Aia Subrogation Waivers: Reason Reigns Supreme In Maryland

November 17, 2010

This articles was originally published in Claim’s Magazine Vol. 58, #11 (November, 2010).

 Court decisions concerning the scope and application of AIA subrogation waivers are vast and varied, but often employ strained legal logic.  Some courts focus narrowly on the meaning of the terms “Work” and “non-Work.”  Other courts base their analysis on “the extent to which property insurance” may exist.  And sometimes, courts fail to address the underlying rationale for why AIA subrogation waivers are executed in the first place, while also ignoring the internal ambiguities within AIA contract documents themselves.

The Court of Appeals of Maryland recently issued a well reasoned decision concerning the scope and application of AIA subrogation waivers.  In  John L. Mattingly Constr. Co., Inc. v. Hartford Underwriters Ins. Co.,1 the Court determined that AIA subrogation waivers did not extend to losses sustained after completion of, and payment for the project.  The Mattingly Court determined that AIA subrogation waivers were vague and ambiguous as to post-construction claims, when considered in conjunction with AIA contract documents that specifically allowed for post-construction claims for construction defects.
Mattingly is instructive, because the case dealt with a classic subrogation fact pattern:    The defendant contractors in Mattingly constructed a restaurant for a building owner pursuant to construction documents that included commonplace AIA subrogation waivers.  However, the contract documents also included language that allowed the building owner to seek recovery for post-construction defects.  Sixteen months after final payment for the project, a fire occurred at the restaurant, allegedly due to defective electrical wiring.  The owner’s property insurer, Hartford, consequently filed a subrogation claim against various contractors involved in the construction.  The contractors then filed Motions for Summary Judgment, arguing that certain AIA subrogation waivers barred Hartford’s claim, even for losses that occurred after completion of the project.

The Mattingly Court considered the following issue:  “[W]hether property insurance underwritten by Hartford, secured after completion of the restaurant, comes within this phrase, ‘other property insurance applicable to the Work,’ abrogating any rights of subrogation.”2  After reviewing the waiver language, the Court noted that the term “Work,” to which the waiver applied, had various meanings throughout the contract documents, making the term “ambiguous.”3  The Mattingly Court also found that the contract documents contemplated the owner’s ability to make claims for defective construction work after completion of the project, which was inconsistent with the waiver of subrogation.  Ultimately, the Court found the AIA subrogation waivers “ambiguous,” requiring the matter proceed to trial.  Per its directions on remand, the Court ordered that trial court to consider extrinsic evidence that could clarify the scope and application of the AIA subrogation waivers.4 

The Mattingly Court also embraced the reasoning of the Missouri Court of Appeals, in Automobile Ins. Co. v. United H.R.B. Gen. Contractors,5 which dealt with a similar post-construction fire loss with similar contract language.  In United H.R.B., the Court  recognized that for post-construction losses, a contractor seeking to use an AIA subrogation waiver to avoid liability, did so contrary to the notion of shared insurable interest, which is a fundamental rationale for why AIA subrogation waivers exist. 

Given the language of the contract taken as a whole, we are not persuaded that the waiver was intended to extend beyond the life of the contract.

                 …

Therefore, once final payment is made, the contractor retains no further interest in the project and the waiver is rendered inapplicable.

                 …

We find that the completed structure is no longer “work” after final payment is made and therefore the waiver of claims only applies to the completed structure up to the time of final payment.6

It is uniformly understood that when the contractors and owners have a shared insurable interest in the project, AIA subrogation waivers were designed to prevent litigation from impeding the project’s completion.

The policy underlying these [subrogation waiver] clauses is to avoid disruption and disputes among the parties to the project.
The need for lawsuits between the parties is eliminated because all contracting parties are protected from property loss under the owner’s property insurance.7

There are circumstances where AIA subrogation waivers are consistent with the goals for a construction project.  Generally speaking, AIA subrogation waivers should apply to projects under construction, and should be limited to the specific “work” at
issue.  As demonstrated in Mattingly, this interpretation comports with the plain meaning of the AIA construction documents and all notions of shared insurable interest, which also supports the underlying rationale for AIA subrogation waivers.

1 999 A.2d 1066 (Md. 2010).

2 Id. at 1074.
   
3 Id. at 1075.
 
4 Id. at 1079.
 
5 876 S.W. 2d 791 (Mo. Ct. App. 1994).

6 Id. at 794.

7 See Trinity Universal Ins. Co. v. Bill Cox Constr., Inc., 75 S.W. 3d 6 (Tex App. 2001).