Opinion ID: 790378
Heading Depth: 2
Heading Rank: 1

Heading: The Breach-of-Contract Theory

Text: 44 In support of its contention that the waiver-of-subrogation clause is unenforceable by reason of a breach of contract by UBS, St. Paul relies on the Insurance Rider's Subrogation and Waiver clause stating that the Owner ... waive[s] all rights ... against separate Contractors ... for damages caused by fire or other perils to the extent covered by insurance obtained pursuant to Owner's `All Risk' Builder's Risk Insurance or any other property insurance applicable to the Work (Rider § II.8), that the Owner ... shall require of ... Contractors... similar waivers, each in favor of all other parties enumerated above ( id. ), and that [a]ll certificates of insurance shall indicate, in the special items section, that waiver of subrogation has been endorsed to the insurance policies ( id. ). St. Paul argues that th[is] clause requires that each party waive subrogation rights as against the other, and require their insurers to do the same (Plaintiffs' brief on appeal at 13), that the TIG, AIU, and Royal policies covering UBS contain clauses barring [UBS] from waiving its [ sic ] subrogation rights ( id. at 25), and that UBS thereby breached its obligation to waive subrogation, making St. Paul's waiver unenforceable. This contention suffers both legal and factual flaws. 45 Subrogation is an equitable doctrine [that] allows an insurer to stand in the shoes of its insured and seek indemnification from third parties whose wrongdoing has caused a loss for which the insurer is bound to reimburse. Kaf-Kaf, Inc. v. Rodless Decorations, Inc., 90 N.Y.2d 654, 660, 665 N.Y.S.2d 47, 49, 687 N.E.2d 1330 (1997). The parties to an agreement may waive their insurer's right of subrogation. Id. at 660, 665 N.Y.S.2d at 49-50, 687 N.E.2d 1330. However, a waiver of subrogation clause cannot be enforced beyond the scope of the specific context in which it appears .... Id. at 660, 665 N.Y.S.2d at 50, 687 N.E.2d 1330; see, e.g., S.S.D.W. Co. v. Brisk Waterproofing Co., 76 N.Y.2d 228, 236, 557 N.Y.S.2d 290, 294-95, 556 N.E.2d 1097 (1990). By the same token, an obligation to secure a waiver-of-subrogation clause does not exist with respect to a type of insurance not encompassed by the contractual obligation to obtain such a waiver. 46 New York law recognizes a distinction between property insurance and liability insurance. See, e.g., Tokio Marine & Fire Insurance Co. v. Employers Insurance of Wausau, 786 F.2d 101, 104 (2d Cir.1986) ( Tokio ); Board of Education v. Valden Associates, Inc., 46 N.Y.2d 653, 657, 416 N.Y.S.2d 202, 203, 389 N.E.2d 798 (1979) ( Valden ). A builder's risk policy is a form of property insurance that covers the interests of the owner, contractor, subcontractors, and others involved in the construction project, insuring them against risks of property damage to the project. See, e.g., Tokio, 786 F.2d at 104. Contract provisions that require the procurement of such a policy and require the owner, contractor, and all other involved parties to waive all rights against each other for damages caused by perils covered by that insurance in effect simply require one of the parties to the contract to provide insurance for all of the parties. Valden, 46 N.Y.2d at 657, 416 N.Y.S.2d at 203, 389 N.E.2d 798. In connection with such a policy, [a] waiver of subrogation is useful ... because it avoids disruption and disputes among the parties to the project. It thus eliminates the need for lawsuits, and yet protects the contracting parties from loss by bringing all property damage under the all risks builder's property insurance. Tokio, 786 F.2d at 104; see, e.g., 4 P. Bruner & P. O'Connor, Construction Law § 11:100 (2002) (Construction contracts often contain provisions which require the parties to waive their right to claim damages against one another up to the amount of insurance coverage available for their losses. These `waiver of subrogation' provisions are intended to cut down the amount of litigation that might otherwise arise due to the existence of an insured loss.). Such waivers are commonplace. See, e.g., Tokio, 786 F.2d at 104 (describing waiver-of-subrogation clause as standard); S. Turner, Insurance Coverage of Construction Disputes § 5:7 (2004) (waivers of subrogation are quite common in construction contracts as to the subrogation rights of property insurance insurers.... and case law has upheld these waivers, against ... the subrogated insurer). 47 A liability insurance policy is different in kind from a builder's risk policy covering damage to the construction project. A liability policy covers damage to third parties ... such as injuries to passersby or damage to adjoining property. Tokio, 786 F.2d at 104. [T]hird-party liability insurance ... is not similar to ... first-party property coverage[]; each encompasses a different classification of risks and, by extension, each protects against exposure to different liabilities, with the latter covering damage to property or assets of the insured, and the former covering injury ... to [a third-party] himself. Great Northern Insurance Co. v. Mount Vernon Fire Insurance Co., 92 N.Y.2d 682, 689, 685 N.Y.S.2d 411, 415, 708 N.E.2d 167 (1999). 48 In the present case, the Subrogation and Waiver clause of the Insurance Rider relied on by St. Paul, i.e., Rider § II.8., deals with the contractual ramifications of builder's risk insurance. As indicated by the language quoted at the beginning of this Part, that clause requires mutual waivers by the Owner and contractors of their rights to recover against each other only  to the extent covered by insurance obtained pursuant to Owner's `All Risk' Builder's Risk Insurance or any other property insurance applicable to the Work.  (Rider § II.8. (emphases added).) The subrogation and waiver clause does not purport to deal with liability insurance. 49 The policies issued to UBS by AIU and Royal were for, respectively, commercial general LIABILITY insurance and excess LIABILITY insurance. Similarly, the TIG insurance policy obtained by the Owner, which covered UBS, was an excess LIABILITY policy. The Insurance Rider imposed no obligation on UBS to obtain any waiver of subrogation in liability policies. 50 Further, St. Paul's contention that AIU Policy § IV.8., Royal Policy § VIII.12., and TIG Policy § IV.N. explicitly prohibit[] UBS from waiving subrogation rights (Plaintiffs' brief on appeal at 14, 15) is not supported by the language of those policies. As quoted in Part I.A. above, those sections did not prohibit UBS from impairing the insurers' subrogation rights except after loss. 51 In sum, UBS's acceptance of the provisions in the TIG, AIU, and Royal policies did not breach UBS's obligations under the Insurance Rider or the Construction Contract. The district court properly rejected St. Paul's contention that the waiver-of-subrogation clause was unenforceable by reason of UBS's alleged breach of contract.