 cases and appellate court decisions pertaining to the scope of the AIA waiver of subrogation seeking to interpret the intent of the language.
One line of cases, followed by the Indiana Supreme Court in the Jefferson County case, focuses on the insurance policy that applies to the claim not on whether the damages are to the contractor's work versus damage to other property. Courts holding this view point to the AIA language that states the waiver applies to damages caused by fire or other causes of loss to the extent covered by property insurance obtained pursuant to the AIA property insurance requirements or any other property insurance applicable to the work.
If the insurance policy that meets the owner's obligation to maintain builder's risk coverage is the same policy that covers other property damage, the AIA waiver applies to all damages covered by the owner's property insurance. This line of cases now is regarded as the majority approach.
The other line of cases holds the AIA waiver of subrogation is limited to damages covered under builder's risk insurance so only the work of the contractor is subject to the waiver; nonwork of the contractor (an existing building in a reroofing scenario) that is not covered by the builder's risk insurance the owner is to maintain under the AIA contract documents is not subject to the waiver.
These cases make a distinction between work and nonwork. When a roofing contractor contracts with an owner to reroof a building, only the work that comprises the new roof would be covered. This much more limited interpretation of the scope of the AIA waiver of subrogation is the minority view.
In addition to the owner's obligation to purchase and maintain a builder's risk all-risk or equivalent policy, the AIA General Conditions state that if during construction the owner insures properties (real, personal or both) at or adjacent to the construction site under policies separate from those insuring the construction project, the owner waives all rights in accordance with the waiver of subrogation provision for damages caused by fire or other causes of loss covered by this separate property insurance. This provision, Article 11.3.5 in the 2007 edition of the AIA A201 General Conditions, has been cited by courts following the majority approach to show the intent of the AIA contract is to waive damage claims covered by property insurance beyond damages to the contractor's work.
Similar to the Indiana Supreme Court in the Jefferson County case, courts in California, Georgia, Indiana, Maine, Massachusetts, Minnesota, Nebraska, New Hampshire, New Jersey, Ohio and Texas have adopted the more expansive majority approach so all damages covered by the property insurance that includes builder's risk coverage are waived.
Courts in Colorado, Mississippi, Missouri, New York, Oklahoma and Washington have issued decisions following the minority approach, limiting the scope of the AIA waiver of subrogation to only property damage covered by builder's risk insurance so damage to an existing building during a reroofing contract would not be subject to the waiver. Some states have conflicting intermediate appellate court decisions, and in some states there is not yet a definitive decision.
Another example
The Indiana Supreme Court's decision in the Jefferson County case was similar to a 2012 decision by the Texas Court of Appeals in American Zurich Insurance Company as Subrogee of the Varsity Golf Club, Ltd. d/b/a The University of Texas Golf Club v. Barker Roofing Company.
In this case, the University of Texas Golf Club, Austin, entered into an AIA construction contract for clubhouse improvements with Harvey-Cleary Builders, Austin, who subcontracted the roofing work to Barker Roofing L.P., Austin. The university club obtained builder's risk insurance from Fireman's Fund Insurance Co., Novato, Calif., with policy limits of $5.8 million. The subcontract between Harvey-Cleary Builders and Barker Roofing stated the university club or Harvey-Cleary would provide builder's risk insurance and incorporated the AIA waiver of subrogation. The subcontract also included a broad indemnification obligation running from Barker Roofing to the university club and Harvey-Cleary Builders.
A fire started while Barker Roofing's personnel were using a propane torch, causing $8 million in damage to the clubhouse and $930,000 to contents within the building. Fireman's Fund Insurance paid $5.8 million for the damages to the building and $930,000 for the damage to property within the building. American Zurich Insurance Co., Schaumburg, Ill., paid $500,000 to the university club for business interruption losses.
American Zurich Insurance brought a subrogation suit against Barker Roofing alleging Barker Roofing's negligence caused the fire that resulted in the property and business interruption losses. The trial court granted Barker Roofing's motion for summary judgment, agreeing with Barker Roofing that the university club had contractually waived subrogation rights per the provisions in the AIA contract documents. American Zurich Insurance appealed to the Texas Court of Appeals, which also ruled the subrogation claim was barred by the waiver of subrogation provision in the contract documents.
The Texas Court of Appeals found the parties intended the language in the prime contract between Harvey-Cleary Builders and the university club served as a waiver of claims against Harvey-Cleary Builders and its subcontractors. Because an insurer's rights are limited to those of the insured, this language operated as waiver of any subrogation claims of the insurer. This waiver was effective whether the university club already had purchased insurance or later purchased insurance covering damage to the clubhouse resulting from fire or other perils.
The court of appeals also concluded Barker Roofing was entitled to benefit from the waiver provision as a third-party beneficiary because the waiver clause listed subcontractors among those against whom the owner and contractor waived rights.
American Zurich Insurance argued a broad indemnification obligation in Barker Roofing's subcontract negated the waiver provisions. The Texas Court of Appeals held the indemnification clause in Barker Roofing's subcontract, though broad, could be read in a way that it did not modify or conflict with the waiver clause. Instead, the court held the indemnification clause referred to compensation and liability losses not covered by property insurance.
The court of appeals considered American Zurich Insurance's arguments that its claim was not subject to the waiver clause because the university club's business interruption was not damage to the work itself and the business interruption insurance provided by American Zurich Insurance was not property insurance. The court held the interruption of an owner's business is a proper element of property damages. Therefore, American Zurich Insurance's business interruption insurance was considered property insurance, and because the university club had waived its rights against Barker Roofing for property damages, American Zurich Insurance's rights also were waived.
Water damage cases
Although many of the waiver of subrogation cases interpreting the scope of the AIA waiver provision pertain to losses caused by fires, the same principle has been applied to water damage claims where the owner's property insurance policy applied to the work performed by the contractor and property damage to the building and its contents. One of the leading and oft-cited cases addressing water damage to interior property and the AIA waiver of subrogation is a 1994 decision by the California Court of Appeal, 4th District, in the case Lloyd's Underwriters v. Craig and Rush, Inc.
In this case, the owner, Mercy Rehabilitation and Care Center, Oakland, Calif., using standard AIA contract documents, contracted with Craig & Rush Inc., San Marcos, Calif., and Westerly Mechanical Inc., San Diego, to perform roof system repairs. During the job, rain entered the building and damaged the building's interior. The owner's property insurer carrier, Lloyd's Underwriters, London, paid the owner's claim minus the deductible and then sued the contractors.
The AIA contract documents included the provisions that the owner was to purchase and maintain property insurance in the amount of the contract to include the interests of the owner, contractor, subcontractors and sub-subcontractors and that the owner and contractor waived all rights against each other for damages caused by fire or other perils covered by property insurance obtained pursuant to the AIA contract or other property insurance applicable to the work. To meet its insurance obligation, Mercy Rehabilitation and Care Center chose to rely on its existing all-risk property insurance policy rather than purchasing a separate builder's risk policy with coverage limited to roofing work.
In ruling against Lloyd's Underwriters and in favor of the contractors, the California Court of Appeal said the plain meaning of the AIA language is "so long as a policy of insurance applicable to the Work pays for the damage, the waiver applies." Succinctly stated, the court ruled "[t]he waived claims are not defined by what property is harmed (i.e. 'any injury to the Work'); instead, the scope of waived claims is delimited by the source of any insurance proceeds paying for the loss (i.e. whether the loss was paid by a policy applicable to the Work)."
The court said the AIA language defined waived claims not by the type of property damaged but by which policy provided coverage for the loss. Because the property insurance policy that paid for the interior damage was the insurance policy obtained by the owner applicable to the work of the contractors, the waiver applied so the contractors did not incur liability for the interior damages.
In the 2001 case Independent School District 833 v. Bor-Son Construction, the Minnesota Court of Appeals ruled the school district waived subrogation rights to pursue a substantial interior damage claim resulting from water entry during reroofing based on the waiver language in the AIA A201 General Conditions.
During the course of reroofing several schools, the roofing contractor failed to keep three elementary schools watertight, leading to a $775,086 interior property damage claim.
The school district recovered from its property insurer, and a sub