The Subrogation Strategist

In Board of Commissioners of County of Jefferson v. Teton Corp., 30 N.E.3d 711 (Ind. 2015), Jefferson County hired Teton Corporation to perform renovation work on the Jefferson County courthouse. Teton hired subcontractors to perform the roofing work.

Jefferson County’s contract with Teton incorporated American Institute of Architects (“AIA”) General Conditions form A201-1987. The AIA contract required Jefferson County to obtain property insurance and included a waiver of subrogation clause that stated, in pertinent part:  “The Owner and Contractor waive all rights . . . for damage caused by fire or other perils to the extent covered by property insurance obtained pursuant to this Paragraph 11.3 or other property insurance applicable to the Work.” (Emphasis added). Instead of procuring a separate builder’s risk policy for the renovation work, Jefferson County relied on its existing “all risk” property insurance policy to cover the entire courthouse, including the renovation work.

While working on the roof, one of Teton’s subcontractors caused a fire that damaged property that was part of the contract work as well as non-work property. Jefferson County’s insurer brought a subrogation action in the county’s name seeking to recover for damage the subcontractor’s negligence caused to Jefferson County’s property that was outside the scope of the work, i.e. non-work property. The defendants argued that the waiver of subrogation clause barred the plaintiff’s claims.

To address the defendants’ argument, the court considered, in a matter of first impression, whether it should interpret the waiver of subrogation clause according to “either (1) the ‘Work versus non-Work’ approach, under which the Owner waives subrogation only for losses related to ‘the Work’ (i.e., the contracted-for construction and services); or (2) the ‘any insurance’ approach, under which the Owner waives subrogation for all losses covered by Owner’s insurance policy ‘applicable to the Work,’ regardless of whether the damage was to work or non-work property.” The court, following the “any insurance” approach, an approach that the court stated is the “majority” approach, held that the plain meaning of the contract defines the waiver based on the extent and source of insurance coverage, not on the nature of the property damaged. Thus, because Jefferson County’s insurance policy covered all damages – including damages to non-work property – the waiver of subrogation clause applied and barred the plaintiff’s subrogation claims.

Although the court adopted the “majority” approach, an approach that the court points out has been adopted by only twelve other jurisdictions that have considered the issue, there are jurisdictions that follow the “Work versus non-Work” approach. Thus, if an insurer is subrogating in a jurisdiction whose highest court has not yet decided which approach to follow, the insurer should argue that the jurisdiction at issue should adopt the “Work versus non-Work” approach. Under this approach, an insurer should, arguably, be allowed to recover for damage done to an insured’s non-work property.