Construction and Engineering Alert
October 2007
Author:
William Wickard
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william.wickard@klgates.com
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The Pennsylvania Superior Court Holds that a
Subrogation Waiver Between Owner and Contractor
is Enforceable Against an Insurer Where The Insurer
Was Not a Party to the Contract, Had No Notice of
the Waiver, and Did Not Consent to It.
In a case of first impression, the Pennsylvania Superior Court recently held, in Universal
Underwriters Insurance Co. v. A. Richard Kacin, Inc.,1 that the subrogation waiver contained
in the standard American Institute of Architects (“AIA”) General Conditions is enforceable
against an insurer that was not a party to the contract, had no notice of the waiver, and did not
consent to it. The Superior Court specifically recognized that some jurisdictions addressing
the issue required the insurer’s notice or consent before enforcing such a subrogation waiver.
Nonetheless, because an insurer’s subrogation rights are derivative of the policyholder’s
rights, the Superior Court concluded the insurer’s notice or consent is not needed to enforce
such a waiver.
Background
Watson Chevrolet Oldsmobile (“Owner”) entered into a contract with A. Richard Kacin,
Inc. (“Contractor”), where Contractor agreed to perform construction work at Owner’s
automobile dealership. Bassett Masonry, Inc. (“Subcontractor”) served as Contractor’s
subcontractor. The construction contract incorporated the following provisions from the
standard AIA General Conditions:
11.3.7 Waivers of Subrogation. The Owner and Contractor waive all rights
against (1) each other and any of their subcontractors, sub-subcontractors,
agents and employees, each of the other, and (2) the Architect, Architect’s
consultants, separate contractors described in Article 6, if any, and any of their
subcontractors, sub-subcontractors, agents and employees, for damages 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, except such rights as they have to proceeds of such insurance held by the
Owner as fiduciary. The Owner or Contractor, as appropriate, shall require of
the Architect, Architect’s consultants, separate contractors described in Article 6,
if any, and the subcontractors, sub-subcontractors, agents and employees of any
of them, by appropriate agreements, written where legally required for validity,
similar waivers each in favor of other parties enumerated herein. The policies
shall provide such waivers of subrogation by endorsement or otherwise. A
waiver of subrogation shall be effective as to a person or entity even though that
person or entity would otherwise have a duty of indemnification, contractual or
otherwise, did not pay the insurance premium directly or indirectly, and whether
or not the person or entity had an insurable interest in the property damaged.
1
916 A.2d 686 (Pa. Super. Ct. 2007).
Construction and Engineering Alert
11.3.5 If during the Project construction
period the Owner insures properties, real or
personal or both, adjoining or adjacent to
the site by property insurance under policies
separate from those insuring the Project,
or if after final payment property insurance
is to be provided on the completed Project
through a policy or policies other than
those insuring the Project during the
construction period, the Owner shall waive
all rights in accordance with the terms of
Subparagraph 11.3.7 for damages caused by
fire or other perils covered by this separate
property insurance. All separate policies
shall provide this waiver of subrogation by
endorsement or otherwise.2
After the construction project was completed, a
rainstorm caused the collapse of a wall at Owner’s
dealership. Owner’s commercial property insurers,
Universal Underwriters Insurance Co. and Motors
Insurance Corporation (collectively, the “Insurers”),
paid for the property damage and brought a subrogation
action against Contractor, Subcontractor and other
subcontractors. The action alleged the defendants’
negligence and breach of contract caused the collapse
and sought reimbursement for payments made to
Owner.3 Contractor and Subcontractor moved for
summary judgment, arguing that because Owner had
waived its subrogation rights, the Insurers’ action
was barred. The trial court granted the motions for
summary judgment and the Insurers appealed to the
Superior Court.
The Kacin Holding
The Superior Court began its analysis in Kacin by
summarizing Pennsylvania subrogation law. In general,
subrogation is an equitable doctrine which places a
debt upon the one who in good conscience ought to
pay it. The doctrine applies where one pays a debt
for which someone else is primarily liable. Thus, “the
insurer is granted the right ‘to stand in the shoes of
the claimant and assert the claimant’s rights against the
tortfeasor.’”4 As a result, the insurer, “as subrogee, can
only recover damages when his subrogor has a legally
cognizable cause of action against a third party,
making the right to subrogation contingent on [the
subrogor] having a cause of action against a known
tortfeasor.”5 Subrogation waivers are not contrary to
Pennsylvania public policy and they do not indemnify
a tortfeasor for his own negligence.6 Instead, “[w]
aivers of subrogation are a matter of contract” and a
tortfeasor satisfies his debt to the other party to the
waiver by obtaining insurance coverage to pay claims
for which he is liable.7
Although the provisions at issue in Kacin required
that “[t]he policies shall provide such waivers
of subrogation by endorsement or otherwise,” the
Insurers claimed that they had not received any notice
of the waiver nor had they consented to the waiver.
Consequently, the court’s decision turned on whether a
subrogation waiver may be enforced against an insurer
where the insurer was not a party to the agreement, and
there was no notice to or consent of the insurer. The
Superior Court found that no Pennsylvania appellate
court had considered the issue and other state appellate
courts reached split decisions. Some courts have
held that it was inequitable to bind an insurer to an
agreement it did not join and thus required notice or
consent of the insurer. Other courts have held that
where the policyholder had waived its cause of action,
the insurer’s ability to bring a subrogation claim was
also waived, regardless of notice or consent.
The Superior Court found the latter approach to be the
most consistent with Pennsylvania law. First, the court
noted that it found nothing inequitable about enforcing
a subrogation waiver provision in the absence of an
insurer’s consent or notice. In this case, Owner,
Contractor and Subcontractor had agreed to share the
burden of either party’s negligence by requiring each to
purchase property insurance covering the construction
work and by agreeing not to sue for damages covered
2
The contract at issue in Kacin was the 1987 Edition of AIA Document A201 General Conditions of the Contract for Construction. In the most recent 1997 Edition, these provisions appear at sections 11.4.7 and 11.4.5.
3
4
The claims against the other subcontractors were either discontinued or disavowed. 916 A.2d at 688 n.1.
5
Id. (emphasis added).
6
Id. at 963 (citing Penn Avenue Place Associates, L.P. v. Century Steel Erectors, Inc., 798 A.2d 256, 259 (Pa. Super. Ct. 2002)).
7
Id. at 691 (quoting Penn Avenue, 798 A.2d at 259).
916 A.2d at 692 (quoting Kiker v. Pennsylvania Fin. Responsibility Assigned Claims Plan, 742 A.2d 1082, 1086 (Pa. Super. Ct. 1999)) (emphasis added).
October 2007 | 2
Construction and Engineering Alert
by that insurance. Moreover, the court found that
because Owner had waived its right to sue for the
damages covered by its property insurance, Owner
had no legally cognizable cause of action against
Contractor or Subcontractor. Thus, the Insurers,
whose rights were derivative of the Owner’s, had no
legally cognizable cause of action against Contractor
or Subcontractor.
The Superior Court ended its analysis by offering
practical advice to insurers to protect themselves from
subrogation waivers:
Insurers can protect themselves by (1) inserting an
exclusion into their policies that permits the insurer
to deny coverage if an insured waives the insurer’s
subrogation rights, (2) raising premiums to offset
outlays incurred from the loss of their subrogation
rights, (3) investigating whether a potential insured has
already waived any subrogation rights, (4) requiring
insureds to warrant at the time a policy is issued that
the insured has not, and will not, waive the insurers’
subrogation rights, and (5) obtaining reinsurance to
cover any waiver of subrogation rights.8
Conclusion
None of the parties petitioned the Pennsylvania
Supreme Court to review the Superior Court’s
decision in Kacin. Thus, under Pennsylvania law,
waivers of subrogation may be enforced against
an insurer where the insurer was not a party to the
agreement and there was no notice to or consent of
the insurer. Nevertheless, in an abundance of caution,
policyholders should still provide their insurers notice
and obtain their consent to waive subrogation because
their policy may not be governed by Pennsylvania law.
Moreover, the subrogation waivers contained in AIA
contracts suggest that an insurer’s notice and consent is
otherwise required. Additionally, in light of the Kacin
decision, insurers may be more vigilant of subrogation
waivers and take some or all of the steps outlined by
the Superior Court, including raising premiums. In
particular, before waiving their subrogation rights,
policyholders should ensure that their insurance policies
do not contain exclusions which deny coverage where
a policyholder has waived its rights to subrogation.
8 Id. at 695 (quoting Bakowski v. Mountain States Steel, Inc., 52 P.3d 1179 (Utah 2002)).
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