John L. Mattingly Construction Co. v. Hartford Underwriters Insurance

BATTAGLIA, J. In this certiorari case, we are called upon to address whether ambiguity exists in a waivers of subrogation clause in a form contract governing the construction of a restaurant. We have compressed the various questions into one, that being: Was the Circuit Court correct in granting summary judgment against an insurer on the basis that a waivers of subrogation clause in a form contract plainly and unambiguously encompassed losses sustained after completion of construction and final payment, rather than solely during construction? Mattingly Constr. v. Hartford, 411 Md. 598 , 984 A.2d 243 (2009), 1 Phoebus v. Hartford, 411 Md. 599 , 984 A.2d 243 ³¹⁸ (2009). 2 The Circuit Court for Calvert County determined that ambiguity did not exist and granted the contractor’s and subcontractor’s motions for summary judgment, but we disagree and shall hold that the waivers of subrogation clause was ambiguous and requires further elucidation on remand. Background and Procedural History Our focus is whether a waivers of subrogation clause in a form contract, between the contractor and the owner of the real property and the restaurant to be constructed, encompasses losses sustained after completion of construction and final payment. 3 “Subrogation,” in this regard, is defined as “[t]he substitution of one party for another whose debt the party pays, entitling the paying party to rights, remedies, or securities that would otherwise belong to the debtor.” Black’s Law Dictionary 1563-64 (9th ed. 2009).

In the insurance context, “[a]n insurer asserting a subrogation right is usually viewed as ‘standing in the shoes’ of the insured so that the insurer’s rights are equal to, but no greater than, those of the insured.” Robert E. Keeton and Alan I. Widiss, Insurance ³¹⁹ Law: A Guide to Fundamental Principles, Legal Doctrines, and Commercial Practices § 3.10, at 219 (student ed. 1988); see also Hill v. Cross Country Settlements, LLC, 402 Md. 281, 312 , 936 A.2d 343, 362 (2007) (“Subrogation is the substitution of one person to the position of another, an obligee, whose claim he has satisfied ....”) (internal quotations omitted). “Waivers of Subrogation,” or waivers of the opportunity to make subrogation claims, which are prevalent in construction contracts, have been aptly described by our intermediate appellate court in this case as follows: 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 waiver[s] encourage[ ] parties [to a construction contract] to anticipate risks and to procure insurance covering those risks and also facilitate[ ] 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 damages are covered by insurance .... Id. at [567] (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. ³²⁰ Hartford Underwriters Ins.

Co. v. Phoebus, 187 Md.App. 668, 677 , 979 A.2d 299, 304-05 (2009). Within this framework, we consider the factual circumstances underlying the present controversy. In 2002, K.B.K., Inc. and John L. Mattingly Construction Co., Inc., Petitioner, entered into an American Institute of Architects (“AIA”) 4 form contract number A107-1997, 5 to build an Arby’s Restaurant in Dunkirk, Maryland. The contract designated K.B.K. as the “Owner” and Mattingly as the “Contractor” and provided that “the Project is” the Arby’s Restaurant in Dunkirk.

Section 16.4, governing “Property Insurance,” required K.B.K. to “purchase and maintain” property insurance “until final payment has been made” or “until no person ... other than [K.B.K.] ha[d] an insurable interest in the property”: 16.4.1. Unless otherwise provided, the Owner shall purchase and maintain, in a company or companies lawfully authorized to do business in the jurisdiction in which the Project is located, 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, unless otherwise provided in the Contract Documents or otherwise agreed in writing by all persons and entities who are beneficiaries of such insurance, until final payment has been made as provided in Paragraph 14.5 or until no person or entity other ³²¹ than the Owner has an insurable interest in the property required by this Paragraph 16.4 to be covered, whichever is later. This insurance shall include interests of the Owner, the Contractor, Subcontractors, and sub-subcontractors in the Project.

(Emphasis added). Section 16.5, governing “Waivers of Subrogation,” stated that K.B.K. and Mattingly “waive[d] all rights against ... each other and any of their subcontractors” for damages “covered by property insurance ... applicable to the Work”: 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.b or other property insurance applicable to the Work, except such rights as they have to proceeds of such insurance held by the Owner as fiduciary.... The policies shall provide such waivers of subrogation by endorsement or otherwise. A waiver of subrogation shall be effective as to a person or entity even though that person or entity would otherwise have a duty of indemnification, contractual or otherwise, did not pay the insurance premium directly or indirectly, and whether or not the person or entity had an insurable interest in the property damaged.

(Emphasis added). “The Work” was defined in Section 6.3 of the contract as follows: The term “Work” means 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. ³²² 14.5.3 The making of final payment shall constitute a waiver of claims by the Owner except those arising from: ³²¹ (Emphasis added). Section 14.5, governing “Final Completion and Final Payment,” provided that final payment by K.B.K. constituted a waiver of claims, with limited exceptions: ³²² .1 hens, 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 .3 terms of special warranties required by the Contract Documents. (Emphasis added).

Mattingly hired several subcontractors, including Wilma L. Phoebus d/b/a Wilma Phoebus Electric Company, the other Petitioner herein, which performed electrical work. Although Phoebus was not a party to the K.B.K.—Mattingly contract, Section 10.3 of the K.B.K.—Mattingly contract provided that subcontractors, such as Phoebus, were entitled to “all rights, remedies, and redress afforded” to Mattingly: 10.3 Contracts between the Contractor and Subcontractors shall (1) require each Subcontractor, to the extent of the Work to be performed by the Subcontractor, to be bound to the Contractor by the terms of the Contract Documents, and to assume toward the Contractor all the obligations and responsibilities, including the responsibility for safety of the Subcontractor’s Work, which the Contractor, by the Contract Document, assumes toward the Owner and Architect, and (2) allow the Subcontractor the benefit of all rights, remedies and redress afforded to the Contractor by these Contract Documents. (Emphasis added). Construction was completed and the restaurant opened for business in October, 2003, after which K.B.K. made final payment on the contract.

Subsequently, K.B.K. purchased from Hartford Underwriters Insurance Company, Respondent, a policy of property insurance insuring the restaurant, 6 ³²³ with effective coverage dates of October 1, 2004, through October 1, 2005. Sixteen months after final payment was made, on May 8, 2005, a fire broke out, causing substantial damage to the Arby’s. K.B.K. submitted a claim to Hartford for property damage totaling $1,117,711.26, which Hartford paid, less a $1,000 deductible. Thereafter, Hartford, as subrogee 7 of K.B.K., filed a complaint against Mattingly and Phoebus in the Circuit Court for Calvert County, alleging negligence, breach of contract, and breach of warranty, asserting that the “failure of electrical wiring within the Arby’s Restaurant” caused the fire. 8 Mattingly and Phoebus answered, generally denying liability and asserting various affirmative defenses.

Thereafter, Petitioners filed motions for summary judgment, asserting that the waivers of subrogation clause, Section 16.5 in the AIA form contract, precluded Hartford’s claim. Specifically, Mat-tingly and Phoebus argued that “the parties agreed to look solely to the insurance” to cover perils such as fire, and therefore, Hartford could not enforce any subrogation rights. Hartford opposed the motions and also filed a cross-motion for partial summary judgment, asserting that the waivers of subrogation provision was not applicable, because K.B.K., its insured, sustained the loss after completion of construction and final payment. Mattingly filed a reply and opposition to ³²⁴ Hartford’s cross-motion for partial summary judgment, and Phoebus filed a supplemental memorandum in support of its motion for summary judgment.

After a hearing on the motions, the judge issued an opinion and order granting summary judgment in favor of Mattingly and Phoebus and denying Hartford’s cross-motion for partial summary judgment. The judge determined that the waivers of subrogation clause was clear and unambiguous because the term “the Work” in Section 6.3 of the form contract included “the building as constructed, even after final payment.” The judge also reasoned that because the damage caused by the fire was covered by “other insurance applicable to the Work,” a phrase in Section 16.5 of the contract, K.B.K., and consequently, Hartford waived any rights against Mattingly and Phoebus. Hartford noted a timely appeal to the Court of Special Appeals, which reversed and remanded in a reported opinion, Hartford Underwriters Ins. Co. v. Phoebus, 187 Md.App. 668 , 979 A.2d 299 (2009), in which it concluded that the waivers of subrogation provision, read in tandem with the definition of “the Work,” was ambiguous and “reasonably [could] be read to have more than one meaning, temporally.” Id. at 685 , 979 A.2d at 309 .

We agree with the Court of Special Appeals that summary judgment in favor of Mattingly and Phoebus was improper, because the waivers of subrogation clause was ambiguous as to whether it encompassed losses sustained after completion of construction and final payment; we add our two cents, nevertheless, regarding the path that should be followed by the Circuit Court on remand. Standard of Review The entry of summary judgment is governed by Rule 2-501, which states in relevant part: (f) Entry of judgment. The court shall enter judgment in favor of or against the moving party if the motion and response show that there is no genuine dispute as to any ³²⁵ material fact and that the party in whose favor judgment is entered is entitled to judgment as a matter of law. As we recently stated in Blondell v. Littlepage, 413 Md. 96 , 991 A.2d 80 (2010), the standard of review of a grant of such a motion is as follows: In considering a trial court’s grant of a motion for summary judgment, this Court reviews the record in the light most favorable to the non-moving party.

Anderson v. Council of Unit Owners of Gables on Tuckerman Condominium, 404 Md. 560, 570-71 , 948 A.2d 11, 18 (2008); Rodriguez v. Clarke, 400 Md. 39 , 926 A.2d 736 (2007); Rhoads v. Sommer, 401 Md. 131, 148 , 931 A.2d 508, 518 (2007) (“We review the record in the light most favorable to the non-moving party and construe any reasonable inferences that may be drawn from the facts against the moving party.”); Harford County v. Saks, 399 Md. 73, 82 , 923 A.2d 1, 6 (2007) (In reviewing a trial court’s decision on a motion for summary judgment, “we seek to determine whether any material facts are in dispute and, if they are, we resolve them in favor of the non-moving party.”); Lovelace v. Anderson, 366 Md. 690, 695 , 785 A.2d 726, 728 (2001) (In reviewing a grant of the defendants’ motions for summary judgment, “we must review the facts, and all inferences therefrom, in the light most favorable to the plaintiffs.”). If no material facts are in dispute, this Court must determine whether the Circuit Court correctly entered summary judgment as a matter of law. Anderson, 404 Md. at 571 , 948 A.2d at 18 ; Rodriguez, 400 Md. at 70 , 926 A.2d at 754 ; Saks, 399 Md. at 82 , 923 A.2d at 6 ; Property and Casualty Ins. Guaranty Corp. v. Yanni, 397 Md. 474, 480-81 , 919 A.2d 1, 5 (2007); Standard Fire Ins.

Co. v. Berrett, 395 Md. 439, 451 , 910 A.2d 1072, 1079 (2006). On appeal from an order entering summary judgment, we review “only the grounds upon which the trial court relied in granting summary judgment.” Rodriguez, 400 Md. at 70 , 926 A.2d at 754 , quoting Standard Fire, 395 Md. at 450 , 910 A.2d at 1079 ; Eid v. Duke, 373 Md. 2, 10 , 816 A.2d 844, 849 (2003), quoting Lovelace, 366 Md. at 695 , 785 A.2d at 729 . ³²⁶ Id. at 110, 991 A.2d at 88 , quoting Gourdine v. Crews, 405 Md. 722, 735-36, 955 A.2d 769, 777-78 (2008). Discussion Mattingly and Phoebus assert that the waivers of subrogation clause in Section 16.5 of the contract clearly and unambiguously encompassed losses sustained after substantial completion of the Arby’s and final payment. Petitioners claim that the phrase “other property insurance applicable to the Work” in Section 16.5 refers to both ongoing construction as well as the completed restaurant, as evidenced by the definition of “the Work” in Section 6.3.

Mattingly and Phoebus also cite decisions from other jurisdictions which they claim support the notion that subrogation waivers clearly encompass post-construction losses. Hartford counters that the contract is “vague and ambiguous” regarding whether the waivers of subrogation provision remained in force after the completion of the restaurant and that the “most reasonable interpretation” is that the waiver “was not intended to apply to losses that occur many months or years after substantial completion and final payment.” Hartford further asserts that decisions from other jurisdictions cited by Mattingly and Phoebus are inapposite, because those courts interpreted different ALA form contracts from the instant one in that they included provisions specifically addressing what to do in the event of damages occurring after construction was completed and final payment made. In interpreting the contract in issue, we are mindful that “Maryland adheres to the principle of the objective interpretation of contracts.” Clancy v. King, 405 Md. 541, 557, 954 A.2d 1092, 1101 (2008), quoting Cochran v. Norkunas, 398 Md. 1, 16 , 919 A.2d 700, 709 (2007). Our task in determining the meaning of a contract is necessarily “focused on the four corners of the agreement.” Clancy, 405 Md. at 557 , 954 A.2d at 1101 , quoting Cochran, 398 Md. at 17 , 919 A.2d at 710 . “When the clear language of a contract is unambiguous, the court will give effect to its plain, ordinary, and usual meaning, taking into account the context in which it is used.” Sy-Lene ³²⁷ of Washington, Inc. v. Starwood Urban Retail II, LLC, 376 Md. 157, 167 , 829 A.2d 540, 546 (2003); accord Langston v. Langston, 366 Md. 490, 506 , 784 A.2d 1086, 1095 (2001).

In contrast, a contract is “ambiguous if it is subject to more than one interpretation when read by a reasonably prudent person.” Sy-Lene, 376 Md. at 167 , 829 A.2d at 547 ; see also Calomiris v. Woods, 353 Md. 425, 436 , 727 A.2d 358, 363 (1999) (“Under the objective view, a written contract is ambiguous if, when read by a reasonably prudent person, it is susceptible of more than one meaning.”). “If the contract is ambiguous, the court must consider any extrinsic evidence which sheds light on the intentions of the parties at the time of the execution of the contract.” Sy-Lene, 376 Md. at 167-68 , 829 A.2d at 547 , quoting County Comm’rs of Charles County v. St. Charles Assocs. Ltd. P’ship, 366 Md. 426, 445 , 784 A.2d 545, 556 (2001). “It is a basic principle of contract law that, in construing the language of a contract, ambiguities are resolved against the draftsman of the instrument.” Burroughs Corp. v. Chesapeake Petroleum & Supply Co., Inc., 282 Md. 406, 411 , 384 A.2d 734, 737 (1978). Section 16.5, governing “Waivers of Subrogation,” stated that K.B.K. and Mattingly “waive[d] all rights against ... each other and any of their subcontractors” for damages caused by perils such as fire “to the extent covered by property insurance obtained pursuant to [Section] 16.4 or other property insurance applicable to the Work ....” (emphasis added). The issue is whether property insurance underwritten by Hartford, secured after completion of the restaurant, comes within this phrase, “other property insurance applicable to the Work,” abrogating any rights of subrogation.

Mattingly and Phoebus assert that this language plainly refers to the construction period as well as the completed restaurant, such that K.B.K. waived subrogation rights, without any temporal limitation to the clause whatsoever. Hartford counters that the use of the phrase “the Work” varies throughout the contract, such that the waivers of subrogation clause is rendered ambiguous. ³²⁸ “[T]he Work” is defined in Section 6.3 of the form contract as follows: The term “Work” means 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. In the first sentence of the definition, the phrase “construction and services required by the Contract” clearly refers to the construction period.

The next phrase, “whether completed or partially completed,” however, could yield a different understanding because it could refer reasonably to the completed restaurant. The second sentence of the definition, which states, “[t]he Work may constitute the whole or a part of the Project,” also could be construed to modify the prior phrase to include all actions necessary to constitute performance under the contract. On the other hand, this phrase could be interpreted reasonably to refer to the completed Arby’s restaurant. As a result, the waivers of subrogation clause, including “other property insurance applicable to the Work,” may refer reasonably to “other property insurance applicable” to the ongoing construction, or, “other property insurance applicable” to the completed Arby’s.

Thus, the waivers of subrogation clause, in which the words “the Work” are prominent, is internally inconsistent, and ergo, ambiguous, as also recognized by our colleagues on the intermediate appellate court. Section 14.5, governing “Final Completion and Final Payment,” exacerbates this ambiguity contextually. The provision states that by making final payment, K.B.K. does not waive any claim that “the Work” does not comply with the contract. As noted by the intermediate appellate court, the clause