When Does the Waiver of Subrogation Apply?
December 1, 2007
The question is frequently asked as to whether parties to a burglar or fire alarm contract can or should include a waiver of subrogation clause.
A recent case in the United States District Court for the District of Massachusetts dealt with a waiver of subrogation provision in the contract. Subrogation occurs when an insurance company seeks to recover the sum it paid to its insured from a negligent defendant. Waiver of the right to subrogation is an agreement the parties sign where the insured waives the insurance company’s right to subrogate. In the case at hand, the insurer, as subrogee, sued a general contractor and several subcontractors for fire damage that occurred at the insured’s facility to recover the amount it paid to its insured allegedly as a result of the negligent installation and inspection of certain equipment.
The contract between plaintiff’s insured and the defendants included a waiver of subrogation clause.
After the completion of construction, a fire occurred causing significant property damage and the destruction of the system. The insurance company paid its insured for damages resulting from the fire and sought to recover that amount from the defendants.
The defendants filed motions for summary judgment on the grounds that any such recovery is barred by the waiver of subrogation clause. In addition, one of the defendants filed a motion for summary judgment to limit recovery under a limitation of liability clause in a separate inspection contract between it and the owner.
The court pointed out that even though Massachusetts recognizes a waiver of subrogation, the waiver applied only to insurance that covered the contractor and the subcontractor’s work while the work was ongoing. In this case, the fire occurred after the work was completed. Therefore, the parties waived their right to subrogation only with respect to damage occurring before final payment is made. Therefore, although the court recognized the waiver of subrogation, the motions for summary judgment were denied as the fire occurred after the completion of the construction.
With reference to the limitation of liability provision, plaintiff brought a subrogation claim for breach of contract against the contractor based upon work that the contractor performed for the plaintiff’s insured after completion of the project under an independent sprinkler inspection contract. The agreement contained a limitation of liability clause whereby any potential recovery was limited to the value of the contract price. The court ruled that the limitation of liability clause will, in any event, be enforced, and defendant’s motion for summary judgment will to that extent be allowed.