Waivers of Subrogation Under The AIA Documents

June 23, 2000

Introduction
The parties to a business relationship often memorialize it in writing. That agreement, a contract between the parties, often seeks to allocate risks associated with the venture, hopefully according to which party is best able to handle it. The paradigm of this type of business relationship in which parties allocate risks is the construction contract, and the risks associated with construction are considerable. A means of addressing the risks by the parties to a construction contract is through "contractual risk transfer," the major method in which risks are dealt with on construction projects.
 
The ability of parties to transfer risk contractually is profoundly affected by legal doctrines and principles, whether those principles are embodied in statutes or common law. A common law doctrine of particular importance to the implementation of contractual risk transfer is that of subrogation. This doctrine allows a party who has paid a loss or debt on the part of another to succeed to the rights of that other party to pursue recovery from a third party who was responsible for causing the loss.
 
The common law doctrine of subrogation attempts to allocate liability to the party responsible for the injury or damage. When two or more parties contract with each other, however, they often desire to allocate risks in a different manner. In such cases, the doctrine of subrogation may operate so as to controvert their intent. For example, an owner and a contractor enter into a contract for the construction of a commercial office building. The contract requires that the owner provide builders risk coverage to insure the project while under construction. The policy is issued with the owner as the named insured. The contractor subcontracts out the electrical work and, during the course of construction, a short in an electrical system causes a fire that severely damages the project. The builders risk insurer adjusts and pays the loss and then files a lawsuit against the general contractor and the subcontractor, claiming that their negligence caused the fire. The lawsuit is eventually settled by the contractor's and subcontractor's commercial general liability (CGL) insurers.
 
When they prepared the contract, the owner and contractor probably intended for the interests of all the parties (including subcontractors) to be protected under the builders risk policy in the event of loss to the project, even if the loss was caused by their negligence. This risk allocation approach is generally considered the most cost-efficient method of handling the risk of damage to a project under construction because it purportedly avoids the frictional costs of litigation. Thus, their attempt at allocating the risk of property damage to the project while under construction to a single property insurer failed.
 
Specific actions can be taken by contracting parties to avoid having their attempts to allocate risks circumvented by the doctrine of subrogation. These include contractually waiving the right to subrogate against specific parties or including those parties as insureds under the insurance policy. For example, the contracts in the example above could have contained waivers of subrogation to prevent the builders risk insurer from bringing the suit against the contractor and the subcontractor. Another method to avoid that result would be to add the contractor and all of its subcontractors as named insureds to the policy since insurers are generally not allowed to pursue subrogation against their own insureds.
 
This paper discusses general principles of subrogation, waivers of subrogation, and other methods to alter the operation of the doctrine of subrogation to assure that risks will remain with the party to whom they are allocated. Since builders risk subrogation is a frequently litigated area, there is a considerable body of case law, including case law from Texas, addressing these issues. In addition, many of these cases address insurance provisions contained in the standard construction contract forms promulgated by the American Institute of Architects (AIA), particularly those provisions dealing with the obligation to provide builders risk coverage, as well as the waiver of subrogation as to damage to property covered under builders risk policies. The waiver of subrogation provisions contained in the AIA documents are prototypical in the construction industry and form the basis for analysis of the legal issues discussed in this presentation.

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