State Specific: Maryland
Maryland Court Holds Waiver of Subrogation Contract Language Does Not Bar Recovery After Project Completion and Final Payment
This article was originally published in NASP’s Subrogator Spring/Summer 2010 publication. © 2010. Reprinted by permission.
In Hartford Underwriters Insurance Company v. Phoebus,[1] a Maryland appellate court ruled that an insurance company’s subrogation claim could proceed against a general contractor and subcontractor, despite subrogation waivers in the AlA form construction contract governing the contractors’ work. In Phoebus, the plaintiff-insurer issued a property insurance policy to a restaurant’s owner subsequent to the restaurant’s construction. When a fire damaged the restaurant and it was determined that defective electrical wiring and components caused the fire, the insurer sought recovery from the contractors who performed electrical work during the restaurant’s construction.
The defendants argued that the AlA contract barred recovery because it contained waiver of subrogation clauses and required the restaurant owner to look to its property insurance in the event of perils such as fire.
In considering the defendants’ arguments, the primary issue the court considered was whether the subrogation waiver triggered when the restaurant owner obtained insurance on the post-construction restaurant. The court found that when the “Waiver of Subrogation” and “Final Payment Waiver Exception” clauses were read together, subrogation was waived before completion and final payment on the construction, but subrogation was not waived after completion and final payment.
The court relied on a Missouri court’s analysis of the AlA Contract clauses in a factually-similar matter.[2] In that case, the court held that the subrogation waiver terminated upon completion and payment on the project. First, it found the definition of “work” and “Waiver of Subrogation” clause in the AlA contract were ambiguous as to whether the waiver would, or even could, continue after completion and final payment. It found that the term “work” includes a completed structure, bur only until final payment is made. The completed structure will no longer be “work” after final payment, and therefore, the waiver only applies to the completed structure up until the point of final payment. Second, reading the plain language of the “Final Payment Waiver Exception” clause is inconsistent with the interpretation that the “Waiver of Subrogation” clause could survive completion and final payment. [3]
For those reasons, the court remanded the case to proceed against the defendant-contractors.
Similarly, the Phoebus court found that the “Waiver of Subrogation” clause applied before final payment, and the “Final Payment Waiver Exception” clause applied after final payment. The “Waiver of Subrogation” and “Final Payment Waiver Exception” clauses, when read together, covered the time period before and after completion of the construction. The court remanded the case to proceed against the defendants.
The defendants have appealed the court’s ruling.
[1] 979 A.2d 299 (Md. App. 2009).
[2] Automobile Insurance Ca. of Hartfard v. United HRB.General Can/radaTS. Inc. 876 S.w. 2d 791 (Ma.ClApp.1994). In both Phoebus and United H.R.B., the AlA contracts did contain both a ‘Waiver of Subrogation” and “Final Payment Waiver Exception” clause, but no clause relating to “Completed Project Insurance.”
[3] The “Final Payment Waiver Exception” clause provides that by making final payment, the owner waives all claims except those arising from faulty or defective