Maine's Highest Court Rejects Argument That Gross Negligence is an Exception to a Waiver of Subrogation Provision
January, 2005
Various types of contracts (i.e., construction, leases, etc.) commonly contain a provision wherein the parties agree to waive claims for damages against each other to the extent the damages are covered by an injured party's insurance. Several courts have held that this contract provision effectively waives the subrogation rights of the injured party's insurer.
Generally, public policy is against exculpatory clauses that protect a party whose conduct is in reckless disregard for the consequences, which is one shade removed from intentional conduct. A recent development in subrogation law has been the recognition of a gross negligence exception to waivers of subrogation. See Am. Motorist Ins. Co. v. Morris Goldman Real Estate Corp., 277 F. Supp.2d 304, 308 (S.D.N.Y. 2003); Charter Oak Ins. Co. v. Trio Realty Co., 2002 U.S. Dist Lexis 1442, at 12, 2002 WL 123506, at 4 (S.D.N.Y. 2002); Travelers Indem. Co. of Conn. v. Losco Group, Inc., 136 F. Supp.2d 253, 256 (S.D.N.Y 2001); Colonial Props. Realty Ltd. P'ship v. Lowder Constr. Co., 256 Ga. App. 106, 567 S.E.2d 389, 394 (Ga. App. 2002). Clausen Miller represented the Plaintiff in Am. Motorist and convinced Judge Shira A. Scheindlin that a gross negligence exception applied to waivers of subrogation provisions.
Nevertheless, waivers of subrogation seem to stand on a different footing in some jurisdictions, even though they are exculpatory and seemingly against the general public policy. Some courts have presumed that such terms reflect (though not expressly stated) a negotiated commercial allocation of risk, and that those terms were taken into account by the parties' insurers in setting premiums. Clearly, this might not be correct in any given case. Whether there truly was such an allocation of risk first must be determined by an interpretation of each contract and then as a second issue whether that allocation extends to gross negligence or willful/wanton conduct.
A recent ruling by the Supreme Court of Maine highlights this subject. In Reliance National Indemnity v. Knowles, 2005 WL 415947 (2005), the Supreme Judicial Court of Maine declined to follow the recent line of cases holding that gross negligence is an exception to a waiver of subrogation provision and instead followed the decision of Judge Kimba Wood in St. Paul Fire & Marine Ins. Co. v. Universal Builders Supply, 317 F. Supp.2d 336, 341 (S.D.N.Y. 2004). In Knowles, a subcontractor's employee's careless smoking caused a fire at Saco's First Parish Congregational Church, UCC (“Church”). The Church's insurance carriers, proceeding by way of subrogation, sought to prove that employees of the subcontractor regularly smoked in areas where chemicals had been applied. The construction contract between the Church and its general contractor contained the following waiver of subrogation clause:
The Owner and Contractor waive all rights against each other, separate contractors, and all other subcontractors for damages caused by fire or other perils to the extent covered by Builder's Risk or any other property insurance, except such rights as they may have to the proceeds of such insurance.
The insurance carriers maintained that the conduct of the subcontractors was not merely negligent, but willful and wanton - - grossly negligent. The trial court held that the contractual waiver of subrogation provision barred the claims of the insurance carriers, as well as the product liability claims against the manufacturer of the chemicals, who were considered subcontractors covered under the waiver of subrogation provision. The case was appealed to Maine's highest appellate court.
The Supreme Judicial Court of Maine criticized Reliance's attempt to carve out an exception for willful and wanton conduct, the Court recognized that Maine does not subscribe to the view that there are categories of negligence in the first place. Essentially, there can be no gross negligence exception because there is no distinction between ordinary and gross negligence, in the first instance under Maine law. Knowles, at *4 (citing Cratty v. Samuel Aceto & Co., 151 Me. 126, 131, 116 A.2d 623, 627 (1955) (stating that “there are no degrees of care”)).
Despite stating that “there are no degrees of care,” the Court nonetheless accepted that gross negligence or willful and wanton conduct generally renders exculpatory provisions void. However, relying on Judge Wood's analysis in Universal Builders, the Court held that waivers of subrogation were not, in fact, exculpatory clauses because “a party injured by another's gross negligence will still be able to recover its losses.” Knowles, at * 3 (citing St. Paul Fire & Marine Ins., at 341). Essentially, the Court viewed waiver of subrogation provisions as allocation of risk provisions and not exculpatory clauses.
In justifying its decision, the Court examined several public policy grounds. First and foremost, the Court explained that waiver of subrogation provisions fulfill the important social goal of allowing parties to a contract to anticipate risks and to purchase adequate insurance in order to avoid wasteful litigation. Knowles, at * 4. Secondly, the Court stated that waivers of subrogation are allocations of risk and thus deter litigation. The Court opined that the beneficial economic impact of deterring litigation diminished the necessity of maintaining additional policies for gross negligence and as carriers can rely on waiver of subrogation provisions there will be a beneficial impact on premiums. However, it is not entirely clear (and quite unlikely) that the record contained any evidence that there will be a beneficial economic impact or that insurance carriers will even be aware that their insured had a contract which included a waiver of subrogation provision. More likely, the Court was engaged in an activist manner and was improperly subsuming the role of the legislature.
Like Judge Wood's decision in Universal Builders, and unlike Judge Scheindlin's decision in Am. Motorist, the Court did not address the important social goal of discouraging reckless behavior. More careful behavior, of course, reduces claims against insurance policies and thus costs associated with insurance. Also, by placing liability on those most responsible for a claim, the premium rates can adequately be assessed to those engaging in risky behavior. Inexplicably, the Court assumed that there is an economic incentive for parties to refrain from grossly negligent conduct because their insurers will account for the waiver provisions in setting premiums. The Court failed to explain in its decision what evidence it was presented with indicating that insurance companies were aware when an insured has a waiver of subrogation provision with the potentially liable party.
Learning Point:
To be sure, the status of the newly created gross negligence exception to waiver of subrogation provisions is under attack. Knowles illustrates the pitfalls and opportunities of waivers of subrogation for insurers on both sides. It also illustrates that some courts present an anti-insurer bias that produces judge-made law on matters of public policy which are traditionally within the province of the state's legislature. The remedy for insurers on both sides of the issue is the educated advice of experienced counsel.•
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