Insights

Subrogation is a legal principle which allows one person, called the subrogee, to be substituted to the rights of another, called the subrogor. One of the most common occurrences of subrogation is when a property insurance company, upon paying a damage claim, is substituted for the claims of the insured, typically the property owner, entitling the insurance company to pursue recovery against the entity or person who caused the loss.

In construction cases, where the owner purchases Builder’s Risk coverage for the project, subrogated insurance companies could cause significant interruptions in the progress of the work by seeking recovery against the contractor or other negligent party through litigation.  To avoid such litigation, many construction contracts contain provisions in which the owner and contractor waive all rights against each other to the extent the damages are covered by property insurance, typically the owner’s. Such provisions have the added salutary benefit of denying the property insurer of any subrogation to the owner’s (or contractor’s) claims for damages.

These “subrogation waivers,” as they have come to be called, can be a lifesaver for the contractor. Such clauses allow contractors, who would normally shoulder all risk of loss before project completion, to completely avoid that risk to the extent that insurance covers the loss. The intent is to eliminate litigation that would otherwise disrupt construction by having contracting parties look only to the owner's insurance for protection in the event of loss.

A particularly common subrogation waiver is contained in the American Institute of Architects (“AIA”) A201 General Conditions form. This clause, A201-2017, § 11.3.1 (“Section 11.3.1”)[1] provides that:

The Owner and Contractor waive all rights against (1) each other and any of their subcontractors, sub-subcontractors, agents and employees, each of the other, and (2) the Architect, Architect's consultants, separate contractors described in Article 6, if any, and any of their subcontractors, sub-subcontractors, agents and employees, for damages caused by fire or other causes of loss to the extent covered by property insurance obtained pursuant to this Section 11.3 or other property insurance applicable to the Work.[2]

While the U.S. Fifth Circuit Court of Appeals has noted that Section 11.3.1 has generated “more than its fair share of litigation,”[3] Louisiana appellate courts have rarely considered the application and enforceability of Section 11.3.1. [4]

In 2700 Bohn Motor, LLC v. F.H. Myers Constr. Corp., 2021-0671, (La. App. 4 Cir. 4/20/22) 338 So.3d 500, the Louisiana Fourth Circuit Court of Appeal provided welcome guidance, holding both that Section 11.3.1 was enforceable and, also protected non-signatory subcontractors and that the clause did not violate Louisiana’s anti-indemnity statute, La. R.S. 9:2780.1

In Bohn Motor, a fire occurred during the renovation of an automobile dealership in New Orleans. The owner and its insurer paid the costs for repairs and then sued the general contractor and multiple subcontractors for negligence. The trial dismissed by summary judgment all claims against the contractor and several of the subcontractors.

The Fourth Circuit affirmed. First, the court held that Section 11.3.1 did not violate Louisiana’s anti-indemnification statute because a waiver of subrogation clause did not shift liability between the parties, in the absence of an indemnity provision which the contract did not contain. In the absence of an indemnity clause, the subrogation waiver merely allocated the risk of loss to the extent of insurance coverage.

Second, the Fourth Circuit found Section 11.3.1 to be enforceable even as to non-signatory subcontractors. Louisiana’s Civil Code Article 1978 permits contracting parties to stipulate a benefit for a third person, commonly referred to as a “stipulation pour autrui.” Three factors are used to determine whether contracting parties provided a benefit for a third party: 1) the stipulation is manifestly clear; 2) there is certainty as to the benefit provided; and 3) the benefit is not a mere incident of the contract. The Fourth Circuit found the plain language of Section 11.3.1 was manifestly clear, the benefit certain and not incident, thereby establishing the subcontractors as third-party beneficiaries of the A201 contract under Louisiana law.

In Board of Trustees of Oakton, Community College District #535 v. Legat Architects, Inc., 2022 Ill. App. 210155-U, 2022WL1201821 the Board of Trustees of an Illinois community college, entered into a contract with various contractors and subcontractor defendants, including the architect for construction of a new building on their campus. This contract expressly incorporated, by reference, the A201-2007 General Conditions of the Contract for Construction, including Section 11.3.1. The College filed suit after the concrete slab for a new campus building settled unevenly and had to be demolished and replaced.

The architect filed a motion for summary judgment, arguing plaintiff's claims were barred pursuant to Section 11.3.1 and specifically that the architect was an intended third-party beneficiary to the contract based on Section 11.3.1. The trial court granted the architect’s motion and plaintiff appealed. The Illinois Appellate Court found that the architect was 'undoubtedly' an intended third-party beneficiary, as the architect is one of the parties explicitly identified in Section 11.3.1, and that Section 11.3.1 constituted an 'unequivocal intended benefit' to the architect.

Additionally, the Court pointed to Section 1.1.2 of the A201 Agreement, stating:

“Additionally, Section 1.1.2 of the CM agreement expressly states: “The Architect shall, however, be entitled to performance and enforcement of obligations under the Contract intended to facilitate performance of the Architect's duties.” The only way to interpret that language is as an explicit intention to benefit Legat with rights under the CM agreement.”

The Appellate Court ultimately held that the architect was an intended third-party beneficiary to the contract and affirmed summary judgment in the architect’s favor.

The Bohn Motor case established that a subrogation waiver such as Section 11.3.1 can apply to the signatories’ subcontractors if the clause satisfies the elements establishing the subcontractors as third-party beneficiaries. The Oakton decision demonstrates that application of Section 11.3.1 to architects and design professionals flows naturally from the reasoning in Bohn Motor for those seeking application of the AIA subrogation waiver to design professionals and other subcontractors.