Source: https://subrogationstrategist.com/2019/04/05/new-jersey-court-washes-away-insurers-waiver-of-subrogation-arguments/
Timestamp: 2019-04-20 12:49:08+00:00

Document:
Subrogating insurers often address waiver of subrogation clauses in the form contracts drafted by the American Institute of Architects. In ACE Am. Ins. Co. v. Am. Med. Plumbing, No. A-5395-16T4, 2019 N.J. Super. LEXIS 45 (App. Div.), ACE American Insurance Company (ACE) argued that the waiver clause in the AIA General Conditions form A201-2007 did not extend to the post-construction loss at issue. Adopting what the court termed the “majority” position, the Appellate Division held that, by reading §§ 11.3.5 and 11.3.7 together, the waiver applied to bar the insurer’s subrogation claim. The Appellate Court’s ruling makes pursuing subrogation against New Jersey contractors using AIA contract forms more difficult.
In this matter, Equinox Development Corporation (Equinox Development), ACE’s insured, contracted with Grace Construction Management Company, LLC (Grace Construction) to build the “core and shell” of a new health club (the Work). Grace Construction subcontracted the plumbing work to American Medical Plumbing, Inc. (AM Plumbing).
In April of 2013, after construction was complete, a water main failed and flooded the health club. The flood caused damage to the “core and shell” of the building as well as damage to internal construction, furnishings and equipment. In other words, the flood caused damage to the Work and to non-Work property. The flood caused less than $8,000 in damage to the Work and approximately $1.2 million in damages overall.
When the flood occurred, ACE insured Equinox Development pursuant to a blanket all-risk insurance policy that included multiple forms of coverage. The policy insured Equinox Development’s interest in its real and personal property, including “[p]roperty while in the course of construction . . .” The policy also covered the interests of contractors and subcontractors for whom Equinox Development assumed liability by contract. The policy was effective from September 2012 to September 2013. Although it is unclear from the decision, it appears that court concluded that the policy was in effect both during construction, when it covered the Work, and after construction, when the loss occurred.
After ACE filed suit against AM Plumbing alleging that AM Plumbing was at fault for the water main break, AM Plumbing filed a motion for summary judgment arguing that ACE’s claims were barred by the waiver of subrogation provisions in A201-2007. The trial court granted AM Plumbing’s motion and ACE appealed.
The A201-2007 contract form required Equinox Development (aka Owner) to purchase and maintain builder’s risk insurance in an amount equal to the cost of construction and to maintain this insurance until no entity other than Owner had an insurable interest in the property. See A201-2007, § 11.3.1. The General Conditions also provided a waiver of subrogation clause, § 11.3.7, that applied to the required builder’s risk policy. A separate clause, § 11.3.5, extended the applicable waiver of subrogation clause to other insurance policies.
The Owner and Contractor waive all rights against (1) each other and any of their subcontractors . . . for damages caused by fire or other causes of loss to the extent covered by property insurance applicable to the Work, except such rights as they have to proceeds of such insurance . . . . A waiver of subrogation shall be effective as to a person or entity . . . whether or not the person or entity had an insurable interest in the property damaged. (Emphasis added).
§ 11.3.5 If during the Project construction period the Owner insures properties, real or personal, or both, at or adjacent to the site by property insurance under policies separate from those insuring the Project, or if after final payment property insurance is to be provided on the completed Project through a policy or policies other than those insuring the Project during the construction period, the Owner shall waive all rights in accordance with the terms of Section 11.3.7 for damage caused by fire or other causes of loss covered by this separate property insurance. . . . (Emphasis added).
Although the court provided a detailed analysis and justification for its decision, including a discussion of § 11.3.5, ultimately the court, adopting what it refers to as the “majority” position, applied the source of coverage approach to the waiver of subrogation clause. Under this approach, the word “covered” restricts the scope of the subrogation waiver based on the source and extent of the property insurance coverage. The waiver’s scope is not defined by the nature of the damages or the damaged property.
Although the loss occurred after the Work was completed, the policy covering the post-construction loss was “property insurance applicable to the Work.” Thus, the court held that even where, as here, the damages were almost entirely non-Work-related, because the policy covering the loss also covered Work-related damages, the subrogation waiver applied. Further, the court held that the waiver of subrogation clause applied because, by its express terms, § 11.3.7 applied whether or not the responsible party had an insurable interest in the property damaged.
While the court’s decision is disheartening for subrogation practitioners, subrogation professionals faced with a New Jersey post-construction loss subject to AIA form contracts should not give up the fight. Rather, practitioners should attempt to distinguish their facts from those involved in the ACE decision. Importantly, practitioners should check to see whether, as frequently happens, the parties to the contract have modified the standard language in any way. In addition, although the ACE decision is binding on lower courts, New Jersey’s highest court has not yet ruled on this issue. Thus, to the extent that an insurer wants to challenge the ruling, it should, while acknowledging ACE, make arguments against applying the waiver clauses in the AIA contract documents to post-construction losses. Otherwise, any arguments that the insurer plans to make on appeal will not be preserved.

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