No Bend In Waiver of Subrogation Clause

By Don R. Sampen, published, Chicago Daily Law Bulletin [December 13, 2016]

The 1st District Appellate Court recently construed an owner’s contractual waiver of subrogation in connection with a construction project.

The court held that the waiver was incorporated into the owner’s builder’s risk and property policies and was effective with respect to the general contractor and its subcontractors even though the damage to the premises was allegedly the result of willful and wanton misconduct. Empress Casino Joliet Corp. v. W.E. O’Neil Construction Co., 2016 IL App (1st) 151166 (Nov. 16, 2016).

Many law firms were involved in the case. They included Cozen O’Connor, which represented the owner, Empress Casino; the McDonald Law Firm, which represented the builder’s risk insurer, Axis Insurance Co.; Franks & Maroney, which represented the general contractor, W.E. O’Neil Construction Co.; and Hinshaw & Culbertson LLP, which represented Averus Inc.

Empress entered into a construction contract with O’Neil in 2008 for renovation of its casino property in Joliet. The contract required Empress to maintain both liability and property insurance for the project, with the property insurance covering the interests of O’Neil and its subcontractors. It also contained an explicit waiver of subrogation applicable to O’Neil and the subs.

Empress purchased a builder’s risk policy from Axis and “all-risk” property insurance from National Fire and Marine Insurance Co. and Lloyd’s Syndicate 1414. The latter two policies divided responsibility for loss at 90 percent for National Fire and 10 percent for Lloyd’s. Those policies also contained a subrogation provision stating that the insurers would not exercise any rights of recovery that the insured had waived prior to loss.

In 2009, large portions of the casino were destroy by fire, and Empress recovered more than $81 million from Axis, National Fire and Lloyd’s. Empress subsequently filed suit against O’Neil and some of its subcontractors. Empress also named as a defendant Averus Inc., which was not a subcontractor but a cleaning and maintenance service company separately contracted by Empress prior to the renovation contract.

Empress claimed that the fire was started as the result of the defendants’ negligent and willful and wanton misconduct. It sought to recover for itself and for its insurers. The three insurers then filed their own direct subrogation action against the defendants with allegations identical to those in Empress’ complaint. The two cases were consolidated.

The defendants moved for summary judgment, which the trial court allowed. Empress and the insurers took this appeal.

No waiver as to Averus

In an opinion by Justice James Fitzgerald Smith, the 1st District mostly affirmed. He first addressed the summary judgment entered in favor of Averus. The defendants argued that, even though Empress separately contracted with Averus, that company fell under the technical definition of a “contractor” in the construction contract to which the waiver of subrogation applied.

Smith disagreed. He acknowledged that the section of the contract the defendants relied on potentially waived subrogation with respect to other contractors that were not subcontractors or sub-subcontractors of O’Neil. But the wording of the section required that the contract entered into by Empress contain terms substantially similar to the O’Neil contract.

In this case, Empress had a pre-existing oral contract with Averus to clean ductwork, the failure of which allegedly contributed to the fire. Since that oral contract never discussed or contemplated a waiver of subrogation, Smith said the trial court erred in granting Averus summary judgment.

Willful conduct and other arguments

Smith next took up the argument by Empress and the insurers that the waiver of subrogation should not apply to conduct by the defendants that is allegedly willful and wanton. This argument was based on Illinois public policy, which, according to the defendants, barred the enforcement of exculpatory clauses where heightened misconduct is alleged.

Smith observed that nothing in the contract suggested that the parties intended an exception to the waiver provision to apply to fires caused by willful and wanton conduct. As to the public policy justification, he said that waivers of subrogation are not construed as exculpatory clauses in Illinois.

He therefore concluded that nothing in the state’s law or public policy prevented competent parties to a construction contract to negotiate among themselves a full waiver of subrogation rights, regardless of fault.

National Fire and Lloyd’s further contended that the waiver-of-subrogation provision was limited to the builder’s risk coverage issued by Axis and did not apply to their policies’ property coverage.

Basically, their argument seemed to be that their policies did not cover “property in the course of construction,” except for property in the “incidental course of construction,” which was defined as projects under $10 million.

Smith countered that the policies, by their terms, covered property not only in the care, custody or control of the insured, Empress, but also property in the care, custody or control of others. And here an Empress witness admitted that Empress placed the property in the care, custody or control of O’Neil during the construction. So the proposed limitation on coverage did not apply.

In addition, the construction contract provided for a waiver even where Empress insured properties adjacent to the construction site by property insurance separate from those insuring the project. Thus, Smith said, the waiver applied not only to the property under construction, but also to Empress’ property next door to the actual construction site.

Smith also rejected an argument that the defendants’ breaches of the construction contract barred enforcement of the subrogation waiver clause.

In addition he rejected the contention that O’Neil’s obligation to obtain liability insurance and to indemnify Empress for the claims arising out of the work, conflicted with the waiver-of-subrogation clause and constituted an exception to the waiver. He ultimately determined that the waiver provision trumped any indemnification obligation.

The 1st District, therefore, affirmed the summary judgments entered in favor of all defendants save Averus and reversed as to Averus.

Key points

Willful and wanton conduct by a tortfeasor as to whom a waiver-of-subrogation provision is otherwise effective will not invalidate the waiver.

A defendant’s indemnification obligation to an insured will not invalidate a waiver-of-subrogation provision in property insurance obtained by the insurer that is otherwise effective as to that defendant.