In November, 2024, a U.S. Bankruptcy Judge in Houston dismissed two lawsuits filed by several insurance companies against Zachry Holdings Inc. and its joint venture partners, ruling that the waiver of subrogation clause in the construction contract barred the lawsuits, robbing the insurers of standing to sue.

Shortly after Zachry filed bankruptcy in May 2024, the insurers filed the lawsuits arising out of a June 2022 explosion at the LNG Freeport liquified natural gas facility located on the Gulf of Mexico. According to a report issued by the U.S. Pipeline and Hazardous Materials Safety Administration, the explosion was caused by an improperly isolated pressure relief valve which allowed warming and expansion of the liquified natural gas inside piping and increased pressure. As a result of the increased pressure, there was a rupture that released gas in vapor and liquid form and the vapor ignited. Zachry’s counsel noted during the hearing on Zachry’s motion to dismiss that the owner’s investigation attributed the explosion to “operator error.” The explosion caused the facility to go offline for eight months while repairs were made.

In the lawsuits, the insurers alleged Zachry caused the explosion by failing to install proper safeguards which would have alerted operators of an issue before the explosion. The insurers alleged damages of $1.3 billion for reimbursement of insurance payments made to the owner of the facility, including payments for lost profits during the eight-month shutdown of the Facility.

Zachry filed a motion to dismiss based on the risk allocation provisions in its engineering, procurement, and construction services contract with the facility owner. Specifically, Zachry argued that the contract required the owner to obtain its own property insurance and contained a waiver of subrogation provision which precluded any claims against Zachry to the extent the owner received payments for the claims under the contractually required insurance policy. The contract also contained a waiver of consequential damages and business interruption losses. During the hearing on Zachry’s motion to dismiss, its counsel emphasized that the contract was negotiated between sophisticated parties and contained mutual risk allocation provisions. Zachry’s counsel also highlighted the importance of risk allocation provisions in multibillion dollar projects like this one.

In dismissing the lawsuits, the Judge ruled the claims were barred by the waiver of subrogation in the contract and that the insurers did not have standing. As illustrated by the Bankruptcy Judge’s dismissal of the lawsuits, risk allocation provisions, such as a waiver of subrogation or waiver of consequential damages, are vital components of construction contracts, and can make the difference between getting entangled in a lengthy lawsuit and getting an early dismissal.

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