The Subrogation Strategist

In Rural Mut. Ins. Co. v. Lester Bldgs., LLC 2019 WI 70, 2019 Wisc. LEXIS 272, the Supreme Court of Wisconsin considered whether a subrogation waiver clause in a construction contract between the defendant and the plaintiff’s insured violated Wisconsin statute § 895.447, which prohibits limitations of tort liability in construction contracts. The Supreme Court affirmed the lower court’s decision that the waiver clause did not violate the statute because it merely shifted the responsibility for the payment of damages to the defendant’s insurance company. The waiver clause did not limit or eliminate the defendant’s tort liability. This case establishes that while § 895.447 prohibits construction contracts from limiting tort liability, a subrogation waiver clause that merely shifts responsibility for the payment of damages from a tortfeasor to an insurer does not violate the statute and, thus, is enforceable.

In Rural Mutual, the plaintiff’s insured, Jim Herman, Inc. (Herman), entered into a contract with Lester Buildings, LLC (Lester) to design and construct a barn on Herman’s property. The contract included a provision that stated the following:

Both parties waive all rights against each other and any of their respective contractors, subcontractors and suppliers of any tier and any design professional engaged with respect to the Project, for recovery of any damages caused by casualty of other perils to the extent covered by property insurance applicable to the Work or the Project, except such rights as they have to the proceeds of such property insurance and to the extent necessary to recover amounts relating to deductibles of self-insured retentions applicable to insured losses. . . . This waiver of subrogation shall be effective notwithstanding allegations of fault, negligence, or indemnity obligation of any party seeking the benefit or production [sic] of such waiver.

Herman entered into a separate contract with third-party defendant, Van Wyks, Inc. (Van Wyks), to install concrete in portions of the foundation, walls and piers of the barn. The contract with Van Wyks included a similar subrogation waiver provision. Lester provided the specifications to Van Wyks for the concrete.

The barn that Lester constructed was covered by Herman’s insurance policy with the plaintiff Rural Mutual Insurance (Rural Mutual). Rural Mutual’s policy allowed Herman to waive its right of recovery, in writing, before a loss occurred without voiding coverage.

Lester completed the barn in 2010. In 2013, the barn collapsed due to strong winds. The collapse killed a large number of Herman’s cattle. As a result of this loss, Rural Mutual paid Herman $607,000 to rebuild the barn and $51,000 for the loss of cattle.

In 2014, Rural Mutual filed a subrogation action against Lester, alleging breach of contract and negligence. Rural Mutual claimed that the collapse was due to Lester improperly installing the steel rebar cages in the concrete piers lower than the specifications required. Lester filed cross claims against Van Wyks. Lester and Van Wyks filed motions for summary judgment, asserting that the subrogation waiver clause in Lester’s construction contract barred Rural Mutual’s claims. The circuit court granted summary judgment, finding that the waiver clause was enforceable. The court of appeals affirmed the circuit court’s decision, but refused to address whether the waiver clause violated § 895.447 on grounds that Rural Mutual’s argument was “woefully insufficient.” Thereafter, Rural Mutual filed a petition to the Supreme Court of Wisconsin for review, which the court granted.

Wisconsin statute § 895.447 states that any provision to limit or eliminate tort liability as a part of or in connection with any contract relating to the construction, alteration, repair or maintenance of a building or structure is against public policy and void. The statute does not define “tort liability.” After reviewing Black’s Law Dictionary’s definitions of “tort” and “liability,” the court found that “tort liability” means the legal obligation or responsibility to another resulting from a civil wrong or injury for which a remedy may be obtained. Rural Mutual claimed that the subrogation waiver clause violated the statute because it required the parties to “waive all rights against each other… notwithstanding allegations of fault, negligence, or indemnity.” However, the court found that when read in its entirety, the statute only limits recovery “to the extent covered by property insurance.” The court found that the subrogation waiver clause did not limit or eliminate the legal responsibility of the contractors to Herman for the collapse of the barn. Rather, the court found that the waiver clause merely shifted the responsibility for the payment of damages—the remedy for tort liability—from the contractors to Rural Mutual.

The court’s majority essentially distinguished the responsibility for the payment of damages from the assessment of liability, finding that the contractors could be 100% liable even though Rural Mutual would be responsible for paying the damages pursuant to the waiver clause. The court also found that the subrogation waiver clause was not against public policy because the contract was between sophisticated parties and the waiver was expressly authorized by Rural Mutual in its insurance policy.

The plain language of § 895.447 appears to prohibit any provisions in construction contracts which limit tort liability, and subrogation waiver clauses arguably fall under the purview of the statute. However, the Supreme Court of Wisconsin restricted the statute’s application to subrogation waiver clauses by holding that subrogation waiver clauses merely shift the responsibility of payment rather than limit tort liability. The Rural Mutual opinion establishes that in Wisconsin, as long as the provision at issue does not limit the victim’s right to be made whole, subrogation waiver clauses in construction contracts are enforceable even if they appear to be limiting the defendants’ tort liability.