By AIA Contract Documents
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A201-2017 General Conditions of the Contract for Construction
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August 30, 2022
Waiver of subrogation clauses have long been a key feature in construction contracts, and recent legal cases continue to highlight their importance. A waiver of subrogation is a provision that prevents one party’s insurance carrier from pursuing a claim against another party to recover losses paid on a covered claim. This clause is designed to reduce conflicts between project participants, minimize litigation, and help allocate risks more fairly in construction projects. In this article, we will explore how waiver of subrogation clauses work, using the 2022 Bohn Motor case as an example, and examine the role of such clauses in property insurance.
A waiver of subrogation is a provision commonly found in construction contracts and property insurance policies. It ensures that if a loss occurs, such as damage to a building, the insurance company will cover the costs without the option to recover those funds from another party, such as the general contractor or subcontractors. This prevents legal disputes between the parties involved in a project, allowing all parties to focus on completing the work rather than getting entangled in lawsuits.
A recent case that sheds light on the application of waiver of subrogation clauses is 2700 Bohn Motor, LLC v. F.H. Myers Construction Corp. (La. App. 4 Cir. 4/20/2022). In this case, a fire occurred during the restoration of the historic Bohn Motor Company automobile dealership in New Orleans. The building owner and its property insurers sought to recover damages from the general contractor and subcontractors under the builder’s risk insurance.
However, the owner and general contractor had agreed to a mutual waiver of subrogation, as outlined in the standard AIA Contract Documents. This clause stated that the contracting parties waived “all rights” against each other, as well as their subcontractors, sub-subcontractors, agents, and employees. The appellate court upheld the trial court’s decision, granting summary judgment to the contractor and subcontractors, and concluding that the claims from the owner and insurer were barred by the waiver of subrogation clause in the contract.
This case demonstrates how such clauses can significantly impact the outcome of construction-related legal disputes, preventing claims from being pursued in situations where they might otherwise have been filed.
Waiver of subrogation clauses have long been included in AIA Contract Documents for good reason. These clauses serve several important functions:
The inclusion of a waiver of subrogation clause in property insurance is a powerful tool in risk management. By shifting the responsibility for losses to the insurance company, the waiver helps project participants avoid direct financial responsibility for damages. This ensures that builder’s risk insurance or other property insurance policies are the primary sources of coverage in the event of a loss.
This provision first appeared in the 1958 edition of AIA’s A201, and it has been included in every subsequent edition. The AIA Contract Documents have long recognized the value of integrating existing insurance products to address the unique risks of construction projects. This integration helps reduce the likelihood of claims among parties that could delay or halt progress.
The legal impact of a waiver of subrogation clause is clear: it prevents a party’s insurance from pursuing reimbursement from another party involved in the project. This clause is especially significant in preventing complex and costly litigation.
Financially, the impact is equally important. Without a waiver of subrogation, project participants might face high legal costs and financial penalties if an insurer decides to pursue claims. The insurance carrier can manage these risks across multiple projects and reduce overall costs, which benefits everyone involved in the construction project.
The AIA Contract Documents have been widely adopted in the industry for their approach to property insurance and subrogation waivers. However, it is important to note that other industry frameworks, such as ConsensusDocs and EJCDC, also use similar provisions to manage risks. These trade associations agree that the approach used by AIA is an effective way to fairly allocate risks and avoid unnecessary litigation in construction projects.
The mutual waiver of subrogation has become the standard practice in most major construction contracts, with these frameworks offering variations of the same principle to help reduce conflicts and ensure that risks are managed effectively.
Incorporating a waiver of subrogation clause into construction contracts and property insurance policies is essential for managing risk, avoiding litigation, and ensuring smooth project execution. The 2022 Bohn Motor case highlights the importance of these clauses, demonstrating how they can help resolve disputes and protect parties from costly claims. By shifting the responsibility for damages to the insurer, these clauses minimize the financial burden on contractors, subcontractors, and property owners.
The construction industry continues to rely on established frameworks like AIA Contract Documents, understanding how these provisions work is crucial for anyone involved in the construction process.
AIA Contract Documents has provided this article for general informational purposes only. The information provided is not legal opinion or legal advice and does not create an attorney-client relationship of any kind. This article is also not intended to provide guidance as to how project parties should interpret their specific contracts or resolve contract disputes, as those decisions will need to be made in consultation with legal counsel, insurance counsel, and other professionals, and based upon a multitude of factors.