Waiver of Subrogation - Good News for General Contractors
Thursday, September 8, 2011 at 12:49PM
Jack DiNicola

A recent Massachusetts Appeals Court case held that a waiver of subrogation clause was enforceable by the general contractor even though the general contractor failed to obtain a waiver of subrogation from a subcontractor as required by the general contract.  In North Am. Specialty Ins. Co. v. Payton Constr. Corp., Appeals Court No. 09-P-1391 (September 8, 2011), the all risk insurer sued a general contractor and two subcontractors as subrogee to the project owner after the insurer paid a claim for fire damage.  At issue was the American Institute of Architects A201 General Conditions, which contains the waiver of subrogation language.  That provision waives either party's rights against the other for claims covered by property insurance.  Therefore, when a property insurer pays a claim, even though it subrogates to the rights of that particular party (the owner in this case), the parties had previously waived those rights against one another and the insurer has no recourse.

The waiver of subrogation provision also required the general contractor to include similar provisions in its subcontracts with all of its subcontractors.  In North Am., the general contractor did not procure a waiver of subrogation with one of the subcontractors that was alleged to have caused (at least in part) the fire.  The insurer argued that the general contractor's failure to obtain a waiver of subrogation from the subcontractor was (1) a material breach of the general contract; and (2) as such, the entire waiver of subrogation provision was void and unenforceable.

The Superior Court and the Appeals Court disagreed.  The Appeals Court succintly held, "that the failure of a general contractor to obtain a waiver from a subcontractor under the AIA contract, in circumstances such as presented here, does not invalidate the subrogation waiver, nor does it render it unenforceable.  In short, the insurer, North American, is bound by the subrogation waiver set forth in the AIA contract at issue."

The waiver of subrogation clause is one of the most important clauses in a construction contract because it defines and limits risk.  This case is significant because (1) it enforced the waiver of subrogation clause; and (2) it enforced the clause even though there was a technical violation of the clause by the general contractor.  It is in the best interests of all parties to a construction project to have appropriately drafted waiver of subrogation clauses in all contracts.  However, in the event aproject participant does not consent to such a clause, this case makes it clear that a party that has a waiver of subrogation clause in its contract can utilize it, and it will be enforced.

Article originally appeared on DiNicola Seligson & Upton (http://dsu-law.com/).
See website for complete article licensing information.