Ruling prevents county from subrogating damages after courthouse fire

The Indiana Court of Appeals Tuesday adopted the “majority approach” in a waiver of subrogation issue and concluded a southern Indiana county waived its right to subrogate any and all claims covered by its property insurance. Jefferson County sued contractors after its courthouse caught fire during renovations in 2009.

Jefferson County entered into a contract with Teton Corp. to renovate the building and subcontract work to several companies. The contract prepared by the American Institute of Architects stated that Jefferson County, as owner of the project, should obtain separate insurance. Instead of obtaining separate property or builder’s risk insurance for the project, the county relied on its existing property and casualty insurance. The county also did not tell Teton that it wasn’t getting the separate insurance. The contract also required Teton to obtain contractors liability insurance.

During renovations, a fire broke out in May 2009 causing more than $6 million in damages. The county relied on its general insurance policy, but that did not cover all of the damages.

The county sued Teton and other defendants involved in renovations, claiming negligence, breach of implied warranties and breach of contract. The defendants argued Jefferson County agreed to provide insurance for the project and waived its subrogation rights against them, so the county can’t recover damages that were caused by the fire.

In granting the defendants’ motion for summary judgment, the trial court ruled that the county as owner of the project was to obtain insurance and that insurance would be the source of compensation in the event of a loss. The contract also says every party would waive the right to seek recovery of the loss covered by the insurance policy.

Jefferson County conceded that pursuant to the terms of the AIA contract, subrogation is barred when a property owner seeks to recover damages to its insured “Work” property, but maintains that “this case involves damage to non-Work property.” And therefore, Jefferson County argues that under the AIA contract, Teton was responsible for procuring insurance to cover damages for claims “other than to the Work.”

In support of its argument, Jefferson County relied on Midwestern Indemnity Company v. Systems Builders, Inc., 801 N.E.2d 661 (Ind. Ct. App. 2004), which concluded that under the AIA contract there is a distinction between work and non-work property, and the scope of the waiver is limited to damages to the work property.

The interpretation of the waiver provision has been litigated in other jurisdictions and the Court of Appeals, but not made it to the Indiana Supreme Court. After examining caselaw, in The Board of Commissioners of the County of Jefferson v. Teton Corporation, Innovative Roofing Solutions, Inc., Gutapfel Roofing, Inc. and Daniel L. Gutapfel, 72A04-1302-CT-55, Judges Paul Mathias and Edward Najam affirmed, ruling the “majority view” is the better approach to risk allocation in construction projects in general, which rejects the “work” v. “non-work” approach.

They believed adopting the “minority, non-Work distinction” used previously by the Indiana Court of Appeals would “throw many projects into protracted litigation, possibly even years after project completion and acceptance.”

“Each and every major construction project adds both value and risk to the owner’s property. Section 11.3.1 of the AIA contract therefore requires owners to insure their interests in the construction project at least to the value of the underlying contract.

The AIA contract expressly requires property owners to separately insure these interests and, in order to facilitate the completion of the project without delaying and debilitating litigation, to obtain an ‘all-risk’ insurance policy that waives the carrier’s rights to be subrogated to any loss arising within the extremely broad coverage described in the contract. If the owner does not secure such insurance, then it still waives its subrogation rights for any loss described within the AIA contract that it sustains,” Mathias wrote.

Judge Elaine Brown dissented, believing the court should uphold the minority approach as outlined in Midwestern. By adopting the majority approach, the majority in this case has prevented the county from being able to attempt to recoup damages to non-work property from Teton’s liability insurer based upon alleged negligence.