In a case of first impression, the Massachusetts Appeals Court has ruled that an insured’s waiver of its carrier’s subrogation rights can survive the completion of a construction project. Middleoak Ins. Co. v. Tri-State Sprinkler Corp., No. 09-P-1265 (Mass. App. Ct. Aug. 5, 2010). The court’s decision puts Massachusetts in the majority of jurisdictions to have considered the issue.

In 2004, a contractor finished work on an apartment complex in a rural town about thirty-five miles north of Boston. The construction contract had been written on standard AIA forms, which contained the following condition: “[I]f after final payment property insurance is 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” to subrogation against each of the architect, contractor, and subcontractor. In 2006, the owner purchased first-party property coverage through the plaintiff.

In 2007, fire damaged one of the buildings. The plaintiff paid the claim and then attempted to pursue subrogation recovery against the project’s contractors and the architect. The Superior Court concluded that the contractual waiver of subrogation barred the insurer’s claim.

Citing what it characterized as compelling legal reasoning from other jurisdictions and strong public policy considerations, the Appeals Court affirmed. It held that that waivers of subrogation are not necessarily limited to losses occurring during the construction period; with the language present in the AIA agreements, the waiver applies equally to post-construction losses that are covered by insurance.

In so holding, the Appeals Court specifically rejected what it characterized as an overly strained reading of the subrogation waiver employed by a federal court sitting in Massachusetts. See Lumbermens Mut. Cas. Co. v. Grinnell Corp., 477 F.Supp.2d 327 (D.Mass. 2007). The Appeals Court held that the waiver here applied not just to cases where the construction contract required property insurance to be maintained after the completion of work, but in any case where insurance happened to be maintained on the property post-construction.

A copy of the court’s opinion is available by clicking here. Enter "08/05/2010" in the date field.