Many contractors believe a waiver of subrogation clause protects them from any effort by the owner’s property or builder’s risk carrier to recover damages covered by that insurance. As a federal court decision emphasizes, the protection afforded by the waiver is not against claims for property damage generally, but typically only claims for damage to the contractor’s “work” under the contract. Which puts a very different light on the situation.

A fire in an apartment complex caused more than $2.5 million in damage. The owner’s insurance paid out, subject to a deductible of about $250,000. The carrier then pursued the fire protection subcontractor in court, but the sub argued that it was on the hook for – at most – the amount of the deductible, based on a waiver of subrogation.

The waiver of subrogation clause included the following sentence:

OWNER and CONTRACTOR waive all rights against each other and against all other contractors or subcontractors for loss or damage to the extent reimbursed by Builder's Risk or any other property or equipment insurance applicable to the Work, except such rights as they may have to the proceeds of such insurance.

The court, citing a New York Court of Appeal decision, held that the waiver of subrogation does not apply to claims for damage outside of the sub’s “work” (often denoted “Work” in many contracts, and typically defined by plans and specifications). As the court noted, the sub’s own general liability insurance would typically cover property damage to areas other than the Work. Thus, the waiver of subrogation normally addresses only that portion of risk to a contractor being covered by the owner’s insurance, and not the risk that would be covered by the contractor’s own insurance.

This will not be news to some contractors, owners, subs, etc. But many parties often fail to parse through insurance programs and contract terms to fully appreciate the overall allocation of risk. This decision is a reminder of that risk allocation. The case is Garden City Apts., LLC v. Xcel Plumbing of N.Y., Inc., 2017 U.S. Dist. LEXIS 6605 (E.D. N.Y., Jan. 18, 2017) (LEXIS subscription required).