Broad “Assumption of Liability” Clause in Subcontract Likely Trumps “Waiver of Subrogation” Clause in Prime ContractIn a recent case handled by Bradley, a federal court in Maryland issued a decision attempting to reconcile inconsistent contract provisions.

The general contractor said that its fire sprinkler subcontractor was responsible for the burst sprinkler pipe and the resulting property damage based on the “Assumption of Liability” provision in the subcontract, which stated that the subcontractor “assumes the entire responsibility for any and all actual or potential damage…” and “agrees to indemnify and save harmless [the general contractor]… from and against any and all loss.” The subcontractor said that the general contractor waived its right to hold the subcontractor responsible based on a provision in the form contract between the general contractor and the project owner. Under the boilerplate “Waiver of Subrogation” in the American Institute of Architects (AIA) A201-2007 General Conditions, the owner and general contractor “waive all rights against … each other and any of their subcontractors” for “causes of loss to the extent covered by property insurance obtained pursuant to … Section 11.3 or other property insurance applicable to the Work.” (emphasis added)

Finding “sufficient ambiguity for consideration of extrinsic evidence” as to whether the parties actually intended the Waiver of Subrogation clause to control, the Court denied the parties’ cross-motions for summary judgment.

The Court determined that the subcontractor could invoke the Waiver of Subrogation provision even though that clause resided in a contract to which it was not a party. After all, the subcontract incorporated the general contract by reference, and the phrase “and any of their subcontractors” in the subrogation waiver clause supported the subcontractor’s contention that it was an intended third-party beneficiary of that provision. Moreover, the Court observed that courts in other jurisdictions have permitted subcontractors to invoke prime-contract subrogation waivers.

Next, the Court took up the conflict between the subrogation waiver provision and the Assumption of Liability clause in the subcontract concluding that the general contractor had the better argument.

First, the Court invoked the “well-established canon of contract interpretation” that a “specific” provision takes precedence over a “general” provision holding that the specific Assumption of Liability provision in the subcontract should prevail over the Waiver of Subrogation clause in the general contract, which was merely incorporated into the subcontract by reference.

Next, the Court identified another subcontract provision that favored the general contractor’s interpretation. The subcontract required the subcontractor to maintain commercial general liability insurance and to list both the project owner and the general contractor as additional insureds. The subcontract also stated: “It is expressly agreed … that all insurance … afforded the additional insureds shall be primary insurance … and that any other insurance carried by the additional insureds shall be excess of all other insurance carried by the Subcontractor and shall not contribute with Subcontractor’s insurance.” The Court found it “difficult to square” that provision with a Waiver of Subrogation clause that purported to make the project owner’s property insurance primary.

Third, the Court found yet another subcontract provision in support of the general contractor’s interpretation which said “[i]f … any provision … irreconcilably conflicts with a provision of the General Contract … the provision imposing the greater duty or obligation on the Subcontractor shall govern.” Here, the Assumption of Liability provision imposed the greater obligation on the subcontractor.

Characterizing the Assumption of Liability clause as “breathtaking in scope,” the Court begrudgingly found that the Assumption of Liability clause should prevail over the Waiver of Subrogation provision stating: “The Court thus suspects that this case may be an outlier – a rare case in which the obvious public-policy benefit of orderly and predictable insurance planning at the outset of a venture must yield to the explicit arrangements between a general contractor and the subcontractors with which it chooses to transact.”

This case offers important lessons concerning insurance and indemnification provisions and reinforces familiar rules of contract interpretation. It also serves as a reminder that prime contract language incorporated by reference into subcontracts should be reviewed for consistency with the intent of the subcontract provisions.

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Contractors Beware: Subcontractor Exception to “Your Work” Exclusion May Not Save the Day

Commercial general liability (CGL) coverage for a general contractor is not guaranteed, even if property damage is all a subcontractor’s fault. Consider the following example: A general contractor builds a stadium for which a subcontractor builds the frame. After the project is complete, a wall collapses. An independent investigation reveals the subcontractor’s defective framing work caused the collapse. The owner sues the general contractor, and the general contractor tenders the claim to its CGL insurer. The insurer denies coverage. Is there coverage?

The typical CGL policy contains a “Your Work” exclusion. This exclusion precludes coverage for “property damage to Your Work arising out of it or any part of it and included in the Products-completed Operations Hazard.” In general, the Products-Completed Operations Hazard extends the CGL policy to property damage that occurs after the project is complete, such as, for example, building settlement. This exclusion then may be read to say that the policy will NOT respond if there is property damage to the Contractor’s work that arises out of that work or some part of it. On its face, the Your Work exclusion may bar coverage even if a subcontractor’s faulty work caused the property damage. A leaking drain on the 23d floor of a condominium tower that damages sheet rock for the 22 floors below is arguably NOT covered. Accordingly, many policies include a “subcontractor exception” which states that the Your Work exclusion “does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.”

Although the subcontractor exception has rescued some faultless contractors by providing coverage, in a few cases, lower state courts have sometimes negated the exception by holding that a CGL policy does not cover faulty work in the first place because faulty workmanship cannot be an “accident” or “occurrence” under a CGL policy or because the faulty workmanship did not damage other property. At least one of these courts declined to reach the question of whether the subcontractor exception applied, because there had not been an “occurrence” (other than the alleged faulty workmanship which was not an “occurrence” in that court’s view). Without an “occurrence,” the “your work” exclusion never applied, and the subcontractor exception was essentially irrelevant to the analysis.

So what can a contractor do?

  • Read your CGL policy, including endorsements and determine if your policy has the “your work” exclusion and the subcontractor exception to that exclusion.
  • Recognize risks, and understand potential exposure arising from the “your work” exclusion.
  • When tendering a claim to your insurer, evaluate the “occurrence” which caused the damages, the underlying cause of the “occurrence,” and the damages that the “occurrence” caused.

For more on the subcontractor exception, please view the “Filling the Gap: The Subcontractor Exception” presentation slides.

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