Chapter 15c Owners, Contractors, and Subcontractors

• Library: The Handbook on Additional Insureds (ABA) (2018 Ed.)

CHAPTER 15C Owners, Contractors, and Subcontractors

Lyndon F. Bittle

Construction projects are the backdrop for many, perhaps most, of the issues addressed throughout this book. Injuries and damages attributed to construction defects and accidents trigger finger-pointing, liability lawsuits, and insurance claims involving every link in the construction chain—owners, general contractors, subcontractors, and their employees. This subchapter, to avoid unnecessary duplication, will focus on additional-insured issues particularly pertinent to the construction industry. The most common policies procured for construction projects that give rise to additional-insured issues are builder's risk and general liability policies.

I. Builder's Risk Policies

Builder's risk coverage is a specialized type of property insurance that covers property losses associated with construction projects. As stated by the Eleventh Circuit, "[B]uilder's risk policies are used to insure the building while it is being built."¹Builder's risk policies typically cover the structure under construction as well as materials, fixtures, supplies, machinery, and equipment to be used in construction. The primary insured may be the project owner, in which case the general contractor, subcontractors, and possibly others may be (but are not always) additional insureds. On some projects, both the owner and the general contractor may obtain builder's risk insurance. Alternatively, the general contractor may be required to obtain builder's risk coverage and to include the owner and all subcontractors as additional insureds. A builder's risk policy ordinarily terminates when the construction or repair work is completed; care should be taken to avoid coverage gaps between builder's risk and permanent property coverage.

A. Waiver of Subrogation, Express or Implied

As a general rule, upon payment of a loss, an insurer is entitled to be subrogated to any claim that the insured may have against a third person whose negligence or wrongful act caused the loss.² Even though an insurer's right of subrogation is an action based in equity and thus does not require any formal assignment of the claim or any express stipulation of a right of subrogation, most insurance policies contain provisions giving the insurer a contractual right to subrogation. Such a provision might read as follows:

If the insured has rights to recover all or part of any payment we have made under the Coverage Part, those rights are transferred to us. The insured must do nothing after the loss to impair them. At our request, the insured will bring suit or will transfer those rights to us.

With respect to builder's risk policies, an insurer's right of subrogation can frustrate the very purpose of the coverage, which is to transfer the risk of losses from property damage to the insurer and away from the owner, general contractor, and subcontractors. For example, if a builder's risk insurer pays a claim to a project owner and then brings a subrogation action against a contractor that is allegedly responsible for the loss, the defendant contractor is likely to file contributory negligence actions against or seek indemnification from other contractors. The end result can be a litigation mess that throws the project off course, thus negating the value of the builder's risk policy. Because subrogation rights can defeat the purpose of a builder's risk policy, the insurer's subrogation rights are often waived as to all insured parties, including named insureds and additional insureds. The waiver of subrogation can be express or implied.

1. Express Waivers of Subrogation

An express waiver of subrogation is one that is made by contractual agreement and reflected in the policy. General contractors and subcontractors may be contractually required to waive the right to pursue claims directly against the owner and/ or other contractors. A contractual waiver impacts the insurer's subrogation rights because an insurer pursuing a subrogation claim stands in the shoes of its insured and thus has no greater right than the insured to bring claims.³ Therefore, if the insured has waived or released its claims against another party, the waiver generally extends to the insurer.

Whereas a contractual waiver of subrogation between insureds can defeat an insurer's right of subrogation, such a waiver may be ineffective if it is not accompanied by parallel provisions in the builder's risk policy. If the policy expressly gives the insurer a right of subrogation and requires insureds not to impair that right, the waiver may put the policyholder in breach of the conditions of the policy, as well as the underlying construction contract. A builder's risk policyholder can avoid this situation by making sure that the policy includes a provision expressly waiving the insurer's right of subrogation against specified parties (e.g., all contractors and subcontractors), or allowing the policyholder to waive its rights of recovery against certain parties when contractually required to do so. Such a provision might read as follows:

You may waive your rights against another party in writing: 1) prior to loss to Covered Property; or 2) after a loss to Covered Property if, at the time of loss, that party is one of the following: (a) someone insured by this insurance; (b) a business from that is (i) owned or controlled by you; or (ii) that owns or controls you; or (c) your tenant.

A more restrictive provision might read: "You may waive your right to recover from others in writing before a loss occurs."⁴ Under this language, waiver of subrogation may depend on the scope and effectiveness of the insured's pre-loss waiver of recovery, whether contained in the construction contract or other written instrument.

A 2005 case from the Second Circuit illustrates the effectiveness of properly comprehensive waivers of subrogation in assuring that a builder's risk policy will provide the expected coverage. In St. Paul Fire & Marine Insurance Co. v. Universal Builders Supply, the contract between the project owners and the general contractor, Universal Builders Supply ("UBS"), required the owners to obtain a builder's risk policy that would cover not only the owners but also UBS as the general contractor and all subcontractors as additional insureds.⁵ The owners were required to obtain a policy that contained a waiver of subrogation clause in which the insurer waived its right to seek reimbursement for a paid claim from any other party that was also an insured under the policy.⁶ The contract also waived the rights of the owners and UBS to bring claims against each other or any subcontractors for damage covered by the builder's risk policy and required that all contracts with subcontractors include similar waivers in favor of all parties.⁷ The owners duly obtained a builder's risk policy that permitted the owners to waive their rights against other parties prior to any loss to the covered property.⁸ During the course of construction, a forty-nine-story scaffolding for which UBS was responsible collapsed, causing $20 million in property losses.⁹ The builder's risk insurer paid the owners' claim, but then brought a subrogation action against UBS.¹⁰ The insurer argued that the waivers of subrogation were unenforceable on the grounds that: (1) UBS had, in breach of its contract with the owners, obtained liability insurance policies that did not permit waivers of subrogation, and (2) New York law, as a matter of public policy, prohibited a contractual waiver of subrogation with respect to a claim of gross negligence.¹¹ The court rejected both arguments, first pointing out that UBS's contract with the owners required that only the builder's risk policy, and not liability policies, include a waiver of subrogation.¹² Second, while New York law would not enforce contractual exculpation clauses that attempted to relieve one party of liability to another for gross negligence, this tenet of public policy did not preclude enforcement of waivers of subrogation in a builder's risk policy where gross negligence may have been involved.¹³ The court endorsed waivers of subrogation under builder's risk policies generally, stating that

A waiver of subrogation is useful . . . because it avoids disruption and disputes

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