A federal court in Mississippi allowed a property insurer's subrogation claim against its insured's subcontractor to proceed based on the Fifth Circuit's approach to determining the scope of subrogation waivers in construction agreements. Liberty Mut. Fire Ins. Co. v. Fowlkes Plumbing, Inc., 2018 WL 842169 (N.D. Miss. Feb. 12, 2018).
A local school district contracted with several subcontractors to perform window replacement and restoration work on one of its buildings. While the work was ongoing, the entire building was consumed by fire. The contracts at issue contained a waiver of subrogation in favor of the contractors. The school district's property insurer paid for the damage caused to the building, and then filed suit against the contractors. The contractors moved for summary judgment, arguing the waivers of subrogation foreclosed the insurer's claims against the contractors.
The court had to determine whether the waivers of subrogation applied (1) only to policies obtained by the owner pursuant to the agreements or (2) only to the work as defined by the agreement. The court identified two lines of cases to determine an insurer's subrogation rights. The first approach defines the scope of the waiver of subrogation provision by the type of property damage that was incurred. Under this approach, damage to "work" is covered by the waiver, and damage to non-work property is not. The second approach defines the scope of the subrogation waiver by the source of the insurance proceeds. Under this approach, if the proceeds were paid from the policy provided by the owner, then they are covered by the waiver.
The district court recognized that while a majority of courts follow the second (insurance source) approach, it found that the Fifth Circuit follows the first (damage type) approach. The district court determined there was no evidence the policy was purchased specifically to cover the work, or that it included any interests of the contractors or subcontractors and that the waiver of subrogation applied only to claims for damage to the work itself, but not to non-work property. It held the insurer could subrogate against the contractors for damage as to the non-work property.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
