Contract documents

December 1, 2022

One of the best ways to manage risk on construction projects is through insurance and bonds. Throughout the next several weeks, the AIA Contract Documents Program is going to release a series of articles pertaining to construction insurance. This is Part 4: Waivers of Subrogation.

Waivers of Subrogation

Waivers of subrogation can be complicated. Just saying them is a chore! But, they are critical parts of a construction project’s risk management profile. Let’s break them down.

What is Subrogation?

To understand a waiver of subrogation, you first must understand subrogation. Simply put, subrogation is the process by which you obtain someone else’s rights. It is most easily understood in the context of automobile accidents, in this way: if you are in an accident and the other driver was at fault, your insurance company will pay you for your injuries and will pay to fix your car, and then it will “subrogate” to your rights and can sue the other driver to try to recoup those payments it made to you. Before it made the payments to you, your insurance company had no legal right to sue the at-fault driver; only you did. It was only after the insurance company paid you that it obtained your rights to sue the other driver. This process us known as subrogation.

What is a Waiver of Subrogation?

Once you grasp the concept of subrogation – the process by which you absorb someone else’s rights – a waiver of subrogation is understood as simply waiving that right. In the construction context, parties usually waive subrogation in their contracts with each other, and this waiver is enforceable against their insurance carriers.

Why do Parties Waive Subrogation?

Imagine this scenario: the owner (and not the contractor) purchased a builder’s risk policy (see Part 2 of this series for an explanation of Builder’s Risk) for a large construction project – let’s say it’s worth $50 million when completed. When the contractor is one month away from substantial completion, a fire breaks out and burns the project to the ground. The owner is compensated $50 million through the builder’s risk policy proceeds. If the parties did not waive subrogation, the insurance company can sue the various project participants to recoup the $50 million it paid out to the owner. Those project participants could, in turn, look to their insurance companies for coverage of the owner’s lawsuit. Additionally, on the next project, the contractor (and anyone else who was sued) will also buy builder’s risk insurance to cover this same exact loss. This is inefficient – the parties should each purchase insurance to cover different aspects of the project without fear of future lawsuits from each other’s insurance company.

So, at the onset of the project, the parties agree that only one party – usually the owner – will purchase, for example, the builder’s risk policy and that they all will be covered by it such that the insurance company won’t try to recoup its losses by suing the other project participants.

Do AIA Contracts Contain Insurance Requirements Related to Waivers of Subrogation?

Yes. Article 11 of the A201-2017 contains broad waivers of subrogation for damages covered by fire or other causes of loss, to the extent those losses are covered by property insurance required by the agreement or other property insurance applicable to the project:

• 11.3.1 The Owner and Contractor waive all rights against (1) each other and any of their subcontractors, sub-subcontractors, agents, and employees, each of the other; (2) the Architect and Architect’s consultants; and (3) Separate Contractors, if any, and any of their subcontractors, sub-subcontractors, agents, and employees, for damages caused by fire, or other causes of loss, to the extent those losses are covered by property insurance required by the Agreement or other property insurance applicable to the Project, except such rights as they have to proceeds of such insurance. The Owner or Contractor, as appropriate, shall require similar written waivers in favor of the individuals and entities identified above from the Architect, Architect’s consultants, Separate Contractors, subcontractors, and sub-subcontractors. The policies of insurance purchased and maintained by each person or entity agreeing to waive claims pursuant to this section 11.3.1 shall not prohibit this waiver of subrogation. This waiver of subrogation shall be effective as to a person or entity (1) even though that person or entity would otherwise have a duty of indemnification, contractual or otherwise, (2) even though that person or entity did not pay the insurance premium directly or indirectly, or (3) whether or not the person or entity had an insurable interest in the damaged property.

Stay tuned for Part 5!

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.