The Subrogation Strategist

In 2700 Bohn Motor, LLC v. F.H. Myers Constr. Corp., No. 2021-CA-0671, 2022 La. App. LEXIS 651 (Bohn Motor), the Court of Appeals of Louisiana for the Fourth Circuit (Court of Appeals) considered whether a subrogation waiver in an AIA construction contract was enforceable and, if so, whether the waiver also protected subcontractors that were not signatories to the contract. The lower court granted the defendants’ motion for summary judgment based on the subrogation waiver in the construction contract. The plaintiffs appealed the decision, arguing that the subrogation waiver violated Louisiana’s anti-indemnification statute. The plaintiffs also argued that even if enforceable, the subrogation waiver did not apply to the defendant subcontractors since they were not parties to the contract. The Court of Appeals ultimately held that the subrogation waiver did not violate the anti-indemnification statute because the waiver did not shift liability, which the statute was intended to prevent. In addition, the Court of Appeals found that the contract sufficiently satisfied the required elements for the defendant subcontractors to qualify as third-party beneficiaries of the contract.

In 2017, plaintiff 2700 Bohn Motor Company, LLC (Bohn) retained defendant F.H. Myers Construction Corporation (F.H. Myers) as the general contractor to renovate its dealership in New Orleans. Bohn and F.H. Myers entered into an AIA construction contract for the renovation project. The contract included a mutual subrogation waiver, which stated the parties “waive all rights against (1) each other and any of their subcontractors, sub-subcontractors, agents and employees, each of the other… 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.” F.H. Meyers subcontracted with Orleans Sheet Metal Works and Roofing, Inc. (OSM) and B & J Enterprise of Metairie, Inc. (B & J) on the project. The contract obligated Bohn to secure the property insurance policy for the project.

In November 2019, a fire occurred at the property during the renovation project. As a result of the damage, Bohn’s insurers issued payment to Bohn to make the necessary repairs. Bohn also incurred a deductible. Bohn and its’ insurers filed a lawsuit against F.H. Myers, OSM and B & J, alleging that the defendants’ negligence caused the fire. The defendants filed a joint motion for summary judgment on grounds that the subrogation waiver barred the plaintiffs’ claims. The lower court granted the defendants’ motion and dismissed the case entirely, including Bohn’s claim for its deductible. The plaintiffs filed an appeal with the Court of Appeals.

The Court of Appeals acknowledged that, in Louisiana, a subrogee has no greater rights than those of the subrogor and is subject to all limitations applicable to the original claim of the subrogor. The court also cited several Court of Appeals decisions where the AIA subrogation waiver was deemed enforceable. As per the language of the waiver, the court found that Bohn clearly waived its subrogation rights against the defendants and thus had no rights to which its’ insurers could be subrogated.

The court then considered whether the AIA subrogation waiver violated Louisiana’s anti-indemnification clause. Louisiana statute La. R.S. 9:2780.1 prohibits, among other things, any provision, clause, covenant, or agreement contained in, collateral to, or affecting a construction contract which purports to indemnify, defend, or hold harmless, or has the effect of indemnifying, defending, or holding harmless the indemnitee from or against any liability for loss or damage resulting from the indemnitee’s negligence. The Court of Appeals agreed with the lower court that the anti-indemnification statute did not nullify the subrogation waiver because indemnity agreements and subrogation waivers have separate and distinct legal meanings in a contract. The court explained that unlike indemnification clauses, which can shift liability from the responsible party to another, a waiver of subrogation is simply an allocation of risk. As such, the court held the waiver of subrogation did not violate the anti-indemnification statute.

The Court of Appeals also found that defendants OSM and B & J qualified as third-party beneficiaries under Louisiana law because of the direct language of the subrogation waiver. Louisiana statute La. C.C. art. 1978 permits contracting parties to stipulate a benefit for a third person, commonly referred to as a “stipulation pour autrui.” Louisiana jurisprudence established three factors for determining whether contracting parties provided a benefit for a third party: 1) the stipulation for a third party is clear; 2) there is certainty as to the benefit provided; and 3) the benefit is not a mere incident of the contract between the signatories. Here, the court found that the plain language of the subrogation waiver specifically waived subrogation rights of the owner and the general contractor against each other and their subcontractors and sub-subcontractors on the project. Since the court found that the stipulation is manifestly clear, the benefit is certain and the benefit is not incidental, the court affirmed the lower court’s decision finding that OSM and B & J were third-party beneficiaries of the contract.

Lastly, the court also dismissed Bohn’s claim for its’ deductible. The court found that the contract explicitly obligated Bohn, as the owner, to secure the property insurance policy and stated that if “the property insurance requires deductibles, the Owner shall pay costs not covered because of such deductibles." Thus, the court held that Bohn should bear the cost of the deductible regardless of fault.

The Bohn Motor case establishes that, in Louisiana, the standard AIA subrogation waiver does not violate the state’s anti-indemnification statute and is enforceable. Bohn Motor also finds that a waiver of subrogation clause can apply to the signatories’ subcontractors if the clause satisfies the elements for establishing subcontractors as third-party beneficiaries. The case also serves as a reminder that in Louisiana, an insured may not be able to recover its’ deductible if there is an insurance provision similar to the one in the Bohn Motor construction contract.