Waiver of Subrogation Provision in AIA General Conditions Does Not Bar Owner's Claim for Pollution Clean-Up Costs Against General Contractor

The waiver of subrogation provision in the AIA A201 General Conditions is included to protect parties in the construction process from claims for damages arising out of perils covered by property insurance.  Without this type of protective clause, an insurer who pays a claim would have the right to make a subrogation claim (i.e. pursue collection) against the party who caused the loss.  A recent Indiana case applying the AIA’s waiver of subrogation provision suggests the scope of protection may not be as broad as many parties or insurance professionals may have expected.

In Allen County Public Library v. Shambaugh & Sons, et al., the Allen County Public Library attempted to recover diesel fuel clean-up costs stemming from a leak allegedly caused by the contractor’s employee.[i] The diesel fuel tanks and piping were part of the emergency generator system installed by the contractor as part of a $50M renovation and addition project.  As required by the AIA contract, the owner obtained a “Builder’s Risk Plus” policy, which covered the work while under construction.  The owner’s policy also contained a coverage extension that covered expenses to extract pollutants from “land or water at a job site.”  The extension however had a policy limit of only $5,000. 

Three years after construction had commenced, the owner learned that a hole in copper piping installed by the contractor had allowed 3,000 gallons of diesel fuel to leak into the ground underneath the library.  The owner contended that the hole had been caused when the concrete subcontractor drove steel stakes into the piping while placing its forms.  The clean-up costs were alleged to be in excess of $490,000.  The owner submitted a claim under the builder’s risk policy, and its insurer paid the policy limit of $5,000.  The owner then filed suit against the contractor to recover the remaining clean-up costs.

The contractor moved for summary judgment relying on the AIA waiver of subrogation provision (Par. 11.3.7) which states:

The Owner and Contractor waive all rights against each other and against the Construction Manager…, for damages caused by fire or other perils to the extent covered by property insurance obtained pursuant to this Paragraph 11.3 or other property insurance applicable to the Work….

The trial court dismissed the case, but the owner appealed.  The Illinois Court of Appeals reversed and held that Par. 11.3.7 only applies to claims for damage to the work itself, and not surrounding property.  Because the AIA contract only obligated the owner to purchase builder’s risk insurance (covering only the actual work itself), the damages were to surrounding property not actually part of the contractor’s scope, and no other owner insurance covered the pollution clean-up cost, the Court held that the waiver of subrogation provision did not bar the owner’s $490,000 claim against the general contractor.

Comment: This case highlights the importance of involving experienced insurance professionals early on to review contractual insurance obligations, analyze potential project risks, and ensure the proper insurance products are in place.  While the case does not discuss whether the contractor had purchased pollution insurance to cover this situation, if it had not, it may end up bearing the full cost of the diesel fuel clean-up.

[i] 2 N.E. 3rd 132 (Ind. Ct. App. 2014).

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