• Superior Court Supports Waivers Of Subrogation
  • June 19, 2003 | Author: Harris Ominsky
  • Law Firm: Blank Rome LLP - Philadelphia Office
  • The Pennsylvania Superior Court recently affirmed a common pleas court decision that upheld a waiver of subrogation provision contained in a construction contract. In Penn Avenue Place Associates, L.P. and Oxford Development Company v. Century Steel Erectors, Inc; PICS Case No. 02-0624 (Pa. Super. May 2, 2002 ), the owner of a building had sued a contractor for negligent conduct arising from a violation of ordinances and regulations enacted to protect public safety. According to the complaint, sparks and hot debris from welding and cutting work dropped to the roof of the building and ignited flammable materials located there. Among other things the owner alleges that the contractor failed to follow fire-prevention ordinances regulating welding, including failing to maintain a required fire watch after completing its work. Part of the repair costs was paid by an insurance company and part of it was an uninsured loss in the form of a $25,000 deductible. The legal action was filed to recover the full amount of the damages suffered by the owner and the insurance company, including both insured and uninsured losses.

    Waivers and Indemnification

    The only claim at issue on appeal is the claim for insured losses. On that issue the contractor defended on the grounds that the applicable construction contract provided for a mutual waiver of subrogation, which essentially, gave up each of the insured parties' rights to sue the other party for a loss -- to the extent that they recover for that loss under their insurance policy.

    The owner did not argue that a waiver of subrogation is generally unenforceable, or should not be enforced in the appropriate circumstances. Rather, it argued in this case the contractor cannot claim the benefit of the waiver because its acts and omissions violated an ordinance enacted for public safety protection.

    It also argued that a waiver of subrogation clause is equivalent to an exculpatory or indemnity provision in a contract. On this theory, the waiver clause effectively bars any cause of action against the party benefiting from the waiver, thereby immunizing that party from liability, and typically requires someone other than the wrongdoer to pay for any loss caused by its negligence. The owner cited the case of Warren City Lines, Inc. v. United Refining Co., 287 A.2d 149 (Pa. Super. 1971) which established that a party responsible for causing a loss cannot claim the benefit of an indemnity provision of a contract where the conduct resulting in the loss violated a state fire code regulation.

    Public Policy

    The Superior Court rejected that argument, distinguished the Warren City case and agreed with the following analysis by the trial court:

    [A] waiver of subrogation clause, such as the one at issue here, does not invoke public policy concerns because it does not attempt to transfer liability for negligence away from the tort-feasor. Rather, the tortfeasor who obtains insurance coverage to pay claims for which he is liable does not, ipso facto, transfer liability away from himself to the other party to the clause in question. He satisfies his debt to that party. The public policy concerns regarding indemnification for one's own negligence are therefore not an issue here. Waivers of subrogation are a matter of contract.

    Waivers of subrogation are used in many contexts to deal with liability between parties who are insured for losses, including commercial leases. The Pennsylvania courts are merely enforcing commonly used provisions and the rights of parties to contract freely in commercial transactions.

    If these provisions were not enforced, uninsured tenants or contractors would be lulled into thinking that they are covered by insurance when an accident occurs, only to find that after the insurance company pays the loss, they may still have to defend themselves against the insurance company's claims that they caused the accident. This would mean that with multiple tenants in a building or a group of contractors on a construction job, any other decision would impel all of these parties to carry separate policies of liability insurance to cover themselves, even though the project is insured by the owner and the owner has recovered the loss. This has been viewed by some courts as duplication of insurance coverage and economic waste.

    On the other hand, the Warren City case refused to enforce an indemnity clause, as contrasted with a waiver of subrogation clause because the indemnity clause shifted liability away from the negligent culprit. It reasoned that the party who transfers the risk has no incentive to use reasonable care when it is held harmless for all losses resulting from its own negligence. And this creates a particularly dangerous situation for the public where the party transferring the risk is better able to prevent the loss or reduce the risk associated with it. Similar logic could be applied to waivers of subrogation because like indemnity provisions, the tortfeasor is left off the hook by a boilerplate provision in a contract.

    Public policy arguments may not stand up in either of these cases because one might question whether there is any empirical evidence that people are less careful when they are protected under waivers of subrogation or even indemnifications. It would seem that the deterrent against a welder's negligence for a violation of law may have more to do with training, pride of workmanship, physical danger, loss of business and possible criminal prosecutions then with a waiver on a printed form contract.

    Broader Waivers

    The Penn Avenue Place case does not answer the question of whether a broader waiver than the one in that case would be unenforceable as against public policy in the same way as if it were an indemnification clause. For example, suppose the parties had entered into a commercial lease with full waivers of liability for negligence causing property damage to either party. That way, the waiver would apply whether or not an insurance company pays the loss. Therefore, if an uninsured loss should occur because of a deductible, a policy exclusion or other reasons, a broader clause would not permit the damaged party to sue the tortfeasor. The more limited waiver of subrogation clause used in many leases could still permit the insured party to sue the tortfeasor to the extent that the insurance did not cover the loss.

    However, the broader waiver lets the torteasor off the hook in the same way as a waiver of subrogation clause would if there were full insurance coverage with no uninsured gaps or deductibles. Therefore, the broader waiver should not violate public policy any more than the waiver of subrogation clause did in Penn Avenue Place. Also, indemnification provisions may be distinguished from waivers because, unlike waivers, they protect the tortfeasor from liability to third parties and frequently reimburse the tortfeasor even for its own losses.

    The broader waiver, which doesn't depend on insurance coverage, comes closer to the indemnification provision which may not be enforceable in Pennsylvania for public policy reasons. At a recent workshop held at the Annual Meeting of the American Bar Association, several lawyers from other states stated that those broad waivers are not enforceable in their states because they are considered to be against public policy. While Penn Avenue Place answers that question for waivers of subrogation, it does not answer it as to the more general waivers which are often used in leases.