Issue: Property damage insurance and waiver of subrogation. Ritacca Laser Center v. Brydges. Appellate Court of Illinois, Second District (2018)., by Hugh Anderson

Summary: A medical facility, Ritacca Laser Center, entered into a design-build contract to remodel a basement space into a surgical suite. The design-build contractor retained O’Hare Engineering for design and installation of the building’s HVAC system. A few days after the new facility’s grand opening, a fire caused extensive damage. The cause of the fire was determined to be an air filter that was installed too close to an electric heating coil. Because of the fire the use of the building was adversely affected for three years, resulting in loss of business income.

The design-build contract had required the owner to obtain an “all risk” builder’s risk insurance policy. Apparently there were few if any other specifications regarding the builder’s risk insurance. The contract did require a waiver of subrogation rights for insured perils; the waiver extended to subcontractors.

The owner did not purchase a builder’s risk policy, but did obtain property insurance that covered fire as an insured peril, and that allowed for waiver of subrogation rights. The owner negotiated a settlement with the property insurer, covering the property damage and some of the business losses. The insurance company’s attorneys concluded that the waiver of subrogation precluded the insurance company from pursuing a subrogation claim against the HVAC subcontractor. The owner, however, sought to recover the remainder of its business losses from the HVAC subcontractor.

In the lawsuit that followed, the HVAC subcontractor filed a motion for summary judgment, pointing out that the waiver of rights by its terms applied not only to the subrogation claims by the insurance company, but also to direct claims by the parties (including the owner and subcontractors) against each other. The trial court granted the motion and the owner appealed.

Decision: The appellate court upheld the summary judgment decision in favor of the HVAC subcontractor. The waiver clause referred to losses due to insured perils. Fire was an insured peril. The owner contended that the logical intent of the insurance requirement was insurance of property damage only, not business losses, thus leaving owner free to directly pursue recovery of those losses. The court instead held that the silence of the contract regarding losses would imply that all losses would be covered, not just property damage losses:

Nothing in the language of the waiver indicates that the parties intended an exception for loss of business income. We will not add terms to a contract to change the plain meaning, as expressed by the parties.

Comment: The EJCDC contract documents (both for construction and design-build) include detailed requirements for the builder’s risk insurance. Among the relevant clauses if the EJCDC contract documents had applied in this case are the ensuing loss clause, the loss of revenue/soft cost clause, and the waiver/waiver of subrogation clause.

The case does not indicate whether there was a dispute about whether the insurance purchased for construction applied, given that the fire occurred after substantial completion. Termination dates for builder’s risk policies vary, and in fact the owner had not purchased a builder’s risk policy. In any event, waiver and waiver of subrogation principles apply to owner’s permanent policies of insurance as well as to the builder’s risk.