The Great Escape Wiggling Out of Waivers of

The Great Escape: Wiggling Out of Waivers of Subrogation Presented by Mark W. Moran Munck Butrus Carter, PC

Where we encounter exculpatory provisions: n Commercial Lease agreements

Where we encounter exculpatory provisions: n n Commercial Lease agreements AIA Construction Contracts

“To the extent covered by …other property insurance applicable to the Work. ” –AIA 6

Where we encounter exculpatory provisions: n n n Commercial Lease agreements AIA Construction Contracts Implied Waivers arising out of Parties’ Clear Intent to Shift Risk to Insurance

Implied Waivers n n If obligation to purchase insurance contemplated… Then parties must have contemplated W. O. S. 8

Where we encounter exculpatory provisions: n n Commercial Lease agreements AIA Construction Contracts Implied Waivers arising out of Parties’ Clear Intent to Shift Risk to Insurance Home Inspection reports

Where we encounter exculpatory provisions: n n n Commercial Lease agreements AIA Construction Contracts Implied Waivers arising out of Parties’ Clear Intent to Shift Risk to Insurance Home inspection reports Enforcement by 3 rd Party to the Contract

Subcontractor 13

Where we encounter exculpatory provisions: n n n Commercial Lease agreements AIA Construction Contracts Implied Waivers arising out of Parties’ Clear Intent to Shift Risk to Insurance Home inspection reports Enforcement by 3 rd Party to the Contract Catchall: Look for “buried” release/waiver!

What’s the Purpose of Waiver of Subrogation? ? ? n Facilitates timely completion of project Avoids time consuming, costly and disruptive litigation n Preserves relationship n n n Economically inefficient for multiple parties to insure against same risk Provide sense of certainty in event of loss 15

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…so, how can you escape the Waiver? 17

Know when to hold ‘em… Arguments to Explore and Develop 18

1. Waiver Provision Does Not Expressly Release the Defendants from Liability for their Own Negligence n. Express Negligence Doctrine n. Strict Construction Rule

n n n Scriveners devise novel ways to indemnify a party for its negligence … … yet be just ambiguous enough to conceal that intent. Result=lawsuits to construe ambiguous contracts. 20

n Exculpatory agreements = “strictly construed” to give effect to the intent of the parties as expressed in the contract

“Express Negligence” or “Strict Construction” Doctrine: n n n Where defendant tries to exonerate itself from its own future negligence. To do so, a provision must be clear and unambiguous, and Will not operate if any other meaning may reasonably be interpreted.

Waiver of Subrogation = Exculpatory Clause n n Assert doctrine for all agreements that operate to transfer risk: Whether labeled as indemnity agreements, releases, exculpatory agreement, or waivers n Dresser Industries Inc. v. Page Petroleum Inc. , 858 S. W. 2 d 505, 508 (Tex. 1993); Mayfair Fabrics v. Henley, 48 N. J. 483, 226 A. 2 d 602, 605 (1967). 23

Rickey v. Houston Health Clubs, Inc. 863 S. W. 2 d 148 (Tex. App. --Texarkana 1993) n n Rickey contracted with Health Club Injured knee when tripped and fell on indoor jogging track. “You hereby agree to waive any claims or rights you might otherwise have to sue the health club. You have carefully read this waiver and release and fully understand it is a release of liability. ” Court held release unenforceable because it did not expressly list “negligence” as a claim being relinquished. 24

Conspicuousness n Must be conspicuous n UCC definition? 1 -201 (b) (10) standards: n Reasonable person ought to have noticed it n Heading in capitals equal to or greater in size than the surrounding text n Contrasting font type or color n Set off by symbols or other marks

2. Completed Construction Exception n Waiver of subrogation ineffective after completion of the work in the contract. 26

Lumbermens Mut. Cas. Co. v. Grinnell Corp. 477 F. Supp. 2 d 327 (D. Mass. 2007) n n n Subro suit against GC for fire damage AIA waiver of subro Insurance policy purchased after project not barred by waiver Contractors did not “bargain” for waiver in other policies If policy is original construction policy, waiver applies 27

However… n n Some courts have expanded the duration of the waiver beyond the completion of the work. As long as property insurance covers the damages to the structure, whether completed or not, the waiver applies. 28

Tx. C. C. Inc. v. Wilson/Barnes General Contractors, Inc. , 233 S. W. 3 d 562 (Tex. App. —Dallas 2007) n n Given plain meaning of phrase “other property insurance applicable to the Work, ” Court concluded subrogation claims waived if property insurance covered damage 29

3. Parties Cannot Waive Rights That Belong to Insurer Waiver of subrogation vs. Waiver of insured’s claim 30

Ineffective W. O. S. “The Owner agrees to waive the subrogation rights of any insurance company against the Company for damage to the property of the Owner at the job site. ” 31

n n n If insured waived its own claims, then the insurer is similarly barred. If insured has not released its own claims, a “waiver of subrogation” clause doesn’t work. In other words…the “shoes” are still there!

n n Not bound by “waiver of subrogation” – to which it was not a party and of which it was not aware. 33

Seamless Floors by Ford, Inc. v. Value Line Homes, 438 S. W. 2 d 598 (Tex. App. --Fort Worth 1969). n n Negligence lawsuit by general contractor against flooring sub. Contract contained Waiver of Subrogation. Insurance company not party to agreement. The Court would not enforce the waiver against the insurance company, because it was not shown that insurance company had any knowledge that GC made contract with Seamless Floors.

Many jurisdictions acknowledge n Missouri the rule that an insurer cannot be n New York bound by a “waiver of subrogation” n Louisiana to which it was not a party and of n Texas which it was not aware. n Stay tuned, there may be more…

n Rights of subrogation belong to insurer, not insured. n “waiver of subrogation” can only be effective if there is consent of the insurer n or permission in the policy n Travelers v. Dickey (Okla. 1989)

Unintended result… n “Waiver of Subrogation” without corresponding release by insured could result in a double recovery for the insured n Because insured accepted insurance proceeds and also kept his rights (“shoes”).

4. Code Violation Exception n n Waiver of subrogation not enforceable to protect party from liability imposed by fire, health or safety statue, code, regulation or standard. Intended to protect person, property or general public. 38

Some jurisdictions declared exculpatory clause void where… n Electric Company violated safety regulations due to “physical deterioration of plant” n Apartment failed to have fire escape n Owner failed to have fire extinguishers on dock

Some jurisdictions declared exculpatory clause void where… n n Construction changes in store violated building code because it lacked fire resistant partitions Surety agreement violated Insurance Code (agents not licensed) 40

5. Outside Scope of Waiver n Many jurisdictions hold the waiver is limited and applies only to damage to “the Work”.

Fidelity & Guaranty Ins. Co. v. Craig-Wilkinson, Inc. , 948 F. Supp. 608 (S. D. Miss. 1995), aff’d, 101 F. 3 d 699 (5 th Cir. 1996). n n Plaintiffs hired defendant to construct addition to house. Fire destroyed both addition and existing residence. W. O. S. “unambiguously” applied solely to damages to the Work. Permitted recovery for damage to non-work property.

S. S. D. W. Co. v. Brisk Waterproofing Co. , 556 N. E. 2 d 1097 (N. Y. 1990) n Owner entered into contract for waterproofing the exterior and parking garage floors. n Fire damaged areas of building not part of the contractor’s Work.

S. S. D. W. Co. v. Brisk Waterproofing Co. , 556 N. E. 2 d 1097 (N. Y. 1990) n Where loss involved damage to Work and Non -Work property… n Damages are Shared! Owner’s insurer pays for Work n Contractor’s liability insurer pays for Non-Work n

Rationale: n n n Limiting waiver to “the Work” consistent with respective insurable interests. Contractor has no insurable interest in inventory and business interruption losses n should not be permitted to escape liability for damages to these items Makes property insurer de facto liability insurer n insurance protection not contracted or paid for.

But it depends upon your jurisdiction… n n “Majority view” says waived claims are not defined by what property is harmed (i. e. , “the Work”) But by the source of any insurance proceeds paying for the loss. 46

“To the extent covered by …other property insurance applicable to the Work. ” –AIA n n This language has more than one reasonable interpretation. Isn’t that “ambiguous” as a matter of law? 47

Or Outside the Scope of the Lease n Scope of waiver does not extend to extracontractual claims completely independent of the Lease obligations.

Interested Underwriters v. Ducor’s Inc. , 103 A. D. 2 d 76 (1984). n Waiver not extended from lease for one building… n where insurers’ damage from LL’s negligent maintenance of building next door.

6. Gross Negligence Exception n n Prospective waivers of gross negligence are against public policy. Undertakes a “conscious, voluntary act or omission which is likely to result in injury. ”

When to raise issue in the course of the lawsuit 51

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When to raise issue in the course of the lawsuit n In response to Defendant’s motion for summary judgment on their affirmative defense of waiver: n Allows adequate time for discovery of facts to respond to motion Which arguments require discovery? n Code violations, damage outside scope of work, gross negligence n Views evidence in light most favorable to non-movant. n Some courts NEVER grant msj!!! n

When to raise issue in the course of the lawsuit n File declaratory judgment action n Gets issue resolved at inception of lawsuit n Which arguments are determined as a matter of law? n Strict Construction Doctrine, Conspicuousness, Completed Construction, Insurer not party to contract 54

Potential Repercussions of Filing Suit n Drawing counterclaim against Plaintiff’s insured for failing… n to comply with “requirement to procure insurance” with defendant listed as additional insured n to procure insurance policy with “such waivers of subrogation by endorsement or otherwise” 55

Some jurisdictions treat breach of this obligation a valid defense to subrogation claim. n n Temple Eastex, Inc. v. Old Orchard Creek Partners Owner had affirmative duty to procure property insurance covering contractor Owner failed to comply with the contract obligations Court ruled that they in effect became the insurer for the contractor

However, other jurisdictions have held the opposite. n n the failure to incorporate the necessary waiver language invalidates the “waiver of subrogation” … …because the insurer had no knowledge of it.

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…Know when to fold ‘em. n The airtight waiver?

n Where the insured legitimately waives their own rights… there are no “shoes” left

Hope you paid attention… n Try to escape the W. O. S. : 61

Subcontractor Add-on to Department Store n n Open flame in direct vicinity of flammable adhesive Entire property and all contents destroyed 62

Subcontractor Add-on to Department Store n Waivers of Subrogation. Owner and Contractor waive all rights against each other and any of their subcontractors, subsubcontractors, agents and employees for damages caused by fire or other causes of loss to the extent covered by property insurance obtained pursuant to this Paragraph 11. 4 or other property insurance applicable to the Work. 63

Subcontractor Add-on to Department Store No mention of “negligence” n Damages outside scope of “the work” n Inventory n Rest of building n Gross negligence/Code violations n Parties Cannot Waive Rights That Belong to Insurer n 64

Jewelry Store n n n Tenant operated jewelry store Fire occurred in HVAC serviced by LL day before loss Inventory looted after fire when LL released security guards without notice to tenant to take alternative security measures 65

Jewelry Store It is agreed and understood that where either party hereto may sustain a loss or damage and such party is protected by valid policies of insurance, the party hereto sustaining such loss or damage so protected waives its rights, if any, of recovery against the other party hereto and agrees that no right of subrogation shall accrue to any third party. 66

Jewelry Store n n n Waiver fails to mention “Negligence” Waiver is not conspicuous Parties cannot legally waive subrogation rights that belong to Insurer Waiver does not bar claims for gross negligence Waiver does not bar negligent security/bailment claims that do not arise out of the lease 67

Good luck on all of your recoveries! 68