(Article from Insurance Law Alert, July/August 2024)
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Holding
The Maryland Supreme Court ruled that a subrogation waiver was ambiguous as to whether it precluded a subrogation claim by a tenant’s insurer against subcontractors who were allegedly negligent in the construction of a warehouse. Lithoko Contracting, LLC v. XL Ins. Am., Inc., 2024 Md. LEXIS 256 (Md. July 15, 2024).
Background
Amazon contracted with non-party Duke Baltimore to serve as general contractor for the construction of a warehouse (the “Development Agreement”). The Development Agreement required Duke to hire subcontractors to assist with the project and further required that all subcontractor agreements include certain provisions, including a subrogation waiver. Duke entered into agreements with four subcontractors, and in accordance with the aforementioned requirement, each subcontractor contract included an “Attachment 1,” which contained the requirements set forth in the Development Agreement, including a subrogation waiver. Each subcontractor agreement also included numerous other subrogation waivers, none of which mentioned Amazon specifically.
When the warehouse incurred damage, Amazon turned to its insurer, XL, for coverage. XL made payments exceeding $50 million and then brought a subrogation action against the subcontractors. The action alleged that the subcontractors’ negligence was the cause of the loss. In turn, the subcontractors argued that the waivers of subrogation in the Development Agreement and the subcontractor agreements barred the claims.
A trial court agreed with the subcontractors and granted their motion for summary judgment. An intermediate appellate court reversed, ruling that the subrogation waiver in the Development Agreement was binding only on Amazon and Duke, and did not confer any rights on the subcontractors. The appellate court also held that the subrogation waivers in the subcontracts were not binding on Amazon (and therefore not binding on XL as Amazon’s subrogee) because Amazon was not a party to those agreements. The Maryland Supreme Court reversed and remanded the matter for further development.
Decision
Under the doctrine of subrogation, an insurer that has compensated its insured for a loss stands in the shoes of that insured and may seek recovery from a third-party. However, the insurer’s rights are no greater than those of the insured, and if an insured has waived subrogation via contract or other means, its insurer generally may not assert a subrogation claim.
The Maryland Supreme Court addressed the three possible mechanisms which could preclude XL from asserting subrogation claims against the subcontractors: (1) the subrogation waiver in the Development Agreement; (2) the contractual requirement in the Development Agreement that all subcontracts include subrogation waivers; or (3) the subrogation waiver that was included in each of the agreements between Duke and the subcontractors.
The court ruled that the first element did not preclude Amazon from bringing the subrogation action, reasoning that the subcontractors were neither parties to nor third-party beneficiaries of the subrogation waiver in the Development Agreement. As to the second element, the court ruled that a contractual requirement that mandates inclusion of subrogation waivers in all subcontracts does not operate as a “project-wide waiver of subrogation” without regard to the particular terms of those required waivers.
Turning to the language of the subrogation waivers in the subcontracts, the court deemed them ambiguous. The court noted, among other things, that the waivers did not identify Amazon or indeed any particular party and that the overall contract contained unclear and potentially conflicting language as to whether the parties intended to include Amazon as a party bound by the subrogation waiver.
The court therefore remanded the matter for consideration of extrinsic evidence relating to whether the parties intended that Amazon waive subrogation rights against the subcontractors.
Comments
The court declined to rule, as a matter of public policy, that a project-wide waiver of subrogation exists whenever a construction contract, such as the Development Agreement in this case, requires all subcontracts to include a subrogation waiver. In rejecting this argument, the court acknowledged the benefits of subrogation waivers in construction-related litigation, but emphasized that contracting parties are free to “contract as they wish.” The court stated: “While the Court may decline to enforce contract provisions on the grounds that they are against public policy . . . the Court will not rewrite the contracts of these parties to impose a project-wide waiver of subrogation.”