Maryland High Court Finds Waiver of Subrogation Provision May Be Inapplicable

Not much subrogation news out of New York this month.  I highlight a decision from Maryland’s highest court last summer, which interpreted an AIA waiver of subrogation clause in a construction contract.[1]   Sixteen (16) months after final payment was made on a restaurant construction job, fire broke out which destroyed the structure.  Hartford paid over a million dollars and subrogated against the GC and electrical contractor, alleging that the fire was caused by a failure of electrical wiring.

Not much subrogation news out of New York this month.  I highlight a decision from Maryland’s highest court last summer, which interpreted an AIA waiver of subrogation clause in a construction contract.   Sixteen (16) months after final payment was made on a restaurant construction job, fire broke out which destroyed the structure.  Hartford paid over a million dollars and subrogated against the GC and electrical contractor, alleging that the fire was caused by a failure of electrical wiring.

The subject contract required the Owner to purchase property insurance “until final payment has been made.”  Under “Waivers of Subrogation,” the contract provided that the Owner and Contractor “waived[d] all rights against… each other and any of their subcontractors” for damage “covered by property insurance… applicable to the Work.”   The term “Work” was defined as “the construction and services required by the Contract Documents, whether completed or partially completed.”  Finally, the contract provided that “The making of final payment shall constitute a waiver of claims by the Owner except those arising from… failure of the Work to comply with the requirements of the Contract Documents.” 

The court found these provisions to be vague and ambiguous, and that when the definition of “Work” was read in conjunction with the Waiver of Subrogation provision, it was unclear whether the parties meant to waive all claims or just claims which occurred during the actual construction of the building (i.e., prior to final payment).  Further complicating matters was the fact that the “final payment” provision seemed to clearly state that claims of poor workmanship survived the last payment made.

The Court remanded the case back down to the trial court, with instructions that the contractor must prove what its “intent” was at the time it proposed this AIA contract. 

Bottom Line:   To my knowledge, this case has not yet been followed by any New York court.  It is an interesting precedent in finding ambiguity in the AIA standard construction contract and at least opening the door to a finding that the waiver applies only to claims that arise during the period of construction.  In all subrogation-construction cases, you should obtain a copy of the construction contract from your insured as early as possible, to determine what, if any, specific language is contained therein which might affect your ability to subrogate.

[1] Mattingly v. Hartford Underwriters Ins. Co., Maryland Ct of App. No. 136 (July 27, 2010