Owner’s Property Insurer Could Pursue GC and Sub for Repayment

A waiver of subrogation clause is common in construction contracts, relative to property or builder’s risk insurance. It is not just a risk allocation tool, but an insurance risk allocation tool.

When there is no waiver of subrogation, does other language in the contract or policy protect the contractor and subs? A federal District Court in Massachusetts has said no.

During construction, a cleanout plug failed, and municipal water flooded the construction site. Factory Mutual, the carrier for project owner Novartis, covered the damage and then pursued the GC and mechanical sub for recovery. Those parties argued that they had insurable interests under the Factory Mutual policy and thus the subrogation action should be barred.

The property policy designated Novartis as a “Named Insured.” The property damage provision in the policy stated that it “also insures the interests of contractors and subcontractors in insured property . . . to the extent of the Insured’s legal liability for insured physical loss or damage to such property.” The GC and sub pointed to this language to argue their qualification as “insured parties,” and thus their immunity from the carrier’s cost recovery efforts.

Note that the common waiver of subrogation clause had been stricken from the contract during negotiations. Also, the GC had provided a CCIP. In conjunction with the CCIP coverage, the contract provided that the contractor’s and sub’s insurance would have no recourse against Novartis. But there was no corollary for the property insurance carried by Novartis.

The court held that the phrase quoted above, about “interests of contractors and subcontractors,” was not the same as designating those parties as a “named insured.” Further, the GC and subs had no insurable interest other than the liability of Novartis to them under the contract. The use of the singular “Insured’s” in that sentence meant that only the interests of Novartis were being covered by the policy, including any liability that Novartis might have.

Since Novartis had no liability to the GC or sub arising from the flooding incident – and it certainly looked the other way around – the GC and sub were thus exposed to the claim of Factory Mutual to recover amounts it had paid out for property damage.

The case is Factory Mut. Ins. Co. v. Skanska United States Bldg., 2020 U.S. Dist. LEXIS 95403 (D. Mass., June 1, 2020) (paywall).