Waiver of Subrogation Provision Is Enforceable Against Gross Negligence Claim And Applies To Both The Work And Non-Work Property
July, 2008
The Nebraska Supreme Court holds in Lexington Ins. Co. v. Entrex Communication Services, Inc., 749 N.W.2d 124 (Neb. 2008), that a waiver of subrogation provision in a construction contract will bar claims of gross negligence. The court further held that the waiver applied to not only the property included within the Project/work, but other non-work related property.
Facts
The basic facts were not in dispute. Hearst owned and operated a television station; Hearst contracted with Entrex to modify the television broadcast tower; Entrex subcontracted the work to Communication Structures, who subcontracted the work to Dudutis Erection. Hearst’s contract with Entrex required Hearst to acquire property insurance for the Project; Hearst did not acquire specific insurance for the Project, but relied upon its existing all-risk property insurance policies with Lexington (and others); the tower collapsed; Hearst submitted a property damage claim to Lexington in excess of $6 million; Lexington indemnified Hearst; and Lexington commenced a subrogation action against Entrex alleging that the tower’s collapse was a result of Entrex’s gross negligence.
Entrex moved for summary judgment. Entrex argued that the waiver of subrogation provision barred all subrogation claims. The trial court agreed and dismissed all subrogation claims. Lexington appealed.
The contract between Hearst and Entrex was a standard AIA contract, which incorporated document A201-1997. Paragraph 11.4.7 contained the waiver of subrogation wording. The provision stated, 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.
Analysis
The Nebraska Supreme Court reviewed case law concerning a waiver of subrogation provision’s impact on a claim of gross negligence. The court noted that the courts are split as to whether a waiver of subrogation provision should apply to a claim of gross negligence. In the end, the court stated:
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].”
Next, the court addressed the scope of the waiver of subrogation provision. Specifically, the court addressed whether the waiver provision barred damages to non-work property (i.e., building). The court noted that courts are not consistent on this issue. The majority of jurisdictions “draw no distinction between Work and non-Work, but instead, limit[] the scope of the waiver to the proceeds of the insurance provided under the contract between the owner and contractor.”
In the end, the court found the majority’s approach persuasive. The court held 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.
Learning Point
In Nebraska, when faced with a standard AIA waiver of subrogation provision, the subrogee will not be able to argue that the provision does not apply because the tortfeasor’s conduct was grossly negligence. Further, if the subrogee’s Policy insured both Work and non-Work property, the waiver provision will apply to all property damage.
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