In Federal Insurance Company v. Woodruff Construction, et al., Case No. 2-946/12-0821, 2012 WL 5954588 (Iowa Ct. App. Nov. 29, 2012), the Iowa Court of Appeals affirmed the district court’s grant of summary judgment in favor of several contractors in a subrogation action, holding that the property owner’s first-party property insurer could not bring a subrogation claim against the contractors for water damage caused by the contractors’ negligence.  The court reasoned that the policyholder’s construction contract contained a subrogation waiver that barred the policyholder’s insurer from asserting a subrogation action against the contractors under the circumstances presented. 

Woodruff involved a construction contract by which a contractor and several subcontractors were renovating part of a hospital.  Id. at *1.  During construction, a sprinkler malfunctioned, creating extensive water damage to both the area being renovated as well as to the contents of a storage room that was unrelated to the renovation project.  Id.  The insurer, which issued a first-party property policy to the hospital, paid for all of the property damage and then filed a subrogation action against the contractors.  Id.  The contractors moved for summary judgment, claiming that the hospital waived subrogation rights against the contractors as part of the construction contract between Woodruff and the hospital.  Id.

The construction contract contained what the court called a “standard boilerplate provision” promulgated by the American Institute of Architects (“AIA”), which bars a property owner from asserting a claim against the contractors and subcontractors for losses to property “covered by property insurance obtained pursuant to this Section . . . or other property insurance applicable to the Work.”  Id. at *2.  In particular, because the insurance policy at issue preexisted the construction project, and was not procured specifically for the project, the case turned on the construction contract’s waiver of claims for losses to property “covered by . . . other property insurance applicable to the Work.”  Id. (emphasis added). 

The insurer argued that this clause waived claims against contractors only for damage to “the Work” to the extent it was covered by property insurance and did not waive claims relating to damaged property other than “the Work,” such as the contents of the storage room.  Id.  The contractors argued that the clause waived claims for damage to any property that is covered by insurance “applicable to the Work,” – meaning that because the hospital’s property policy covered the renovation project, the construction contract waived claims for damage to any other property (such as the contents of the storage room) that is also covered by the hospital’s property insurance policy.  Id.

The court noted that there were a number of cases in other jurisdictions construing the AIA language, and that there was case law to support both of the parties’ competing arguments.  Id. at *2-3.   Ultimately, on this issue of first impression for the Iowa courts, the appellate court agreed with the contractors’ position and affirmed the district court’s grant of summary judgment.  Id. at *1, 3.  The appellate court first reasoned that “according to the plain, unambiguous language” of the contract, “the waiver looks to whether the loss was covered by insurance, not whether the loss was to ‘the work.’”  Id. at *3.  That is, the court held that the plain language of the AIA provision required the court to consider whether the construction project (or, in the terms of the AIA provision, “the work”) was covered by the property owner’s property insurance.  If it was (as it was in this case), then the waiver of claims extended to any property also covered by the property policy.  Id.

The appellate court also concluded that its construction of the AIA provision “best comports with and furthers [] public policy.”  Id. at *5.  As the court explained, waivers are used in construction contracts to avoid disrupting projects by decreasing the litigation over liability issues regarding whether the claimed loss was damage to the “work” or “non-work” property.  Id. (citing Lexington Ins. Co.v. Entrex Commc’n Servs., Inc., 749 N.W.2d 124, 135 (Neb. 2008)).

This case highlights how commonly-used provisions in a construction contract can have the effect of waiving a property insurer’s right of subrogation.  As a result, insurers may find it advisable to carefully review construction projects entered into by their first-party property policyholders or consider endorsements that limit a policyholder’s ability to waive the insurer’s subrogation rights through its construction contracts.