Parties to construction contracts seeking to manage risk through waiver of subrogation provisions got a boost in Wisconsin with a key Supreme Court ruling last year.
In Rural Mut. Ins. Co. v. Lester Buildings, LLC, et al., 387 Wis.2d 414, 929 N.W.2d 180 (Wis. 2019), an insurance company issued a property insurance policy covering a barn that was constructed by a builder. When a severe wind event caused the barn to collapse, the insurance company paid for the loss under the subject policy, and then initiated a subrogation action against the builder. For the purpose of constructing the barn, however, the insured and the builder entered into a construction contract that, among other things, required both parties to waive subrogation rights for damages otherwise covered by insurance.
The insurance company filed suit against the builder to recover the amount paid under the insurance policy. The builder filed a motion for summary judgment, arguing the waiver of subrogation precluded the insurance company’s claim. The insurance company’s argument in opposition was two-fold: First, that Wisconsin Statute § 895.447—which states, in relevant part, that “any provision to limit or eliminate tort liability as a part of any contract…relating to the construction…of a build-ing…is against public policy and void”—applied to void the waiver; and second, that the waiver was void as an unenforceable exculpatory contract.
After maneuvering through the trial court and court of appeals, the Wisconsin Supreme Court disagreed, holding the statute did not void the waiver and, importantly, declared that waiver of subrogation provisions are not unenforceable exculpatory contracts under Wisconsin law. Such provisions do not fall within the confines of being an unenforceable exculpatory contract, the court concluded, because the “victim,” i.e. the party to whom the harm was done by the tortfeasor’s conduct, is “made whole” through payment under the insurance policy.
Waiver of Subrogation Provisions
Waiver of subrogation provisions are an often-used tool by parties—to construction contracts in particular—as a means to manage risk at the outset of a project. Such provisions, along with clauses addressing indemnity and damages limitations, allow parties to limit exposure in the event of an unexpected occurrence as a result of services provided on a project.
Waiver of subrogation provisions are attractive to parties to a contract because they avoid protracted litigation that could hold up the progress of a construction project. They allow the parties to remain focused on a project, and transfer the risk to insurers—entities that exist exclusively as a way for companies to manage such risk. They also protect the assets and viability of businesses that cannot absorb significant losses—businesses that are often family-owned home builders and small architectural firms.
Questions remain, however, even after this ruling, regarding the enforceability of waiver of subrogation provisions in other instances. The insurance policy issued by Rural Mutual explicitly permit-ted the insured to waive its subrogation rights. In doing so, the court surmised, “[The insurance company] received a benefit, in the form of premium payments, for expressly allowing its insured to allocate risk in this way. We will not rewrite [the insurer’s] policy to exonerate it from a risk that it contemplated and for which it received a premium.”
The court did not address whether it would still deem the waiver of subrogation provision enforceable where the associated insurance policy explicitly barred the insured from agreeing to waive its subrogation rights. Even more ambiguous are instances where the insurance policy is silent on the issue altogether. As such, to accomplish the goal of having an effective waiver, the waiver should entail two separate provisions: A waiver of subrogation clause contained in the contract, and a provision in the insurance policy granting permission to the insured to waive recovery rights.
More generally, and for the purpose of addressing the entirety of a company’s risk allocation scheme, companies should ensure the applicable provisions in the contract documents are comprehensive, explicit, and unambiguous. To do this, key terms must be defined and consistent across all documents governing the relationship. Acquiring insurance covering the project should be mandated.
A survey of waiver of subrogation provisions shows distinct differences in the waivers’ scope. Some apply to losses only sustained during the course of a project, while others extend the waiver to apply to losses that could be sustained, as in Rural, after the project is complete. Clarity in the language is key and, based on that, the required insurance could be in the form of a builders risk policy, a comprehensive general liability policy, or, as in the case of Rural, a property insurance policy.
For certain, Wisconsin’s Supreme Court has now formally endorsed the use of these provisions in contracts covering projects in the state. A vast majority of states elsewhere have similarly endorsed the use of these provisions. Given this, companies can continue operating with confidence that such provisions, when precisely crafted, effectively manage the risk associating with operating a construction business in a world of uncertainties.