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Waiver of subrogation clause in construction contract may be applied to a subsequent property owner as a third-party beneficiary.

January 1, 2012
Community Association Underwriters of America v. Rhodes Development Group, 2011 U.S. Dist. LEXIS 83403 (Jul. 29, 2011)

A developer transferred ownership of a condominium association (“CA”) while construction continued. Construction activities caused a fire and damages to the CA, which its insurer paid. The insurer filed a subrogation claim against the contractor, who asserted that the claim was barred by the waiver of subrogation clause (“Waiver”) in the general conditions incorporated into the standard AIA contract between the developer and the contractor because the CA was a third-party beneficiary and bound to the contract terms. The waiver stated in part, “Owner and Contractor waive all rights against (1) each other and any of their subcontractors … for damages caused by fire or other perils … to the extent covered by property insurance ... applicable to the Work.” (Article 11, § 11.3.7.)." The court applied the waiver to the CA because the loss arose from the work and because "the contract operates to shift to the owner the ultimate risk of loss, … leaving the insurer no right to proceed by subrogation against a subcontractor … To prevent such litigation, an owner may waive its rights … to the extent covered by the owner's property insurance … the policy underlying [subrogation] clauses is to avoid disruption and disputes among the parties to the project. The need for lawsuits between the parties is eliminated because all contracting parties are protected under the owner's property insurance." When faced with such claims, contractors and design professionals must ascertain the facts regarding the parties’ status and whether the cause of the damage arose from the work defined in the contract.

Case Law Alert, 1st Qtr 2012

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Gregory J. Kelley
(610) 354-8273

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