Opinion ID: 1896055
Heading Depth: 1
Heading Rank: 7

Heading: liability for gross negligence

Text: Hearst argues that if subparagraph 11.4.1.3 operates to protect the defendants from liability for the deductible amount, it is against public policy and void to the extent that it operates to shield the defendants from liability for gross negligence. [12] Resolving Hearst's argument requires a close examination of two particular decisions of this court: New Light Co. v. Wells Fargo Alarm Servs. [13] and Lexington Ins. Co. v. Entrex Comm. Servs. [14] In New Light Co., the plaintiff contracted with the defendant for the defendant to install and maintain a fire alarm system. The operative contract contained an exculpatory clause stating that the defendant would not be liable for any loss or damage, irrespective of origin, to persons or property whether directly or indirectly caused by performance or nonperformance of any obligation imposed by the agreement or `by negligent acts or omissions of [the defendant], its agents or employees.' [15] The issue before this court was whether the exculpatory clause released the defendant from liability for gross negligence or willful and wanton misconduct. We held that public policy prohibited such an exclusion. We explained that whether a particular exculpatory clause in a contractual agreement violates public policy depends upon the facts and circumstances of the agreement and the parties involved and that [t]he greater the threat to the general safety of the community, the greater the restriction on the party's freedom to contractually limit the party's liability. [16] Common sense tells us that the greater the risk to human life and property, the stronger the argument in favor of voiding attempts by a party to insulate itself from damages caused by that party's gross negligence or willful and wanton misconduct. [17] Under the circumstances of that case, we reasoned that when we balance the parties' right to contract against the protection of the public, we find a sufficiently compelling reason to prevent [the defendant] from insulating itself by contractual agreement from damages caused by its own gross negligence or willful and wanton misconduct. Such an agreement would have a tendency to be injurious to the public. This limitation on the freedom to contract is imposed by law because of the potential risks to human life and property and is, therefore, independent of the agreement of the parties. [18] But in Lexington Ins. Co., the predecessor to this case, we concluded that New Light Co. did not extend to the waiver of subrogation provision contained in subparagraph 11.4.7 of the contract, even though that provision was effective against claims for gross negligence. [19] We recognized that [a]dmittedly, language in New Light Co. can be read as suggesting that our policy concern was protecting the public by providing incentive for parties to refrain from grossly negligent conduct. [20] We declined, however, to extend our discussion in New Light Co. We explained that the danger with exculpatory clauses is that a party injured by another's gross negligence will be unable to recover its losses. [21] But such a danger is not present in cases involving waivers of subrogation, because the waiver applies only to losses covered by insurance, so there is no risk that an injured party will be left uncompensated. And we noted that waivers of subrogation served other important policy interests not met by pure exculpatory clauses, because they encouraged parties to anticipate risks and to procure insurance covering those risks, thereby avoiding future litigation, and facilitating and preserving economic relations and activity. [22] We also noted that in the particular context of a construction contract, a waiver of subrogation avoids disruption and disputes among the parties to the project, eliminating the need for lawsuits and protecting the contracting parties from loss by bringing all property damage under the all-risk builder's property insurance. [23] We recognized the important policy goal that waivers of subrogation serve in avoiding disruption of construction projects and reducing litigation among parties to complicated construction contracts and explained that refusing to enforce waivers of subrogation against gross negligence claims would undermine this underlying policy by encouraging costly litigation to contest whether a party's conduct was grossly negligent. [24] Therefore, we held that public policy favored enforcement of waivers of subrogation even against gross negligence claims. [25] The present case falls someplace in the middle. On the one hand, as in New Light Co., permitting the enforcement of subparagraph 11.4.1.3 against a claim of gross negligence leaves Hearst, the injured party, uncompensated for that amount of its damages. On the other hand, subparagraph 11.4.1.3 serves many of the same public policy interests as the waiver of subrogation at issue in Lexington Ins. Co., because it encourages the anticipation of risks and the procurement of insurance, and brings those risks under the all-risk builder's property insurance. The property owner is provided an incentive to abide by the terms of the property insurance provisions. Furthermore, subparagraph 11.4.1.3 is no more or less exculpatory of a grossly negligent defendant than the waiver of subrogation at issue in Lexington Ins. Co. Both provisions permit a grossly negligent party to shield itself from liability. The contract permitted Entrex to protect itself from risk by requiring the purchase of insurancea decision that, in Lexington Ins. Co., we held was favored by public policy. And even if shielded from liability, a contracting party still has an incentive to avoid both negligence and gross negligence, because performing the contracted-for work negligently could threaten its right to payment under the contract. The present case is distinguishable from Lexington Ins. Co. only insofar as the damages Hearst sustained were uninsured. But they were uninsured because Hearst did not obtain the nondeductible insurance that the contract expressly contemplated. Refusing to enforce subparagraph 11.4.1.3 would leave Hearst in the peculiar position of benefiting from the degree of the defendants' alleged negligence, because if the defendants' negligence was gross, as opposed to ordinary, Hearst would be able to recover damages that by the terms of the contract should have been covered by Hearst's insurance. And that would encourage precisely the sort of costly litigation, to determine whether a party was grossly negligent, that we sought to discourage in Lexington Ins. Co. On balance, based on the facts and circumstances of the contract and the parties involved, [26] we conclude that enforcement of subparagraph 11.4.1.3 is not contrary to public policy. The power of courts to invalidate contracts for being in contravention of public policy is a very delicate and undefined power which should be exercised only in cases free from doubt. [27] So, a contractual provision should not be declared void as contrary to public policy unless it is clearly and unmistakably repugnant to the public interest. [28] In this case, as in Lexington Ins. Co., the terms of the contract served to encourage the anticipation of risks and the procurement of insurance against those risks. The parties were sophisticated business entities capable of appreciating those risks. And had the terms of the contract been followed to the letter, none of the alleged damages would have been uninsured. Given the facts and circumstances of the contract and the parties involved, we find that subparagraph 11.4.1.3 is not void as against public policy, and find no merit to Hearst's final assignment of error.