The Indiana Court of Appeals has been busy addressing the scope of subrogation waivers. The latest decision is an argument over whether the waiver extends to property that is not part of the contractor’s “Work” (as defined in the AIA contract form used by the parties). The court1 decided to follow what has been referred to as the majority rule on this issue, and held that the waiver of subrogation bars subrogated claims concerning non-Work property. I wrote about a similar case on a related issue just last month.
The project was to renovate the Jefferson County courthouse. A devastating fire arose during construction, from soldering work on copper roofing materials, causing $6 million in damage. Some of the damaged property was beyond the scope of the project, or the “Work” as defined in the AIA contract form.
As part of the background, the County had decided to rely on its existing property damage policy, and did not purchase a separate builder’s risk policy or rider. (The distinction here is that property insurance policies are written and priced without expecting any waiver of subrogation, but builder’s risk policies are written and priced to anticipate such a waiver.) When the County decided to rely on its existing property policy, it neglected to advise the contractor. No builder’s risk policy was procured. After the fire, the County argued that the contractor was obligated to purchase insurance for damage to any non-Work property, and the waiver of subrogation applied only to the insurance bought by the County for the Work. The appellate court disagreed.
The court noted that the minority approach on this issue (i.e., that the waiver does not apply to non-Work damage) is inconsistent with the principal of allocating insurance risk so as to minimize or avoid litigation over losses. The court examined at length cases on this issue from Nebraska, Texas, Massachusetts and Ohio. It concluded that the plain contract language required the County to insure the project property against various perils including fire, and cited with approval the cases in other states which refused to delineate between Work and non-Work when deciding the scope of the subrogation waiver. So there is at least one more state following the so-called majority rule on the scope of the subrogation waiver.