Broad “Assumption of Liability” Clause in Subcontract Likely Trumps “Waiver of Subrogation” Clause in Prime Contract

Construction and Procurement Law News, Q3 2016

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The federal district court for the District of Maryland recently issued a decision in a case involving a burst sprinkler pipe on a construction project. At the heart of Turner Construction Company v. BFPE International, Inc. was a clash of inconsistent contract provisions.

The general contractor maintained that its fire sprinkler subcontractor was responsible for the property damage based on the “Assumption of Liability” provision in the subcontract. It stated in part 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, on the other hand, contended 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) Document A201-2007 (General Conditions for Construction), 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.”

Ultimately, the Court deferred a ruling. 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’s analysis of the issues, however, is instructive.

As an initial matter, 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 while Maryland’s appellate courts have not stated so conclusively, 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. Citing three points, the Court determined 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. Here, 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.

Second, 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; and the subcontract stated further: “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. The subcontract provided that “[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 favored the general contractor’s interpretation that that clause should prevail over the Waiver of Subrogation provision. But it did so begrudgingly as follows: “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.”

The Court’s decision offers important lessons regarding the intersection of insurance and indemnification provisions and reinforces familiar rules of contract interpretation. It also serves as a reminder that well-established AIA prime contract language may be defeated by carelessly drawn broad subcontract language. The result is that the owner’s insurance carrier got a windfall by subrogating against the subcontractor when the industry expectation is that the AIA waiver is both crystal clear and prevents litigation among the contractor, owner, and the subcontractors.