Subrogation – the right of an insurer, upon paying an injured party’s damages arising out of another's negligence, to chase the negligent party for reimbursement – is a staple of the law. “The doctrine of subrogation presupposes the payment of a debt by a party secondarily liable therefore, who thereby acquires an equitable right to be reimbursed by the principal debtor and for the purpose of making this right effective is invested with all the rights which the creditor had against him (the principal debtor).” Chase v. Ameriquest Mortgage Co., 155 N.H. 19, 26 (2007) (quotation omitted). “[T]he purpose of subrogation is to place the responsibility where it ultimately should rest by compelling payment by the one who ‘in good conscience ought to pay it.’” Security Fence Co. v. Association, 101 N.H. 190, 192 (1957) (quotation omitted).
Upon making payment, the insurer (or “subrogee”) is said to “stand in the shoes” of the insured (or “subrogor”) for purposes of chasing the guilty party. But an injured claimant with insurance coverage will occasionally waive his own right to sue the guilty party and agree to rely instead solely on his insurance – in which case the shoes are tossed away, leaving the insurer nothing to stand in and hence no ability to be reimbursed. And the insurer will have no say in the matter.
In commercial construction contracts the rationale for such waivers is to avoid litigation that could disrupt the construction process. Behr v. Hook, 787 A.2d 499, 503 (Vt. 2001) (“By shifting the risk of loss to the insurance company regardless of which party is at fault, these clauses seek to avoid ‘the prospect of extended litigation which would interfere with construction.’”) (citation omitted). Here’s how it works in the AIA’s popular A201 General Conditions:
§ 11.3.1 The Owner and Contractor waive all rights against (1) each other and any of their subcontractors, sub-subcontractors, agents, and employees, each of the other; (2) the Architect and Architect’s consultants; and (3) Separate Contractors, if any, and any of their subcontractors, sub-subcontractors, agents, and employees, for damages caused by fire, or other causes of loss, to the extent those losses are covered by property insurance required by the Agreement or other property insurance applicable to the Project, except such rights as they have to proceeds of such insurance.
Notice that this clause expressly addresses only property insurance. If a contractor’s negligence damages an Owner’s property and the Owner’s property insurer pays to repair it, this language precludes the insurer from chasing the contractor under subrogation principles. The contractor’s liability insurance may theoretically cover the same loss, giving the Owner a choice between claiming under its own property insurance policy or claiming under the contractor’s liability insurance policy. But the “waive all rights” language of this clause eliminates the latter choice. The contractor and therefore the contractor’s liability insurer will be off the hook.
Because waivers of subrogation facilitate project completion, a purpose not furthered in the case of post-completion losses, some courts hesitate to construe waivers of subrogation as intended to cover post-completion losses – at least without some type of continuation clause expressly extending subrogation waivers beyond completion. Under the AIA A201, losses occurring after the Project has been completed and paid for, and insured under an Owner’s separate property insurance policy, are embraced by a waiver of subrogation this way:
§ 11.3.2 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, to the extent permissible by such policies, the Owner waives all rights in accordance with the terms of Section 11.3.1 for damages caused by fire or other causes of loss covered by this separate property insurance.
Under this approach, waiver of subrogation may be triggered either by “builder’s risk” insurance or by so-called “all-risk” insurance that covers both the entire existing property and the work performed.
Upon making payment, the insurer (or “subrogee”) is said to “stand in the shoes” of the insured (or “subrogor”) for purposes of chasing the guilty party. But an injured claimant with insurance coverage will occasionally waive his own right to sue the guilty party and agree to rely instead solely on his insurance – in which case the shoes are tossed away, leaving the insurer nothing to stand in and hence no ability to be reimbursed. And the insurer will have no say in the matter.
In commercial construction contracts the rationale for such waivers is to avoid litigation that could disrupt the construction process. Behr v. Hook, 787 A.2d 499, 503 (Vt. 2001) (“By shifting the risk of loss to the insurance company regardless of which party is at fault, these clauses seek to avoid ‘the prospect of extended litigation which would interfere with construction.’”) (citation omitted). Here’s how it works in the AIA’s popular A201 General Conditions:
§ 11.3.1 The Owner and Contractor waive all rights against (1) each other and any of their subcontractors, sub-subcontractors, agents, and employees, each of the other; (2) the Architect and Architect’s consultants; and (3) Separate Contractors, if any, and any of their subcontractors, sub-subcontractors, agents, and employees, for damages caused by fire, or other causes of loss, to the extent those losses are covered by property insurance required by the Agreement or other property insurance applicable to the Project, except such rights as they have to proceeds of such insurance.
Notice that this clause expressly addresses only property insurance. If a contractor’s negligence damages an Owner’s property and the Owner’s property insurer pays to repair it, this language precludes the insurer from chasing the contractor under subrogation principles. The contractor’s liability insurance may theoretically cover the same loss, giving the Owner a choice between claiming under its own property insurance policy or claiming under the contractor’s liability insurance policy. But the “waive all rights” language of this clause eliminates the latter choice. The contractor and therefore the contractor’s liability insurer will be off the hook.
Because waivers of subrogation facilitate project completion, a purpose not furthered in the case of post-completion losses, some courts hesitate to construe waivers of subrogation as intended to cover post-completion losses – at least without some type of continuation clause expressly extending subrogation waivers beyond completion. Under the AIA A201, losses occurring after the Project has been completed and paid for, and insured under an Owner’s separate property insurance policy, are embraced by a waiver of subrogation this way:
§ 11.3.2 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, to the extent permissible by such policies, the Owner waives all rights in accordance with the terms of Section 11.3.1 for damages caused by fire or other causes of loss covered by this separate property insurance.
Under this approach, waiver of subrogation may be triggered either by “builder’s risk” insurance or by so-called “all-risk” insurance that covers both the entire existing property and the work performed.
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