Hartford Underwriters Insurance v. Phoebus

DEBORAH S. EYLER, J. In the Circuit Court for Calvert County, Hartford Underwriters Insurance Company (“Hartford”), the appellant, as subrogee of K.B.K., Inc. (“K.B.K.”), sued John L. Mattingly Construction Co., Inc. (“Mattingly”) and Wilma L. Phoebus d/b/a Wilma Phoebus Electric Company (“Phoebus”), the appellees, for negligence, breach of contract, and breach of warranties. After a hearing, the court granted summary judgment in favor of the appellees. The appellants challenge that ruling on appeal. FACTS AND PROCEEDINGS On October 18, 2002, K.B.K. as “Owner” and Mattingly as “Contractor” entered into an American Institute of Architects (“AIA”) form contract number A107-1997 (“Contract”) to ⁶⁷² build an Arby’s Restaurant (“Restaurant”) in Dunkirk.

Mat-tingly hired various subcontractors, including Phoebus for electrical work. Construction was finished and the Restaurant opened for business in October 2003. K.B.K. made final payment on the Contract on January 30, 2004. Sometime thereafter, K.B.K. purchased a property insurance policy for the Restaurant from Hartford, with effective coverage dates of October 1, 2004, through October 1, 2005.

On May 8, 2005, a fire broke out in the Restaurant, causing substantial damage. K.B.K. submitted a claim to Hartford for property damage totaling $1,117,711.26. Hartford paid the claim, minus a $1,000 deductible paid by K.B.K. In the Circuit Court for Calvert County, Hartford, as subrogee of K.B.K., sued Mattingly and Phoebus on theories of negligence, breach of contract, and breach of warranties, alleging that, during construction of the Restaurant, they installed and/or supervised the installation of defective electrical wiring, related components, and equipment, all of which caused the fire. After discovery began, Mattingly and Phoebus filed motions for summary judgment, asserting that a “Waivers of Subrogation” clause in the Contract barred Hartford from pursuing the liability claims against them.

Specifically, they argued that K.B.K. had agreed in the Contract to look only to its own property insurance to cover perils such as fire, and therefore Hartford had no subrogation rights to enforce. Hartford opposed the motions and also filed a cross-motion for partial summary judgment, arguing that the Waivers .of Subrogation clause did not apply to the fire loss as the loss had occurred after the Restaurant was built and paid for. Mattingly filed a reply and an opposition to the cross-motion for partial summary judgment, and Phoebus filed a supplemental memorandum in support of its motion for summary judgment. The circuit court conducted a hearing on the motions and held the matter sub curia.

Thereafter, by memorandum and order, it granted summary judgment in favor of Mattingly and ⁶⁷³ Phoebus and denied Hartford’s motion for partial summary judgment. 1 Hartford noted this timely appeal. DISCUSSION Pertinent Contract Provisions and Ruling of the Circuit Court The Contract is an “Abbreviated Standard Form of Agreement Between Owner and Contractor for Construction Projects of Limited Scope Where the basis of payment is a STIPULATED SUM.” It designates K.B.K. as the “Owner” and Mattingly as the “Contractor” and states “the Project is” the Arby’s Restaurant in Dunkirk. For our purposes, the following Contract provisions are relevant. In Article 16, entitled “INSURANCE,” Paragraph 16.4.1 required K.B.K. to have property insurance in place during construction: Unless otherwise provided, the Owner shall purchase and maintain ... property insurance on an “all-risk” policy form, including builder’s risk, in the amount of the initial Contract Sum, plus the value of subsequent modifications and cost of materials supplied and installed by others, comprising total value for the entire Project at the site on a replacement cost basis without optional deductibles.

Such property insurance shall be maintained ... until final payment has been made as provided in Paragraph 14.5 or until no person or entity other than the Owner has an insurable interest in the property required by this [paragraph] to be covered, whichever is later. ⁶⁷⁴ (Emphasis added.) Section 16.5, entitled “WAIVERS OF SUBROGATION,” then provides, at Paragraph 16.5.1: The Owner and Contractor waive all rights against ... each other and any of their subcontractors, sub-subcontractors, agents and employees, each of the other ... for damages caused by fire or other causes of loss to the extent covered by property insurance obtained pursuant to Paragraph 16.4 or other property insurance applicable to the Work, except such rights as they have to proceeds of such insurance .... The policies shall provide such waivers of subrogation by endorsement or otherwise. (Emphasis added.) It is undisputed that the fire loss was not covered by the property insurance K.B.K. obtained pursuant to Paragraph 16.4, as that insurance no longer was in place when the fire occurred (nor should it have been). Whether, when the fire loss occurred, Hartford’s subrogation rights were waived thus depends largely upon the meaning of “covered by ... other property insurance applicable to the Work,” in Paragraph 16.5.1. “The Work” is defined at Contract section 6.3 to mean, the construction and services required by the Contract Documents, whether completed or partially completed, and includes all other labor, materials, equipment and services provided or to be provided by the Contractor to fulfill the Contractor’s obligations.

The Work may constitute the whole or a part of the Project. (Emphasis added.) It is also relevant that, in Section 14.5, entitled “FINAL COMPLETION AND FINAL PAYMENT,” Paragraph 14.5.3 states: The making of final payment shall constitute a waiver of claims by the Owner except those arising from: .1 liens, claims, security interests or encumbrances arising out of the Contract and unsettled; .2 failure of the Work to comply with the requirements of the Contract Documents; or ⁶⁷⁵ .3 terms of special warranties required by the Contract Documents. (Emphasis added.) (We shall refer to this clause as the “Final Payment Waiver Exception.”) In support of their motions for summary judgment, Mat-tingly and Phoebus argued that K.B.K.’s property insurance policy with Hartford was “other property insurance applicable to the Work,” within the meaning of the Waivers of Subrogation clause (Paragraph 16.5.1); therefore, Hartford, as K.B.K.’s subrogee, could not recover against Mattingly or Phoebus (or any other subcontractor) sums it paid K.B.K. on the property insurance claim. In other words, as long as K.B.K. had property insurance coverage for the Restaurant, the Waivers of Subrogation clause remained in effect, post-construction and post-final payment, and damage to the Restaurant from fire (or other perils) would be compensated only by the insurance, not by the parties to the Contract or their subcontractors or agents, notwithstanding fault. 2 Hartford asserted in opposition that the temporal scope of the Waivers of Subrogation clause vis-a-vis losses to the completed Restaurant covered by Owner-obtained insurance is at best ambiguous, so that its meaning was a genuine dispute of material fact barring summary judgment.

In its cross-motion for partial summary judgment, Hartford made the alternative argument that if the Waivers of Subrogation clause was not ambiguous, it only reasonably could be read as not applying to the completed Restaurant. Therefore, K.B.K.’s right of recovery against Mattingly and Phoebus for the fire loss remained intact, and Hartford was subrogated to that right. The circuit court ruled that the pertinent Contract language was clear and the Waivers of Subrogation clause still governed the legal relationship between K.B.K. and Mattingly (and their subcontractors and agents) with respect to the fire loss to the ⁶⁷⁶ completed Restaurant because K.B.K. had property insurance coverage in effect when the fire loss was sustained. It reasoned: Based on the language' in the [Contract], “Work” means construction, even after final payment.

Thus, this court finds that there was “other insurance applicable to the Work [i.e., the Hartford policy].” Therefore, because the damages were caused by fire and were covered by other insurance applicable to the Work, [K.B.K.] waived all rights against [Mattingly and Phoebus] under paragraph 16.5.1 of the [Contract].... [S]ince this court finds that K.B.K .... waived its right to bring suit, Hartford ... also cannot bring suit against [Mattingly and Phoebus]. (Emphasis added.) Question Presented and Standard of Review Hartford poses one question for review, which, stripped of argument, asks whether the circuit court erred in ruling that the Waivers of Subrogation clause in the Contract applied to the fire loss to the completed Restaurant. We review this question de novo, for two reasons. First, on appeal, a decision granting summary judgment always is subject to de novo review, as an issue of law.

See Prison Health Servs., Inc. v. Baltimore County, 172 Md.App. 1, 8 , 912 A.2d 56 (2006). Like the circuit court, we decide whether, on the summary judgment record, the forecasted facts do not generate a genuine dispute of material fact and, on the undisputed material facts, the moving party is entitled to judgment as a matter of law. See Miller v. Bay City Prop. Owners Ass’n, Inc., 393 Md. 620, 632 , 903 A.2d 938 (2006).

Second, the meaning of contract language, including whether language in a contract is ambiguous, is a pure question of law, which we review de novo. Sy-Lene of Wash., Inc. v. Starwood Urban Retail II, LLC, 376 Md. 157, 163 , 829 A.2d 540 (2003). Analysis The issue in this case concerns the temporal scope of the Waivers of Subrogation clause in the Contract; more specifi ⁶⁷⁷ cally, whether the subrogation waiver was triggered when K.B.K. obtained property insurance with lire loss coverage on the completed Restaurant. Waivers of Subrogation clauses commonly appear in construction contracts. “Construction contracts often contain provisions which require the parties to waive their right to claim damages against one another up to the amount of insurance coverage available for their losses.” 4 Philip L. Bruner & Patrick J. O’Connor, Jr., Bruner & O’Connor on Construction Law § 11:100, at 306 (2002).

A subrogation waiver “is a risk-shifting provision premised upon the recognition that it is economically inefficient for parties to a contract to insure against the same risk.” TX. C.C., Inc. v. Wilson/Barnes Gen. Contractors, Inc., 233 S.W.3d 562, 567 (Tex.App.2007). As a matter of policy, subrogation waiverfs] encourage! ] parties [to a construction contract] to anticipate risks and to procure insurance covering those risks and also facilitate! 1 and preserve! ] economic relations and activity.

Because a property owner can generally acquire insurance to protect the property against fire and other perils, in the context of a construction contract, the waiver of subrogation clause shifts the ultimate risk of loss resulting from such perils to the owner to the extent the damages are covered by insurance. The intent is to avoid disruption during construction and provide certainty and eliminate litigation by having the contracting parties look only to the owner’s insurance for protection in the event of loss resulting from fire or other perils. In other words, a waiver of subrogation clause substitutes the protection of insurance for the uncertain and expensive protection of liability litigation. Id. at 567-68 (citations omitted).

Generally, waivers of subrogation clauses are included in construction contracts “to cut down the amount of litigation that might otherwise arise due to the existence of an insured loss.” 4 Bruner & O’Connor, supra, § 11:100, at 306-07. ⁶⁷⁸ The Court of Appeals has explained the well-established rules of contract interpretation as follows: “Maryland adheres to the principle of the objective interpretation of contracts.” Cochran v. Norkunas, 898 Md. 1 , 16, 919 A.2d 700, 710 (2007). The court will “ *giv[e] effect to the clear terms of the contract regardless of what the parties to the contract may have believed those terms to mean.’ ” United Servs. Auto. Ass’n v. Riley, 393 Md. 55, 79 , 899 A.2d 819, 833 (2006) (quoting Towson Univ. v. Conte, 384 Md. 68, 78 , 862 A.2d 941, 946-47 (2004)). “Thus, our search to determine the meaning of a contract is focused on the four corners of the agreement.” Cochran, 398 Md. at 17 , 919 A.2d at 710 (citing Walton v. Mariner Health, 391 Md. 643, 660 , 894 A.2d 584, 594 (2006)). “[Effect must be given to each clause so that a court will not find an interpretation which casts out or disregards a meaningful part of the language of the writing unless no other course can be sensibly and reasonably followed.” Sagner v. Glenangus Farms, Inc., 234 Md. 156, 167 , 198 A.2d 277, 283 (1964).

Clancy v. King, 405 Md. 541, 557 , 954 A.2d 1092 (2008). Contract language is ambiguous “if, to a reasonable person, [it] is susceptible of more than one meaning or is of doubtful meaning.” Cochran, supra, 398 Md. at 17 , 919 A.2d 700 . In deciding whether contract language is ambiguous, we may consider “the character of the contract, its purpose, and the facts and circumstances of the parties at the time of execution.” See Pac. Indem.

Co. v. Interstate Fire & Cas. Co., 302 Md. 383, 388 , 488 A.2d 486 (1985). Our initial focus in interpreting the Contract in this case must be on the meaning of the phrase “other property insurance applicable to the Work,” in the Waivers of Subrogation clause; and that in turn depends upon the meaning of the Contract’s definition of “Work,” which we shall repeat: The term “Work” means the construction and services required by the Contract Documents, whether completed or partially completed, and includes all other labor, materials, ⁶⁷⁹ equipment and services provided or to be provided by the Contractor to fulfill the Contractor’s obligations. The Work may constitute the whole or a part of the Project.

If the definition of “Work” plainly includes the completed Restaurant, K.B.K.’s Hartford insurance policy is “other property insurance applicable to the Work” and the Waivers of Subrogation clause was operative when K.B.K. obtained the Hartford insurance policy. Conversely, if the definition of “Work” plainly does not include the completed Restaurant, the Waivers of Subrogation clause had no effect when the fire loss was sustained and Hartford, as K.B.K.’s subrogee, was free to pursue liability claims against Mattingly and the subcontractors. Finally, if the meaning of “Work” (and therefore the meaning of “other property insurance applicable to the Work”) is ambiguous, we must employ the canons of contract interpretation to determine its significance. 3 There are no Maryland cases interpreting the construction contract phrase “other property insurance applicable to the Work” (or the definition of “Work”) in any AIA contract. The parties cite cases from other jurisdictions that have done so in the context of other, more comprehensive, AIA contracts.

In all but one of those cases, the contracts have contained a Waivers of Subrogation clause and a related “Completed Project Insurance” clause that must be read and understood together. The typical Completed Project Insurance clause reads: “[I]f after final payment property insurance is to be provided on the completed Project through a policy or policies other than those insuring the Project during the construction period, the Owner shall waive all rights in accordance with [the waivers of subrogation clause] for damages caused ⁶⁸⁰ by fire or other perils covered by this separate insurance .... ” See Town of Silverton v. Phoenix Heat Source Sys., Inc., 948 P.2d 9, 11 (Colo.Ct.App.1997) (quoting the contract in question). In Silverton, the Town entered into a contract with a builder to install a new roof on the town hall. A little more than a year after the new roof was completed and paid for, it was damaged by fire.

The loss was covered by the Town’s property insurance. After the insurer assigned its subrogation rights to the Town, the Town sued the builder and various subcontractors, alleging that their defective work on the new roof had caused the fire. The lower court granted summary judgment against the Town based on a subrogation waiver provision in the construction contract. On appeal, the court examined the contract’s Waivers of Subrogation clause in tandem with its Completed Project Insurance clause, and concluded they were not ambiguous as to temporal scope.

Noting that nothing in the Waivers of Subrogation clause reflected an intention on the part of the contracting parties to limit the waivers to liability for damages occurring before final payment, and that, consistent with that, the Completed Project Insurance clause expressly allowed the owner (the Town) to obtain property insurance on the project after completion and final payment, the court found the coexistence of property insurance and subrogation waivers after project completion and payment significant: Because property insurance applicable to the work ... may remain in effect after the final completion date, so too may a waiver of subrogation rights [in the contract] remain in effect. Id. at 13 . On that basis, the Silverton court held that “the waiver of subrogation clause [in the contract] barred subrogation for insured losses to the [W]ork occurring after the final completion date and the date final payment was made.” Id. Likewise, in Colonial Properties Realty Ltd. Partnership v. Lowder Construction Co., 256 Ga.App. 106 , 567 S.E.2d 389 ⁶⁸¹ (2002), the court read an AIA contract’s Waivers of Subrogation clause (and definition of “Work”) together with its Completed Project Insurance clause to plainly mean that the owner of an apartment complex had waived its liability rights against the builder for a fire loss sustained after the complex was built and paid for.

The loss was paid by the owner’s property insurer. The court held that subrogation waivers in the construction contract between the owner and builder remained in force when the loss was sustained post-completion and post-payment, because the owner had obtained property insurance covering the