of that insurance coverage. See Commercial Union Ins. v. Bituminous Casualty Corp., 851 F.2d 98, 101-02 (3d Cir. 1988); Tokio Marine & Fire Ins. Co. v. Employers Ins. of Wausau, 786 F.2d 101, 105 (2d Cir. 1986); Board of Commissioners of County of Jefferson v. Teton Corp., 30 N.E.3d 711, 713 (Ind. 2015); Lexington Ins. Co. v. Entrex Communication Services, Inc., 749 N.W.2d 124 (Neb. 2008); Employers Mutual Casualty Co. v. A.C.C.T., Inc., 580 N.W.2d 490, 493 (Minn. 1998); Trinity Universal Ins. Co. v. Bill Cox Construction ,Inc., 75 S.W.3d 6, 13-14 (Tex. App.-San Antonio 2001, no pet.).
Under the majority approach, the Fifth Circuit continued, a contractor’s subrogation waiver would cover all the damage, barring Liberty Mutual’s subrogation claim in this case.
The Fifth Circuit added, however, that Liberty Mutual’s claims would go forward under the minority approach, which considered what type of property was damaged, only waiving subrogation for damage to “Work” property. See Copper Mountain. Inc. v. Indus. Sys., Inc., 208 P.3d 692 (Colo. 2009) (en banc); see also Butler v. Mitchell-Hugeback, Inc., 895 S.W.2d 15, 22 (Mo. 1995) (en banc); S.S.D.W. Co. v. Brisk Waterproofing Co., 556 N.E.2d 1097, 1100 (N.Y. 1990); Pub. Emp. Mut. Ins. Co. v. Sellen Constr. Co., Inc., 740 P.2d 913, 916 (Wash. Ct. App. 1987).
The circuit court observed that no Mississippi state court had taken a side in this “deep and longstanding split.”
Accordingly, it certified the following question to the Mississippi Supreme Court:
Is the waiver of subrogation between the school district and Sullivan limited to damages to the Work or does it also apply to damages to non-Work property?
The case is Liberty Mutual Fire Ins. Co. v. Fowlkes Plumbing, L.L.C., No. 18-60608 (5th Cir. Aug. 12, 2019).
Steven A. Meyerowitz
Steven A. Meyerowitz, a Harvard Law School graduate, is the founder and president of Meyerowitz Communications Inc., a law firm marketing communications consulting company. He may be contacted at [email protected].