Appellate Division Upholds Subrogation Waiver in Construction Contract

Apr 9, 2019

In a case involving the interpretation of a waiver of subrogation provision in a form construction contract, the Appellate Division recently upheld the waiver of subrogation based on the contract’s plain language, noting its goal is to transfer the risk of construction-related losses to insurers and preclude lawsuits among contracting parties.  Ace American Insurance Co. v. American Medical Plumbing, Inc. – N.J. Super. – (App. Div. 2019).

Ace insured Equinox Development.  Equinox Development contracted with Grace Construction to build a health club.  American Medical Plumbing was a subcontractor.

After the work was completed, a water main failed and flooded the health club.  The Ace insurance policy provided coverage for Equinox interest in its real and personal property and also included any interests of contractors and subcontractors for which Equinox would assume liability by contract.  The policy further stated that unless subrogation rights have been waived, the insurer was subrogated to the extent of any payments made. 

Ace paid almost $1.2 million for the damages.  It then filed suit against American claiming it was at fault for the water main break and seeking recovery of its payments to Equinox.  American pointed to the subrogation-waiver provisions of the American Institute of Architects (AIA) form A201-2007.  The trial court dismissed plaintiff’s claim and the Appellate Division affirmed.

The court noted that A201 requires the owner and contractor to procure, respectively, property and liability insurance; and requires the owner and contractor and its subcontractors to waive all rights against each other for damages covered by the required property insurance policy.  A201 also extends the subrogation waiver to certain other forms of insurance that the owner may procure at its own option for losses during and after construction.

Citing out-of-state case law, the court noted that the subrogation waiver applies to any insured damage, whether occurring during or after construction, whether to the work performed, to the project, or to other insured property – so long as the policy covering the damage falls within one of two categories: property insurance obtained pursuant to the contractual requirement or other property insurance applicable to the work performed.  The Appellate Division thus affirmed the trial court’s dismissal of the plaintiff’s claim.