Applicability of statute that prohibits the contractual elimination of tort liability, to a contract clause waiving the right to subrogation. Rural Mutual Insurance Co. v. Lester Buildings, LLC. Supreme Court of Wisconsin (2019), by Hugh Anderson

Summary: A farm owner contracted with Lester Buildings for the design and construction of a new barn; the owner also contracted separately with a concrete company, Van Wyks, for foundations, walls, and piers (columns). The contracts contained typical waiver-of-subrogation clauses, in which the parties waived claims against each other to the extent the claims were covered by property insurance.

Three years after completion, strong winds collapsed half the barn, killing or causing catastrophic injuries to a large number of cattle. The owner’s property insurer, Rural Mutual, paid $650,000 to rebuild the barn, and for the loss of the cattle. A lawsuit ensued in which Rural Mutual sought to recover the money it had paid out on the property policy, under the right of subrogation, from Lester Buildings and Van Wyks (the Contractors). According to Rural Mutual, the barn collapsed because of the misplacement of steel rebar cages in the concrete piers that supported the roof. The Contractors denied that the design or workmanship was at fault, and raised the threshold defense that the waiver of subrogation clauses in their contracts must be enforced to bar Rural Mutual’s claims.

Rural Mutual countered that a Wisconsin statute made the waiver of subrogation clauses “against public policy and void.” Wisconsin Statute Section 895.447 (“the Statute”) provides as follows:

Any provision to limit or eliminate tort liability as a part of or in connection with any contract, covenant or agreement relating to the construction, alteration, repair or maintenance of a building, structure, or other work related to construction, including any moving, demolition or excavation, is against public policy and void.

The trial court granted summary judgment in favor of the Contractors, and the intermediate court of appeals affirmed that decision, remarking that Rural Mutual’s argument that the statute voided the subrogation clauses was “woefully insufficient.” The case was appealed to the Supreme Court of Wisconsin.

Decision: The Wisconsin Supreme Court affirmed the two lower court decisions that had enforced the waiver of subrogation clauses. The court concluded that the waivers of subrogation did not “limit or eliminate tort liability”—the actions targeted in the Statute—but rather merely shifted responsibility for damages from the Contractors to the property insurance company.

In support of its ruling, the court pointed out that the project owner’s remedies against the Contractors were not limited by the waiver of subrogation clauses, because in addition to collecting insurance proceeds for covered losses, the project owner was able to recover other damages for uncovered losses, and for the insurance deductible, from the Contractors—and in this instance the owner did exactly that. (A dissent in the case criticized the majority for focusing on the remedies available to the owner, rather than on the tort liability of the Contractors—the statute refers only to tort liability.)

Comment: One of the flaws in Rural Mutual’s attempt to avoid the application of the waiver of subrogation clauses was the fact that the insurance policy expressly permitted the insured (the property owner) to waive the right to recovery (waive subrogation rights) “without voiding the coverage.” The court observed:

Rural Mutual received a benefit, in the form of premium payments, for expressly allowing its insured to allocate risk in this way. We will not rewrite Rural Mutual’s policy to exonerate it from a risk that it contemplated and for which it received a premium.

Property insurance companies (including builder’s risk insurers) do not like waivers of subrogation, but most accept them as a cost of doing business, and we may assume that these costs are accounted for in the premiums paid for property/builder’s risk insurance.

Waivers of subrogation are an important part of the risk allocation structure built into the various interrelated EJCDC standard contracts, including the construction contracts (see EJCDC® C-700 2018, Paragraph 6.05), design services agreements (see EJCDC® E-500 2020, Paragraph 6.04.G), and construction subcontracts (see EJCDC® C‑523, Paragraph 10.03.K). The prices agreed to in these contracts assume that certain specific categories of loss that may occur in connection with the project will be covered by insurance, rather than becoming the subject of a liability battle between and among the owner, design professionals, and contractors.

A previous Wisconsin appellate decision had held that the Statute did not invalidate indemnification clauses in construction contracts. The court concluded that an indemnification clause did not “limit or eliminate tort liability,” rather the clause reallocated responsibility to the indemnitor. The same logic could even apply to a limitation of liability clause: it could be said that such a clause does not really limit or eliminate tort liability, but rather reallocates that liability to the party willing to accept the limitations of the clause.

A recent commentator aptly described the Statute as “perplexing.” It was originally intended to be an anti-indemnity statute, similar to those enacted in various states to protect subcontractors and others from having to accept burdensome indemnification obligations. Severe revisions during the legislative drafting process resulted in a statute whose purpose and application are obscure. Many years after its enactment, the author of the bill that resulted in the Statute—a retired state senator—stated that by the time the bill was passed, nobody knew what it meant or why they were passing it.