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AGC Plugs Loophole in Standard Agreement to Rely on Builders Risk Insurance and Forego Litigation

June 29, 2020

Together, AGC of America and its Maryland Chapter have plugged a potential loophole in standard contract provisions intended to preclude costly litigation over the damage that a project suffers during the course of construction.  The association’s victory in Maryland’s highest court means the standard provisions will continue to have their intended effect, precluding litigation over property damage that builder’s risk insurance will cover. 

The provisions are the mutual release and a waiver of subrogation found in many construction contracts.  The parties to a construction project use such provisions to preclude the other parties to the same project from suing them for such property damage and to preclude their builders risk insurance carrier from suing any of them for reimbursement of a claim that the carrier has to pay. 

The ruling on these provisions came in a case entitled Gables Construction, Inc. v. Red Coats, Inc.  The case grew out of fire that caused a $17.5M in damage to a multifamily housing project in Maryland.  The owner and the construction manager had included a standard release and waiver of subrogation in their contract and the provisions extended, by their terms, to all of the subcontractors on the project.  After collecting on a claim for builder’s risk insurance coverage for the fire (nd possibly at the urging of its builder’s risk insurance carrier) the owner sued a fire watch company (FWC) that the CM had hired for the same fire.  The trial court held that the mutual release and waive of subrogation did not preclude the owner from suing the FWC, reasoning that the latter was not a subcontractor.  Rather than contest that ruling, the FWC settled with the owner and then sued the CM for a $2M “contribution” to the settlement.  At AGC’s urging, Maryland’s highest court has held that the FWC had no right to sue the CM for a such a “contribution,” explaining that the company’s right to do so was merely derivative of the owner’s right to sue the CM – and that the owner had relinquished that right.

 

AGC’s Larger Litigation Program

The Construction Advocacy Fund of the AGC of America provides the financial resources that the association requires to extend its advocacy into federal and state courtrooms across the country.  In conjunction with the its legislative, regulatory and public relations programs, the association’s litigation program seeks to protect if not enhance the business environment for construction contractors.  In other cases, AGC of America is currently seeking:

 

  • To persuade the Virginia Supreme Court to rehear a case in which it recently held that a supplier of materials to a bankrupt subcontractor may sue an upstream party for the amount of the subcontractor’s unpaid bills, on the theory that otherwise, the upstream party would be unjustly enriched by the value of those materials;

 

  • To persuade the Tennessee Court of Appeals to reverse a lower court ruling that a first-tier subcontractor may sue a general contractor not only for breach of contract and the damages allegedly necessary to make the subcontractor whole, but also in tort and on equitable theories, and for compensatory and even punitive damages vastly exceeding exceed that sum of those damages; and

 

  • To persuade the Michigan Supreme Court to reverse its longstanding position on commercial general liability insurance coverage for construction defects and hold, to the contrary, that such insurance does provide coverage for unexpected and unintended defects in a subcontractor’s workmanship.
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