LEXINGTON INSURANCE COMPANY ET AL., APPELLANTS, v. ENTREX
COMMUNICATION SERVICES, INC. ET AL., APPELLEES.
No. S-06-1452.
SUPREME COURT OF NEBRASKA
275 Neb. 702; 2008 Neb. LEXIS 72
May 16, 2008, Filed
PRIOR HISTORY:
Appeal from the District Court for Douglas County: THOMAS A. OTEPKA, Judge.
DISPOSITION: AFFIRMED.
HEADNOTES
1. Summary Judgment. Summary judgment is proper when the pleadings and
evidence admitted at the hearing disclose no genuine issue regarding any
material fact or the ultimate inferences that may be drawn from those facts and
that the moving party is entitled to judgment as a matter of law.
2. Summary Judgment: Appeal and Error. In reviewing a summary judgment, an
appellate court views the evidence in the light most favorable to the party
against whom the judgment is granted and gives such party the benefit of all
reasonable inferences deducible from the evidence.
3. Contracts. The meaning of a contract is a question of law.
4. Contracts: Public Policy. The determination of whether a contract violates
public policy is a question of law.
5. Judgments: Appeal and Error. When reviewing questions of law, an appellate
court has an obligation to resolve the questions independently of the
conclusions reached by the trial court.
6. Contracts: Subrogation: Waiver: Negligence. A contractual waiver of
subrogation is enforceable against gross negligence claims.
7. Contracts. A contract written in clear and unambiguous language is not
subject to interpretation or construction and must be enforced according to its
terms.
8. Contracts: Words and Phrases. A contract is ambiguous when a word, phrase,
or provision in the contract has, or is susceptible of, at least two reasonable
but conflicting interpretations or meanings.
9. Contracts. A contract must receive a reasonable construction, and a court
must construe it as a whole and, if possible, give effect to every part of the
contract.
10. Contracts. When there is a question about the meaning of the contract's
language, the contract will be construed against the party preparing it.
COUNSEL: J. Joseph McQuillan, of Walentine, O'Toole, McQuillan & Gordon, and
Jeffrey R. Learned, Charles R. Tuffley, and Alyssa J. Endelman, of Grotefeld &
Denenberg, L.L.C., for appellants.
William R. Johnson and Craig F. Martin, of Lamson, Dugan & Murray, L.L.P., and
Raymond E. Walden for appellee Entrex Communication Services, Inc.
Thomas A. Grennan and Francie C. Riedmann, of Gross & Welch, P.C., L.L.O., for
appellee Communication Structures & Services, Inc.
Dean Suing, of Katskee, Henatch & Suing, for appellee Dudutis Erection &
Maintenance, Inc.
JUDGES: HEAVICAN, C.J., WRIGHT, CONNOLLY, GERRARD, STEPHAN, MCCORMACK, and
MILLER-LERMAN, JJ.
OPINION BY: CONNOLLY
OPINION
CONNOLLY, J.
Hearst-Argyle Properties, Inc., and the Hearst Corporation (collectively
Hearst) owned a television broadcast tower in Omaha, Nebraska. In February 2003,
Hearst contracted with Entrex Communication Services, Inc. (Entrex), to upgrade
the antenna on the tower. After the tower collapsed in July 2003, Hearst sued
Entrex. Hearst alleged that Entrex's gross negligence caused the collapse.
Entrex moved for summary judgment. Entrex claimed that a waiver of subrogation
in the parties' agreement barred Hearst's claims to the extent insurance
proceeds covered the damages. The district court granted the motion and
dismissed Hearst's claims for damages that had been compensated by insurance.
Hearst's insurer appeals.
This appeal presents two issues. The first is whether enforcing a waiver of
subrogation provision to bar a gross negligence claim violates public policy.
The second is whether the waiver of subrogation is limited to damages to "the
Work" (as defined in the agreement), or whether it also applies to damages to
"non-Work" property. We conclude that the waiver of subrogation is effective
against claims for gross negligence. We further conclude that the waiver applies
to damages to both the Work and the non-Work property. We affirm.
I. BACKGROUND
1. FACTUAL BACKGROUND
The facts are not in dispute. Hearst owns and operates a television station
in Omaha. In February 2003, Hearst contracted with Entrex to modify a 1,234-foot
television broadcast tower by removing the analog antenna and replacing it with
a digital antenna. Entrex subcontracted with Communication Structures &
Services, Inc., which hired Dudutis Erection & Maintenance, Inc., to assist
(hereinafter collectively Entrex).
The parties' contract required Hearst to obtain property insurance to cover
"the Project" (as defined in the agreement). Instead of obtaining a specific
property insurance policy to cover the Project, Hearst relied upon existing
"all-risk" property insurance policies. These policies were issued by Lexington
Insurance Company; Allied World Assurance Company, Ltd.; CNA Insurance Company;
Everest Reinsurance (bermuda) Limited; and Firemen's Fund Insurance Company
(collectively Lexington). These all-risk policies collectively provided Hearst
with $ 25 million in coverage.
The tower collapsed in July 2003, allegedly causing over $ 6 million in
damages to the antenna, tower, transmission building, and personal property in
the transmission building. Lexington compensated Hearst for its losses, less a $
250,000 deductible. Hearst sued Entrex, alleging that the tower collapse
occurred because of Entrex's gross negligence.
Entrex moved for partial summary judgment. It argued that a waiver of
subrogation clause in the parties' agreement barred Hearst's claims against
Entrex to the extent insurance proceeds were available to cover the damages.
Hearst responded with two arguments: (1) The waiver of subrogation was
unenforceable because Hearst had alleged gross negligence and enforcing a waiver
of subrogation against a claim for gross negligence would violate public policy
and (2) the waiver barred only claims for damage to the Work (as defined in the
agreement), and thus, Entrex's motion should be denied as to damage claims
involving non-Work property.
Regarding Hearst's first argument, the court concluded that enforcing a
waiver of subrogation to bar a claim for gross negligence did not violate public
policy. In deciding the second argument, the court concluded that Hearst had
waived all claims covered by its all-risk insurance policies, including damages
to the Work and non-Work property. The district court granted Entrex's motion
and dismissed Hearst's claims for damages covered by insurance.
Hearst appealed, but the Nebraska Court of Appeals dismissed the appeal for
lack of jurisdiction. It determined that although the court's order disposed of
all subrogation claims by Lexington, Hearst's claims for uninsured losses
remained pending. Thereafter, Lexington was substituted as the named plaintiff
in this lawsuit and Hearst's claims were dismissed without prejudice and refiled
under a different case number. The court then entered a final order (consistent
with its earlier order), granting Entrex's motion for summary judgment on
Lexington's claims. Lexington appeals.
2. RELEVANT CONTRACT PROVISIONS
The contract between Hearst and Entrex was an American Institute of
Architects (AIA) standard form of agreement, document A101-1997. The agreement
incorporated another AIA standard form of general conditions of the contract for
construction, document A201-1997.
Pivotal to our analysis are two words used in the parties' agreement--"Work"
and "Project." Subparagraph 1.1.3 of the agreement defined "Work" as "the
construction and services required by the Contract Documents, whether completed
or partially completed, and includes all other labor, materials, equipment and
services provided or to be provided by the Contractor to fulfill the
Contractor's obligations." Simply put, the Work is the construction and services
to be provided by the contractor to fulfill the contractor's obligations under
the contract. Subparagraph 1.1.3 also explains that the Work may constitute the
whole or a part of the "Project."
Subparagraph 1.1.4 of the agreement defines the "Project" as "the total
construction of which the Work performed under the Contract Documents may be the
whole or a part and which may include construction by the Owner or by separate
contractors." Stated more simply, the Project incorporates all the construction
to be done, whether it be by the contractor, the owner, or other contractors.
Here, the only construction being done was that by Entrex, so the terms "Work"
and "Project" are interchangeable.
(a) Entrex's Obligations Under the Agreement
Article 11 of the agreement allocated insurance responsibilities among the
parties. Subparagraph 11.1.1 of that article required Entrex, as the contractor,
to obtain liability insurance covering claims for damages to non-Work property:
The Contractor shall purchase . . . and maintain . . . such
insurance as will protect the Contractor from claims set forth below
which may arise out of or result from the Contractor's operations
under the Contract and for which the Contractor may be legally liable
. . . .
. . . .
.5 claims for damages, other than to the Work itself, because of
injury to or destruction of tangible property, including loss of use
resulting therefrom[.]
(Emphasis supplied.)
(b) Hearst's Obligations Under the Agreement
Subparagraph 11.4.1 of the agreement required Hearst to obtain property
insurance covering the Project:
Unless otherwise provided, the Owner shall purchase and maintain .
. . property insurance written on a builder's risk "all-risk" or
equivalent policy form in the amount of the initial Contract Sum, plus
value of subsequent Contract modifications and cost of materials
supplied or installed by others, comprising total value for the entire
Project at the site on a replacement cost basis without optional
deductibles. . . . This insurance shall include interests of the
Owner, the Contractor, Subcontractors and Sub-subcontractors in the
Project.
(Emphasis supplied.)
(c) Waiver of Subrogation
The agreement's critical provision is set out in subparagraph 11.4.7. It
contains a waiver of subrogation, which forms the basis of this appeal, and
states in relevant part:
The Owner and Contractor waive all rights against . . . each other
and any of their subcontractors . . . for damages caused by fire or
other causes of loss to the extent covered by property insurance
obtained pursuant to this Paragraph 11.4 or other property insurance
applicable to the Work, except such rights as they have to proceeds of
such insurance held by the Owner as fiduciary.
II. ASSIGNMENTS OF ERROR
Lexington assigns, restated, that the district court erred in holding that
(1) the contractual waiver of subrogation barred gross negligence claims and (2)
the waiver barred claims for damage to non-Work property.
III. STANDARD OF REVIEW
[1,2] Summary judgment is proper when the pleadings and evidence admitted at
the hearing disclose no genuine issue regarding any material fact or the
ultimate inferences that may be drawn from those facts and that the moving party
is entitled to judgment as a matter of law. 1 In reviewing a summary judgment,
an appellate court views the evidence in the light most favorable to the party
against whom the judgment is granted and gives such party the benefit of all
reasonable inferences deducible from the evidence. 2
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -1 Erickson
v. U-Haul Internat., 274 Neb. 236, 738 N.W.2d 453 (2007).
2 Id.
- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
[3-5] The meaning of a contract is a question of law. 3 The determination of
whether a contract violates public policy is a question of law. 4 When reviewing
questions of law, an appellate court has an obligation to resolve the questions
independently of the conclusions reached by the trial court. 5
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -3 Hogelin
v. City of Columbus, 274 Neb. 453, 741 N.W.2d 617 (2007).
4 Spanish Oaks v. Hy-Vee, 265 Neb. 133, 655 N.W.2d 390 (2003).
5 Eastlick v. Lueder Constr. Co., 274 Neb. 467, 741 N.W.2d 628 (2007).
- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
IV. ANALYSIS
1. ENFORCING THE WAIVER OF SUBROGATION TO BAR LEXINGTON'S GROSS NEGLIGENCE
CLAIMS DOES NOT VIOLATE PUBLIC POLICY
Lexington contends that the district court erred in deciding that the waiver
of subrogation in subparagraph 11.4.7 bars Lexington's gross negligence claims.
According to Lexington, public policy precludes parties from contractually
disclaiming or limiting their liability for gross negligence.
Other jurisdictions are split on whether to enforce contractual waivers of
subrogation against claims for gross negligence. Some courts have held that even
though traditional exculpatory provisions may not be effective against claims
for gross negligence, waivers of subrogation are effective to bar gross
negligence claims. 6 But other courts have decided that because a traditional
exculpatory clause is generally ineffective against a gross negligence claim, a
waiver of subrogation will similarly be ineffective. 7
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -6 See,
e.g., St Paul Fire and Marine v. Universal Builders, 317 F. Supp. 2d 336
(S.D.N.Y. 2004), affirmed as modified 409 F.3d 73 (2d Cir. 2005); Reliance Nat.
Indem. v. Knowles Ind. Ser., 868 A.2d 220 (Me. 2005); Behr v. Hook, 173 Vt. 122,
787 A.2d 499 (2001).
7 See, e.g., Butler Mfg. Co., Inc. v. Americold Corp., 841 F. Supp. 1107 (D.
Kan. 1993); Colonial Properties Realty v. Lowder Const., 256 Ga. App. 106, 567
S.E.2d 389 (2002).
- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
Two leading cases in which courts have enforced waivers of subrogation to bar
gross negligence claims are St Paul Fire and Marine v. Universal Builders 8 and
Reliance Nat. Indem. v. Knowles Ind. Ser. 9 The St Paul Fire and Marine and
Reliance Nat. Indem. courts reasoned, in part, that policy considerations
associated with traditional exculpatory provisions are not implicated with
waivers of subrogation:
The rule [that gross negligence generally renders exculpatory
provisions void] exists . . . to ensure that "a party injured by
another's gross negligence will be able to recover its losses." . . .
In cases involving waivers of subrogation, however, there is no risk
that an injured party will be left uncompensated, and it is irrelevant
to the injured party whether it is compensated by the grossly
negligent party or an insurer. 10
In sum, because a waiver of subrogation clause does not leave a party
uncompensated, these courts hold that the clause is effective even when the
plaintiff alleges gross negligence.
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -8 St Paul
Fire and Marine, supra note 6.
9 Reliance Nat. Indem., supra note 6.
10 Id. at 226 (citation omitted). See, also, St Paul Fire and Marine, supra
note 6.
- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
Lexington argues we should give these cases little deference. It claims the
decisions "erroneously focused on whether the injured party was compensated for
damages . . . rather than on holding the grossly negligent defendant financially
responsible for its misconduct." 11 Lexington relies on our decision in New
Light Co. v. Wells Fargo Alarm Servs. 12 In New Light Co., a fire in the
plaintiff's restaurant caused extensive damage to the building and its contents.
The plaintiff alleged that the defendant was grossly negligent in designing,
installing, and maintaining a fire alarm system in the building. The plaintiff
further argued that public policy prevented the defendant from relying on a
contractual exculpatory clause or limitation-of-damages provision to insulate
itself from liability for its gross negligence. In New Light Co., we held that
allowing the defendant to use a contractual agreement to insulate itself from
damages caused by its own gross negligence would violate public policy.
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -11 Brief
for appellants at 21-22.
12 New Light Co. v. Wells Fargo Alarm Servs., 247 Neb. 57, 525 N.W.2d 25
(1994).
- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
Relying on New Light Co., Lexington argues that the reason exculpatory
clauses may be unenforceable against gross negligence claims is not to ensure
compensation for the injured party, but, rather, to hold grossly negligent
parties financially responsible for their conduct. Lexington contends that
Nebraska public policy requires that grossly negligent parties be held
financially responsible for their conduct because otherwise they "would have no
incentive to act more appropriately in the future." 13 Lexington acknowledges
that New Light Co. addressed a contractual exculpatory clause and a
limitation-of-damages provision, rather than a waiver of subrogation clause. But
Lexington claims that allowing a party to use a waiver of subrogation to avoid
gross negligence liability would similarly eliminate the financial incentive for
that party to "'clean up its act.'" 14 Therefore, Lexington argues that the New
Light Co. rationale and the underlying Nebraska public policy apply to
contractual waivers of subrogation just as they did to the exculpatory clause
and limitation-of-damages provision in that case.
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -13 Brief
for appellants at 16.
14 Id. at 18.
- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
Admittedly, 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. We decline, however, to extend our
discussion in New Light Co. to this case involving a contractual waiver of
subrogation. We recognize that a waiver of subrogation shares similarities with
traditional exculpatory clauses or limitationof-damages provisions. But, we also
find that significant differences exist between waivers of subrogation and the
exculpatory clause and limitation-of-damages provision we dealt with in New
Light Co.
First, as the Reliance Nat. Indem. and St Paul Fire and Marine courts
observed, the danger with exculpatory clauses is that a party injured by
another's gross negligence will be unable to recover its losses. But such danger
is not present in cases involving waivers of subrogation because the waiver only
applies to losses covered by insurance, so "there is no risk that an injured
party will be left uncompensated." 15
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -15 Reliance
Nat. Indem., supra note 6, 868 A.2d at 226.
- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
Also, waivers of subrogation serve other important policy goals not met by
exculpatory clauses. As the Reliance Nat. Indem. court explained, "'waivers of
subrogation are encouraged by the law and serve important social goals:
encouraging parties to anticipate risks and to procure insurance covering those
risks, thereby avoiding future litigation, and facilitating and preserving
economic relations and activity.'" 16 Other courts have observed that a waiver
of subrogation is particularly useful in a construction contract: "'[I]t 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.'"
17 Traditional exculpatory clauses and limitation-of-damages provisions do not
serve this same important policy goal. Because of these differences, we decline
to extend New Light Co. to the present case.
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -16 Id. at
225-26.
17 Haemonetics Corp. v. Brophy & Phillips Co., 23 Mass. App. 254, 258, 501
N.E.2d 524, 526 (1986), quoting Tokio Marine & Fire v. Employers Ins. of Wausau,
786 F.2d 101 (2d Cir. 1986). See, also, St Paul Fire and Marine, supra note 6;
Reliance Nat. Indem., supra note 6; Behr, supra note 6.
- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
[6] We, like other jurisdictions, recognize the important policy goal that
waivers of subrogation serve in avoiding disruption of construction projects and
reducing litigation among parties to complicated construction contracts.
Concluding that waivers of subrogation cannot be enforced against gross
negligence claims would undermine this underlying policy by encouraging costly
litigation to contest whether a party's conduct was grossly negligent.
Therefore, we conclude that "public policy favors enforcement of waivers of
subrogation even in the face of gross negligence [claims]." 18
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -18 Reliance
Nat. Indem., supra note 6, 868 A.2d at 227.
- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
Because the waiver of subrogation clause in subparagraph 11.4.7 is effective
to bar Lexington's gross negligence claims, we next determine the scope of the
waiver.
2. THE WAIVER OF SUBROGATION APPLIES TO INSURED DAMAGES, WHICH HERE INCLUDE
BOTH THE WORK AND THE NON-WORK PROPERTY
Lexington next contends that the district court erred in holding that the
waiver of subrogation in subparagraph 11.4.7 barred Lexington's claims for
damage to non-Work property. Again, the parties' agreement essentially defines
"Work" as the construction and services provided by the contractor to fulfill
the contractor's obligations under the contract. The record reflects that of the
over $ 6.2 million in claimed damages, about only $ 470,000 represented damages
to the Work, while the remainder represented damages to non-Work property. We
understand from Lexington's counsel at oral argument that the antenna was the
Work property, while the tower and transmission building represented the
non-Work property.
The waiver of subrogation in subparagraph 11.4.7 states in relevant part,
"The Owner [Hearst] and Contractor [Entrex] waive all rights against . . . each
other . . . for damages caused by fire or other causes of loss to the extent
covered by property insurance obtained pursuant to this Paragraph 11.4 or other
property insurance applicable to the Work . . . ." Subparagraph 11.4.1 required
Hearst to purchase a builder's risk "all-risk" property insurance policy
"comprising total value for the entire Project at the site." Here, "Project" and
"Work" are interchangeable. Hearst did not purchase a separate builder's risk
policy covering the Work, but instead relied upon existing "all-risk" property
insurance policies issued by Lexington and other companies. These all-risk
policies collectively provided Hearst with $ 25 million in coverage for both the
Work and the non-Work property. Lexington argues that the waiver of subrogation
in subparagraph 11.4.7 applied only to damages to the Work. In other words,
Lexington claims that even though Hearst's existing property insurance policies
covered both the Work and the non-Work property, the parties waived subrogation
only for damages to the Work property. Therefore, Lexington believes it can
recover for claims it paid for damages to non-Work property.
Entrex, of course, contends that the waiver applies to all insured damages,
including those to non-Work property. Lexington argues that even if Entrex's
interpretation is reasonable, the waiver is at most ambiguous. Lexington also
claims that Entrex "drafted" the contract by requiring use of the standard AIA
form and that therefore, we should construe any ambiguity against Entrex.
[7-10] We have stated that a contract written in clear and unambiguous
language is not subject to interpretation or construction and must be enforced
according to its terms. 19 A contract is ambiguous when a word, phrase, or
provision in the contract has, or is susceptible of, at least two reasonable but
conflicting interpretations or meanings. 20 Also, a contract must receive a
reasonable construction, and we must construe it as a whole and, if possible,
give effect to every part of the contract. 21 In construing a contract, we apply
the general rule that when there is a question about the meaning of the
contract's language, the contract will be construed against the party preparing
it. 22
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -19 Kluver
v. Deaver, 271 Neb. 595, 714 N.W.2d 1 (2006).
20 Id.
21 See id.
22 See Artex, Inc. v. Omaha Edible Oils, Inc., 231 Neb. 281, 436 N.W.2d 146
(1989).
- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
We determine that the waiver of subrogation is subject to only one reasonable
interpretation--that urged by Entrex. Therefore, as explained later, we conclude
that the contract is not ambiguous and that here, the waiver applies to damages
to both the Work and the non-Work property.
(a) Courts Addressing the Issue Generally Apply One of Two Approaches
A review of cases from other jurisdictions reveals two approaches to when an
insurer's subrogation rights are barred. In Trinity Universal Ins. Co. v. Bill
Cox Const., 23 the Texas Court of Appeals has summarized the two approaches:
[O]ne approach makes a distinction between Work (as that word is
defined in the contract) and non-Work property and limits the scope of
the waiver to damages to the Work; and the second approach draws no
distinction between Work and non-Work, but instead, limits the scope
of the waiver to the proceeds of the insurance provided under the
contract between the owner and contractor.
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -23 Trinity
Universal Ins. Co. v. Bill Cox Const., 75 S.W.3d 6, 11 (Tex. App. 2001).
- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
(b) Lexington Urges the First Approach
Lexington urges us to adopt the first approach described above. Lexington
contends that "a reasonable construction of the waiver is that it has no
relevance to claims for damage to non-Work property." 24 The New York Court of
Appeals applied this approach in S.S.D.W. Co. v. Brisk Co. 25 The waiver clause
in that case was nearly identical to the waiver clause here. The court explained
that the waiver barred subrogation claims to the extent the damages sought were
covered by either "(1) 'insurance obtained pursuant to [art 17] [here paragraph
11.4]' or (2) 'any other property insurance applicable to the Work.'" 26 Article
17.3 of the parties' agreement required the owner to provide insurance "'upon
the entire Work at the site.'" 27 In deciding the waiver barred only claims for
damages to the Work, the S.S.D.W. Co. court reasoned:
It makes no difference whether the policy under which subrogation
is sought is one which the owner purchased specifically to insure the
Work pursuant to article 17.3 [here subparagraph 11.4.1] or some other
policy covering the owner's property in which the owner has also
provided coverage for the Work. In either event, the waiver clause, if
given its plain meaning, bars subrogation only for those damages
covered by insurance which the owner has provided to meet the
requirement of protecting the contractor's limited interest in the
building--i.e., damages to the Work itself. 28
Therefore, the S.S.D.W. Co. court concluded that to the extent the plaintiff
sought recovery for damages to non-Work property, that claim was not barred by
the waiver of subrogation. Other courts have similarly decided the waiver
applies only to damages to the Work. 29
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -24 Brief
for appellants at 24.
25 S.S.D.W. Co. v. Brisk Co., 76 N.Y.2d 228, 556 N.E.2d 1097, 557 N.Y.S.2d 290
(1990).
26 Id. at 233, 556 N.E.2d at 1099, 557 N.Y.S.2d at 292 (emphasis in original).
27 Id. at 233, 556 N.E.2d at 1099-1100, 557 N.Y.S.2d at 292-93 (emphasis in
original).
28 Id. at 233-34, 556 N.E.2d at 1100, 557 N.Y.S.2d at 293.
29 See, e.g., Midwestern Indem. Co. v. Systems Builders, 801 N.E.2d 661 (Ind.
App. 2004); Butler v. Mitchell-Hugeback, Inc., 895 S.W.2d 15 (Mo. 1995); PEMCO
v. Sellen Constr. Co., 48 Wash. App. 792, 740 P.2d 913 (1987).
- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
(c) Entrex Urges the Second Approach
Entrex urges us to adopt the second approach described by the Trinity
Universal Ins. Co. court. Entrex contends that we should follow those courts
that have decided the waiver applies to all damages insured by the owner's
property insurance policy, regardless of whether they represent damages to the
Work or non-Work property. The courts adopting this approach represent the
majority. 30
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -30 See,
e.g., ASIC II Ltd. v. Stonhard, Inc., 63 F. Supp. 2d 85 (D. Me. 1999); Stop and
Shop v. ABCO Refrigeration Supply, 48 Conn. Supp. 301, 842 A.2d 1194 (Conn.
Super. 2003); Trinity Universal Ins. Co., supra note 23; Employers Mut. Cas. Co.
v. A.C.C.T., Inc., 580 N.W.2d 490 (Minn. 1998); Lloyd's Underwriters v. Craig
and Rush, 26 Cal. App. 4th 1194, 32 Cal. Rptr. 2d 144 (1994); Chadwick v. CSI,
Ltd., 137 N.H. 515, 629 A.2d 820 (1993); Haemonetics Corp., supra note 17.
- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
The California Court of Appeal adopted this approach in Lloyd's Underwriters
v. Craig and Rush. 31 Like Hearst, the owner in Lloyd's Underwriters elected not
to purchase a separate "builder's risk" policy with coverage limited to the
construction work. Instead, the owner chose to rely on its existing "all-risk"
property insurance to satisfy its obligations under the contract to provide
property insurance for the Work. Non-Work property was damaged while the
contractor was repairing the roof of the owner's facility. The owner's insurers
argued that these damages, although insured, fell outside the waiver of
subrogation.
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -31 Lloyd's
Underwriters, supra note 30.
- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
The Lloyd's Underwriters court read the waiver's language to mean that "so
long as a policy of insurance 'applicable to the Work' pays for the damage, the
waiver applies." 32 The court observed that the owner's insurers "[did] not
dispute that their policies (1) were 'applicable to the Work' and (2) 'covered'
or paid for the loss." 33 The court reasoned that satisfaction of these two
criteria allowed the court to conclude the waiver applied. Stated another way,
the Lloyd's Underwriters court essentially concluded that if a policy covering
the Work paid for the losses, the parties waived subrogation for those losses,
regardless of whether they were damages to the Work or non-Work property.
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -32 Lloyd's
Underwriters, supra note 30, 26 Cal. App. 4th at 1198, 32 Cal. Rptr. 2d at 146.
33 Id.
- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
Another case often cited for the majority approach is Haemonetics Corp. v.
Brophy & Phillips Co. 34 There, the owner also relied on an existing property
insurance policy to meet its obligation to provide property insurance covering
the Work. During construction, a fire damaged non-Work property, and the owner
received insurance proceeds to cover the damage. The owner later argued that the
parties' contract required only that it maintain property insurance on the Work,
so the waiver applied only to damages to the Work property. The court disagreed,
reasoning:
The preexisting insurance policy . . . was the insurance the owner
chose to provide to comply with § 11.3 [here subparagraph 11.4.1] even
though that policy may have been more extensive than what was
required. By the terms of [the waiver of subrogation provision], the
waiver of rights extends to the proceeds of any insurance provided
under § 11.3. 35
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -34
Haemonetics Corp., supra note 17.
35 Haemonetics Corp., supra note 17, 23 Mass. App. at 257, 501 N.E.2d at 526.
- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
The Haemonetics Corp. and Lloyd's Underwriters courts reached the same
conclusion, but with different rationales. Again, for clarification, the waiver
applies to the extent losses are covered by (1) insurance obtained to meet the
owner's obligation to acquire property insurance covering the Project or (2)
"other property insurance applicable to the Work." The Haemonetics Corp. court
reasoned that the owner's preexisting policy fell within the first alternative
as the policy the owner chose to provide to comply with the contract. In
contrast, the Lloyd's Underwriters court reasoned that the owner's preexisting
policy came within the second alternative as "other property insurance
applicable to the Work." Despite their different classifications of the
policies, both courts decided the owner's preexisting policy fell within the
waiver of subrogation clause. The courts concluded that the scope of the waiver
clause was not defined by the property damaged, but, rather, by the extent the
damages were covered by those policies described in the clause: All losses
covered by those policies were subject to the waiver, whether those losses
related to the Work or non-Work property.
(d) We Adopt the Majority Approach and Conclude
That the Waiver Applies to Damages to Both the Work and the Non-Work Property
We find the majority courts' rationale persuasive. We also believe this
approach is more consistent with other provisions in the parties' agreement and
furthers the purpose of the waiver clause. Furthermore, construing the contract
as a whole, we are unable to conclude that the minority approach is reasonable.
The majority interpretation is consistent with a related provision,
subparagraph 11.4.5 in the parties' agreement, which states in relevant part:
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, . . . the Owner shall waive all rights in accordance with the
terms of Subparagraph 11.4.7 for damages caused by fire or other
causes of loss covered by this separate property insurance.
We understand this provision to mean that if the owner acquires a separate
property insurance policy to cover non-Project property--a policy that did not
cover the Project or Work property--and the non-Project property is damaged, the
owner waives subrogation rights for the insurer as to those damages. So even
though the damage occurred to non-Work property, the owner waived subrogation
rights because the damages were insured. This provision shows that the
contracting parties were not opposed to waiving damages to non-Work property. 36
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -36 See,
Lloyd's Underwriters, supra note 30; Walker Engineering v. Bracebridge Corp.,
102 S.W.3d 837 (Tex. App. 2003).
- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
Subparagraph 11.4.5 reinforces our conclusion that the waiver in subparagraph
11.4.7 applies to all damages--including Work and non-Work damages--covered by
the owner's property insurance policy. An example is helpful. Suppose the owner
purchased two separate property insurance policies: "Policy A" that covered only
the Project (Work) and "Policy B" that covered only the non-Work property. Under
subparagraph 11.4.7, the owner waives subrogation rights as to any damages
covered by Policy A (damages to the Work property). Under subparagraph 11.4.5,
the owner waives subrogation rights as to any damages covered by the separate
Policy B (damages to the non-Work property). So, applying subparagraphs 11.4.5
and 11.4.7, the owner waives damages to both the Work and the non-Work property
when the owner obtains two separate policies. We see no reason why the parties
would intend a different result when, instead of purchasing two separate
policies, the owner relied on one policy covering both the Work and the non-Work
property, as Hearst did here.
Also, as the Haemonetics Corp. court noted, the majority approach furthers
the policy underlying the use of waiver of subrogation clauses in construction
contracts. That court explained that a waiver of subrogation is useful in
construction contracts because it avoids disrupting the project and eliminates
the need for lawsuits. 37 The majority approach furthers this purpose. Applying
the waiver to all losses covered by the owner's property insurance policy
eliminates litigation over liability issues and whether the claimed loss was
damage to the Work or non-Work property. 38
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -37
Haemonetics Corp., supra note 17, citing Tokio Marine & Fire, supra note 17.
38 See, Stop and Shop, supra note 30; S.S.D.W. Co., supra note 25 (Alexander,
J., dissenting); Haemonetics Corp., supra note 17.
- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
Lexington, of course, argues we should not adopt the majority approach.
Lexington contends this approach is inconsistent with the agreement's allocation
of insurance responsibilities. Again, under subparagraph 11.1.1, Entrex was
obligated to obtain liability insurance covering claims for damages to non-Work
property, while subparagraph 11.4.1 required Hearst to obtain property insurance
covering the Project (Work). The insurers in Lloyd's Underwriters made a similar
argument. They argued that the court must interpret the waiver of subrogation as
waiving claims only to the extent the loss fell within the owner's area of
insurance responsibility (i.e., a loss to the Work). The court decided this
contention ignored the language defining the scope of claims falling within the
waiver clause. The court explained, "The waived claims are not defined by what
property is harmed (i.e., 'any injury to the Work'); instead, the scope of
waived claims is delimited by the source of any insurance proceeds paying for
the loss (i.e., whether the loss was paid by a policy 'applicable to the
Work')." 39 We agree. Further, as another court noted, the waiver clause
expressly provides that the "'waiver of subrogation shall be effective as to a
person or entity even though that person or entity would otherwise have a duty
of indemnification, contractual or otherwise.'" This reconciles any
inconsistency between the waiver of subrogation and the agreement's allocation
of insurance responsibilities. 40
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -39 Lloyd's
Underwriters, supra note 30, 26 Cal. App. 4th at 1200, 32 Cal. Rptr. 2d at 148
(emphasis in original).
40 See Chadwick, supra note 30, 137 N.H. at 524, 629 A.2d at 826.
- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
Having reviewed the reasons that support the majority approach, we conclude
that the minority approach is not a reasonable interpretation of subparagraph
11.4.7. First, the minority approach is inconsistent with the waiver's purpose
of avoiding disruption and disputes among the parties to the project by
eliminating the need for litigation. Adopting the minority approach would
actually encourage litigation about whether the claimed loss was damage to the
Work or non-Work property. More important, we are unable to reconcile
subparagraph 11.4.5 with the minority approach. If we applied the minority
approach, we would be left with two disparate results depending on whether the
owner (1) purchased a single policy covering both the Work and the non-Work or
(2) purchased two separate policies. An owner relying on a single policy, as
Hearst did here, would waive only damages to the Work (11.4.7). But an owner
purchasing two separate policies, as in the example above, would waive damages
to both the Work (11.4.7) and the non-Work (11.4.5). We do not believe the
parties intended this disparity. Because we must construe the contract as a
whole, 41 subparagraph 11.4.5 is a hurdle that prevents us from deciding that
the minority approach is a reasonable interpretation of subparagraph 11.4.7.
Because we decide that the minority approach is not a reasonable interpretation
of subparagraph 11.4.7, we conclude that subparagraph 11.4.7 is not ambiguous.
Instead, it is subject to only one reasonable interpretation--that of the
majority courts. Therefore, we need not construe the contract against the
drafter.
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -41 See
Kluver, supra note 19.
- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
We find the majority courts' rationale persuasive. The Minnesota Supreme
Court has summarized the result under this approach:
The owner has the option of purchasing an all-risk policy
specifically to cover the "work" or can rely on any existing property
insurance which would cover the "work." However, the waiver clause
creates the "work" and "nonwork" distinction based upon the owner's
decision to purchase a new policy or to rely upon an existing one. The
owner agrees to waive the right to sue for damages done only to the
"work" if it purchases a separate all-risk policy specifically to
cover the "work." But if the owner relies on an existing policy which
is so broad that it covers both "work" and "nonwork" property, it
waives the right to sue for all damages done as long as that damage is
covered by the policy. 42
We hold that the waiver of subrogation applies to all damages covered by a
property insurance policy "obtained pursuant to . . . Paragraph 11.4" or other
property insurance policy that covers the Work. When that policy is broad enough
to cover both the Work and the non-Work property, the waiver extends to non-Work
damages.
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -42
Employers Mut. Cas. Co., supra note 30, 580 N.W.2d at 493.
- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
Here, Hearst relied on existing policies covering both the Work and the
non-Work property. Because these policies are "applicable to the Work," they
fall within the purview of subparagraph 11.4.7. Applying the approach adopted
today, Hearst waived subrogation rights on behalf of Lexington for any damages
covered by those policies, including damages to non-Work property. Therefore,
the district court did not err in granting summary judgment for Entrex and
dismissing Lexington's claims for the insurance proceeds it paid.
V. CONCLUSION
We conclude that the district court correctly determined that contractual
waivers of subrogation are effective to bar gross negligence claims. Therefore,
the waiver of subrogation in the parties' agreement was enforceable even though
Lexington alleged Entrex was grossly negligent. Also, we interpret the waiver of
subrogation provision, subparagraph 11.4.7, as applying to all damages covered
by a property insurance policy "obtained pursuant to . . . Paragraph 11.4" or
other property insurance policy that covers the Work. When that policy is broad
enough to cover both the Work and the non-Work property, as Hearst's policies
were here, the waiver applies to both the Work and the non-Work damages. Thus,
Lexington is unable to recover the proceeds it paid for damages to the Work and
non-Work property. The district court did not err in granting Entrex's motion
for summary judgment or in dismissing Lexington's claims for the insurance
proceeds it paid.
AFFIRMED.