Expensive Discovery an Unfortunate Consequence of a Provision Intended to Prevent Costly Litigation

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Expensive Discovery an Unfortunate Consequence of a Provision Intended to Prevent Costly Litigation

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Diana Z. Bowman

Waivers of subrogation clauses are intended to avoid the expense and hassle associated with insurance company lawsuits for reimbursement of payment of a covered claim. Sadly, a loosely or poorly written waiver of subrogation clause may have the opposite result—extensive discovery and motion practice. Case in point: The Schiff Hardin Construction Law Group recently convinced a Cook County Circuit Court judge to enforce a waiver of subrogation provision against the plaintiff-insurer. Unfortunately for both parties, that win came only after in-depth discovery and pretrial motions.

The lawsuit arose out of the construction of a high-rise, luxury retirement community in downtown Chicago. Nearing the end of the construction project, the property experienced a failure of a hot water riser that caused extensive water damage. The plaintiff (the owner’s property insurer) brought suit against several of the construction and design professionals involved in the project.

The owner-architect agreement for the project included a fairly common waiver of subrogation provision that was intended to prevent such a lawsuit. The provision stated, in part, that the owner waived all claims for damages “to the extent damages are covered by property insurance during construction.” The plaintiff-insurer argued that the waiver provision was inapplicable to the loss because the water riser failed after Substantial Completion was achieved, and therefore did not occur “during construction.” As a result, the design-defendants were compelled to engage in extensive fact discovery to prove that, notwithstanding the issuance of a Substantial Completion certificate, extensive construction work remained to be completed at the time of the hot water riser failure.

After completing extensive discovery, the design-defendants filed motions for summary judgment, arguing that the plaintiff’s claims had been waived. The court’s ruling turned on the meaning of “during construction,” and unsurprisingly, the contracts failed to define “during construction.” Fortunately, the Schiff Hardin Construction Law Group persuaded the judge that issuance of a Substantial Completion certificate does not establish that construction work is complete as of that date, and that in fact, much construction work took place after the Substantial Completion milestone was achieved.

Lessons Learned

A loosely written waiver of subrogation provision helps no one. To avoid ambiguity (and costly litigation!), parties should use a clearly-defined term or contract Milestone to describe the sunset date for the waiver of subrogation provision. And, if your construction project may involve the issuance of more than one Certificate of Substantial Completion, be sure to avoid having the waiver of subrogation clause effective only through issuance of the first Certificate of Substantial Completion to be issued, if that is not the parties’ intent.

To discuss your waiver of subrogation provisions, contact Kenneth M. Roberts in Schiff Hardin’s Construction Law Group.