A recent Maryland case shows the protection contractors enjoy when their contract includes waivers of subrogation.  Gables Construction v Red Coats Md Ct Appeals (2020)

PARTIES AND AGREEMENTS      

Owner – Upper Rock II

General Contractor – Gables Construction

Project – 139 Unit Apartment Building

Contract – AIA A102 with GMP and AIA A201 with waivers of subrogation.  Contract duty of Owner to get builder’s risk – property insurance against things like fire.

Security and night watch – Red Coats (hired by Project Owner’s parent company)

FACTS  

On a night when the Owner-hired night watch company worked, a fire on the nearly completed project caused $22M damages.  The likely cause of the fire was an open flame mushroom heater. The contractor’s superintendent would typically walk the site before closing it for the day, but just before the fire, hadn’t done that.

SUITS AND DISPUTES

The Owner sued the night watch company Red Coats for negligence.  Red Coats brought claims against the General Contractor saying, if I am responsible to the Owner – you, the General Contractor, are liable to me for some or all of the loss.

ISSUE: EFFECT OF SUBROGATION WAIVER?

The General Contractor argued, I can’t be brought into this case because we agreed with the Owner to waive subrogation.  Any liability of the General Contractor for fire losses we agreed, would be covered by builder’s risk insurance required under the Owner/ GC contract and between ourselves, that would be the end of it. 

HOLDING: CONTRACTUAL WAIVER = COMPLETE BAR

Since the Owner and its contractor negotiated to have the Owner’s Builder’s Risk cover such losses, there was no legal liability of the Contractor to the insured Owner for the fire.  That being so, the claim by the night watch security firm against the General Contractor was dismissed completely. 

QUOTES FROM THE COURT

The waiver of subrogation provision, Section 11.3.1, provided that the Owner waive all rights against the Contractor, GCI, as well as other project participants, including subcontractors, for damages caused by fire or other causes of loss to the extent covered by insurance.

Read together, the waiver of subrogation and property insurance provisions transferred the entire risk of loss by fire to the builder’s risk insurer, rather than Upper Rock and GCI, and waived all fire-related claims between Upper Rock and GCI.

One rationale the Court offered – it is economically inefficient for more than one party to pay to cover the same risk.

COBB COMMENTARY

The topic is confusing. The lower Courts in this case led a long process based on an incorrect view of the significance of the subrogation waiver.  The Appeals Court decision enforcing the waiver included a lot of history and jargon.

Waiver of subrogation is boring but important. When it matters, it really matters.