The case of Am. Zurich Ins. Co. v. Barker Roofing, L.P, 2012 Tex. App. LEXIS 8836 (Tex. App. Amarillo Oct. 23, 2012), involved claims arising out of a catastrophic fire that damaged the University of Texas Golf Club (UT) prior to completion of the construction project. The fire was allegedly caused by the roofing subcontractor’s (Barker) use of a small propane torch.
At the time of the loss, UT was insured under two separate policies. First, UT was covered by a commercial insurance policy issued by American Zurich Insurance Company (AZIC), which insured UT against, among other things, real and personal property damage including business income loss.
Consistent with the project’s General Conditions, UT also purchased a separate Builder’s Risk Policy from Fireman’s Fund Insurance. The Builder’s Risk policy insured against risks of physical loss of damage from external causes and expressly excluded losses due to the interruption of business and any consequential loss beyond the direct physical loss of the covered property. The Builder’s Risk policy covered approximately $6.8 million in damages to the building and its contents. The AZIC policy covered $500,000 in business interruption damages. AZIC initiated a lawsuit against Barker seeking subrogation of its damages from UT’s business interruption losses. Barker responded to the lawsuit alleging that AZIC’s claims were barred by a contractual waiver of subrogation. The trial court and the Texas Court of Appeals agreed.
“22.214.171.124 The Owner and Contractor waive all rights against each other and the Architect . . . and any of their Subcontractors . . . for damages caused by fire or other perils to the extent covered by property insurance obtained pursuant to this Article or any other property insurance applicable to the Work . . .” (emphasis added).
AZIC’s Motion for Summary Judgment
AZIC filed a motion for summary judgment on Barker’s affirmative defense of waiver. AZIC first argued that the Owner-Contractor agreement’s waiver clause did not bar its claims because the clause did not reference Barker by name. The court concluded that Barker, as a subcontractor, was entitled to benefit from the waiver provision as a third-party beneficiary to the Owner-Contractor agreement.
Next, AZIC argued that Barker’s subcontract required Barker to indemnify UT for losses it sustained due to the fire despite the waiver clause. Again, the court disagreed. Barker’s subcontract provided that UT would provide builder’s risk for the project and that Barker waived his right to subrogation for damages covered by the builder’s risk insurance. Barker’s subcontract obligated Barker to indemnify, defend and save the “Contractor and Owner harmless from any liability for all claims, causes of action, losses, costs, expenses, damages . . .” due to Barker’s failure to properly pursue the subcontract work or comply with the terms of the subcontract. The court concluded that a “reasonable interpretation of the subcontract’s indemnification clause(s) that is in harmony with UT’s property insurance procurement requirement and waiver clause is that the subcontract’s general indemnification clause refers to compensation and liability losses [that are] not covered by property insurance.” Accordingly, AZIC’s subrogation claims against Barker were barred as a matter of law by Barker’s affirmative defense of waiver of subrogation.
Further, to the extent AZIC wanted to recover UT’s uninsured losses or deductible, AZIC failed to obtain an assignment of UT’s claims.
Last, AZIC argued that UT’s business interruption damages were not subject to the waiver clause because its damages were not within the scope of the Work defined by the Owner-Contractor agreement and its business interruption coverage with UT was not “property insurance” or insurance against“property damages.” The court disagreed and concluded that the plain meaning of the waiver clause’s phrase “other property insurance applicable to the Work” meant that the parties intended to be waived even if UT had existing property insurance that covered any damages to the project resulting from fire or other perils.
REMINDER: This case demonstrates how waivers of subrogation impact a project’s risk allocation. Generally, the industry standard form contracts provide that if a fire loss occurs prior to the completion of the work, the risk of loss is shifted to the owner’s property insurance and/or builder’s risk insurance policies.