Contractors Not Protected from Subrogation Action in Water Damage Claim
In a recent case decided by the U.S. District Court in Massachusetts, the Court held that a general contractor and its mechanical subcontractor must defend a subrogation action from the owner’s builder’s risk insurance carrier and are not protected by the anti-subrogation doctrine. In the case, Factory Mutual Insurance Company, v. Skanska USA Building, Inc. and J.C. Cannistraro, No. 18-cv-11700-DLC, 2020 WL 2838860, the builder’s risk carrier filed a subrogation action against the contractors which it deemed to be negligent for the flawed installation of a cleanout plug that failed and allowed municipal water flood the project site. The contractor’s sought summary judgement on the grounds that the anti-subrogation doctrine, which bars an insurer from bringing a subrogation action against its own insured, barred the subrogation claim.
Under the policy, the owner was listed as the ‘Named Insured’ and the policy contained a ‘property damage’ provision that “insures the interest of contractors and subcontractors in insured property ... to the extent of the Insured's legal liability for insured physical loss or damage to such property.” The Policy also contained a ‘Loss Adjustment’ provision which provided that “[a]dditional insured interests will also be included in loss payment as their interests may appear when named as additional named insured, lender, mortgagee and/or loss payee either on a Certificate of Insurance or other evidence of insurance on file with the Company...”
The Court noted that the insurer has no right of subrogation against its own insured, and thus may not seek indemnification against a third party if the third party also happens to qualify as an insured under the policy. Defendants argued that they qualify as insureds because the policy's ‘Property Damage’ provision “also insures the interest of contractors and subcontractors in insured property during construction at an insured location ... to the extent of the Insured's legal liability for insured physical loss or damage to such property.” Defendants argue, essentially, that term “Insureds” applies to them and their “legal liability for loss or damage.”
The Court did not agree with the contractors’ interpretation of the policy terms. Noting that the term ‘Insured’s’ must be read to refer to the policy named insured, i.e. the owner, which was clearly and unambiguously defined in the policy to include only the project owner. Defendants did not directly argue that the term ‘Insured’ extended to encompass them. Furthermore, the Court noted that the carrier was seeking to recover damages from the contractors due to their own fault, not the fault of the Insured, as permitted by the policy language. The Court also reasoned that its decision would be consistent with prior Massachusetts cases interpreting “Named Insured” provisions and the special means assigned to capitalized terms in contract interpretation.
Lastly, the court looked to the contract between the parties to determine the intended risk allocation with regard to builder’s risk type claims. The court noted that Skanska agreed to provide a CCIP program for the project and the parties agreed to a unilateral waiver of subrogation in favor of the owner only with owner retaining all rights of subrogation.
This case should be instructive to owners and contractors negotiating contractual insurance provisions. Specifically, care should be taken when considering the impact of waivers of subrogation as omitting such waivers, or drafting them carelessly could leave the contractor exposed to significant risk that may not be otherwise insurable. While not likely the case here, owners and contractors relying on insurance policies furnished by their contracting counterparty should carefully review the underlying policies and endorsements to independently confirm they will receive the intended benefits in the event of an insurable loss.