Earlier this year, the Dallas Court Appeals enforced a waiver of subrogation clause in a construction contract relating to the Winspear Opera House, holding that a commercial general liability (CGL) insurance policy was “property insurance” contemplated by the contract.  On behalf of our firm, I argued successfully that the waiver of subrogation barred the insurer’s claim.

In Arch Ins. Co. v. Suprema, Inc., the roofing subcontractor, Anchor Roofing Systems (Anchor), and the supplier of roofing membrane, Soprema, argued that the Arch insurance Company’s (Arch) lawsuit to recover $1.6 million was barred by a waiver of subrogation provision in the prime contract between the owner, the Dallas Center for the Performing Arts Foundation, Inc. (DCPAF), and the general contractor, Linbeck. Linbeck’s insurer, Arch, had settled with DCPAF, obtaining a release of claims against Linbeck. DCPAF alleged that Anchor had installed the Soprema roofing membrane defectively and that the membrane itself was defective.

The waiver of subrogation provision was applicable to “damages caused by fire or other causes of loss to the extent covered by property insurance obtained or required to be obtained by the Contractor…or other property insurance applicable to the Work….”  Unlike many standard form agreements, the prime contract did not require DCPAF to purchase property insurance. In line with industry practice, however, the contract delineated various types of insurance that Linbeck was obligated to carry, including CGL coverage with products and completed operations coverage.

Linbeck’s settlement with DCPAF was under Linbeck’s CGL policy.  Arch argued that the CGL policy was not under a first-party “property insurance” policy as contemplated by the prime contract, but instead a liability policy not covered by the waiver.  The Dallas Court of Appeals disagreed.

The Court found that the prime contract did not define “property insurance”.  Using the “plain meaning” of the term, the Court concluded that Linbeck’s CGL policy with coverage for property damage to completed operations was “property insurance” included in the waiver.  The Court rejected Arch’s argument that “property insurance” was intended to mean “builder’s risk insurance” as required in a later section of the prime contract.  Had the parties intended to limit the waiver of subrogation to payments under the builder’s risk policy, the Court reasoned, the parties would have said so.

Arch also argued that the CGL insurance was “not applicable to the work”, another requirement of the waiver of subrogation provision, because the Work, as defined in the prime contract, only included ongoing operations.  The Dallas Court of Appeals also rejected this argument.

The Court cited both a factual and policy basis for holding that Work included both ongoing and completed operations. First, in an ends-justify-the-means approach, the Court held that since Arch funded the $1.6 million settlement under the CGL policy, the insurance must have been “applicable to the Work”.  On a policy basis, the Court held that, extending application of the subrogation waiver beyond the construction period is “consistent with the public policy underlying subrogation waivers in that it continues to preserve economic relations, anticipates risks, and affords contracting parties certainty as to liability.”

Finding that Arch’s recovery action was barred by the waiver of subrogation provision in the prime contract, the Court affirmed the trial court’s dismissal of Arch’s claim.

The Dallas Court of Appeals’ decision points to the need for parties to a contract to clearly define terms.  If DCPAF and Linbeck had intended to limit the waiver of subrogation clause to builder’s risk coverage or ongoing operations, as Arch argued, they could and should have said so in no uncertain terms.  Without those limitations, the Court was free to apply the “plain meaning” of terms in interpreting the rights of the parties.

The attorneys in our Austin and Dallas offices routinely assist clients in preparing and negotiating contracts to clearly evidence the parties’ intent.  If you should have any questions regarding your contractual rights and responsibilities, please contact us at info@gstexlaw.com.

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