In Ace American Insurance Co. v. American Medical Plumbing, 458 N.J. Super. 535 (App. Div. 2019), the Appellate Division addressed an issue of first impression in New Jersey: the enforcement of waiver-of-subrogation clauses in AIA (American Institute of Architects) construction contracts.

Equinox Development Corp., which was insured by Ace American Insurance Co., entered into a contract with Grace Construction Management Company in March of 2012 to build the “core and shell” of a health club in Summit. American Medical was a plumbing subcontractor that installed a sprinkler system. Following the completion of construction and the installation of gym equipment, the high-pressure connections to the sprinkler system failed, causing damage in excess of $1 million.

Ace American had issued Equinox a blanket all-risk insurance policy inclusive of its real and personal “[p]roperty while in the course of construction and/or during erection, assembly and/or installation.” The policy required Equinox to assume liability by contract for any subcontractors. However, the policy allowed Ace American to subrogate against tortfeasors for any payments made under the policy—except where subrogation had been waived.

Ace American paid Equinox nearly $1.2 million for the net damages for the real and personal property, and thereafter filed a subrogation action against American Medical seeking recovery for its payments per the policy. Citing the subrogation waiver in the contract between the contractor and subcontractor, the trial court granted summary judgment in favor of the subcontractor. Ace American appealed.

AIA contracts are widely used throughout the country. Form A201 requires the owner/general contractor and its subcontractors to waive all rights against each other for damages covered by the requisite policies. The AIA subrogation waiver is well-known in the construction industry and plays a critical role in the AIA approach of remedying construction losses through insurance claims, not lawsuits. See Bd. of Comm'rs v. Teton Corp., 30 N.E.3d 711, 715 (Ind. 2015) (citing Am. Zurich Ins. Co. v. Barker Roofing, 387 S.W.3d 54, 61 (Tex. Ct. App. 2012)).

The parties did not dispute the enforceability of the subrogation waiver. Rather, they disputed (1) whether the subrogation waiver continued to apply after construction was completed; and (2) whether the waiver applied to damage to property outside the scope of the project.

Ace American argued on appeal that the subrogation waiver under section 11.3.7 has a “spatial limit,” rendering it only applicable to damages to the “work” itself—in this case, the core and shell of the building—rather than its internal construction and contents. Ace American further argued that the waiver has a temporal limit, meaning that it applied only to damage incurred before the completion of construction.

The Appellate Division rejected both of these arguments, construing the waiver broadly to preclude Ace American's entire claim.

Section 11.3.7 states:

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 causes of loss to the extent covered by property insurance obtained pursuant to this Section 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.

Section 11.3.5 provides:

If during the Project construction period the Owner insures properties, real or personal or both, at 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 Section 11.3.7 for damages caused by fire or other causes of loss covered by this separate property insurance. All separate policies shall provide this waiver of subrogation by endorsement or otherwise.

The Appellate Division held that Section 11.3.7 “applies to waive any insured damage, whether occurring during or after construction, whether to the Work, to the Project, or to other insured property—so long as the policy covering the damage falls within one of the two categories identified: 'property insurance obtained pursuant to this Section 11.3' or 'other property insurance applicable to the Work.'” American Medical Plumbing, 458 N.J. Super. at 544. By reading Sections 11.3.5 and 11.3.7 in conjunction, the court concluded that Ace American's blanket all-risk policy fell within both of those categories. The court noted that Section 11.3.5 was “designed to extend the waiver related to non-work property even when covered by separate policies.” Id. at 546.

The Appellate Division's interpretation of the subrogation waiver provision is consistent with the majority of courts across the country. The Supreme Court of Indiana, in Teton Corporation, supra, took an “any insurance approach,” meaning that the waiver applied to any property over which the owner had insurance. The Teton Corporation court stated that the plain meaning of the AIA contract was that “any insurance” means “any property covered by insurance and not the specific insurance for the construction project.” 30 N.E.3d at 717. The Supreme Court of Indiana also relied on other jurisdictions to find the broad scope of the waiver of subrogation to be unambiguous. See Lexington Ins. Co. v. Entrex Commc'n Servs., 749 N.W.2d 124 (Neb. 2008) (applying the waiver “to all damages—including work and non-work damages”); Westfield Ins. Group v. Affinia Dev., 982 N.E.2d 132, 141 (Ohio App. 2012).

The Appellate Division also concluded that the plain language of the provisions do not set forth a temporal limitation as suggested by the appellant. In fact, Section 11.3.5 extends the waiver to separate policies an owner may procure post-completion to insure the project. As such, the court found that an interpretation of the waiver provision denying post-completion damages would result in an inconsistency between Sections 11.3.5 and 11.3.7.

In sum, the Appellate Division adhered to the majority rule and ultimately held that the language of the AIA subrogation waiver provision was sufficiently broad to continue beyond project completion and to encompass work outside the scope of the project. The court's ruling will have a substantial impact by effectively barring subrogation in New Jersey between parties to an AIA contract.

Ric Gallin is a partner at Methfessel & Werbel in Edison. He specializes in the litigation of first-party and third-party liability and insurance litigation, and argued the American Medical case on behalf of the American Medical Plumbing. Nabila Saeed is an associate at the firm, specializing in the defense of third-party claims.