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The Veiled Threat of Waiver of Subrogation Provisions in Pennsylvania

The Pennsylvania Superior Court recently held that a Waiver of Subrogation provision in a construction contract was enforceable and barred the insurer from seeking recovery, despite the fact that the insurer had no notice of, and did not consent to the inclusion of the provision in the contract. In light of this development, insurers must take immediate steps to protect themselves from such waivers.

In Universal Underwriters Insurance Company v. A. Richard Kacin, Inc., 916 A.2d 686 (Pa. Super. 2007), the insured, Watson Chevrolet Oldsmobile, hired A. Richard Kacin, Inc. (the general contractor) and Bassett Masonry, Inc. (a subcontractor) to perform construction work at its car dealership. The construction contract included a standard-form Waiver of Subrogation clause. Watson‘s insurers, Universal Underwriters Insurance Company and Motors Insurance Corporation, were not parties to the contract, had no notice of the waiver provision, and did not consent to its inclusion in the contract.

Due to the contractor‘s and subcontractor‘s negligence, a post-construction rainstorm caused one of the dealership‘s walls to collapse. The insurers paid Watson‘s claim and sued the contractor and subcontractor to recover the damages.

The Court of Common Pleas of Allegheny County granted summary judgment in favor of the Defendant contractors, holding that the Waiver of Subrogation provision in the contract barred the insurers‘ suit. The insurers appealed to the Superior Court, which affirmed the lower court‘s decision.

In its opinion, the Superior Court recognized this case as one of first impression in Pennsylvania. Following a review of the general principles of subrogation, the Court held that contracting parties should be free to make and execute contracts as they see fit, and that such freedom includes the right to release a party from liability for its own negligence. The Court explained that, "[s]ince an insurer‘s right to subrogation is limited to the rights of the insured, and there can be no subrogation where an insured has no cause of action against a defendant, an insurer has no subrogation claim against a party to an agreement where the agreement entered before the loss releases the tortfeasor." Put simply, this means that if the insured contracts away its right to sue, it also contracts away the insurer‘s right to sue.

The insurers argued, however, that they should not be bound by the Waiver of Subrogation provision because they were not parties to the contract, had no notice of the provision and did not consent to its inclusion in the contract. The Court, however, rejected this argument. In doing so, the Court reasoned that because the right to subrogation is derivative in nature and flows entirely from the insured‘s rights, the fact that the insurers were not parties to the contract and had no notice of the provision was simply irrelevant.

In justifying its holding, the Court stated that its decision allows contracting parties to retain their autonomy in making and executing contracts and does not harm insurers because they possess the means to protect themselves from such waivers. The Court noted that insurers can protect themselves in a number of ways. For example, an insurer could raise premiums to compensate for the potential loss of subrogation rights. It could investigate whether a potential insured has already waived such rights, or could require potential insureds to warrant at the time a policy is issued that they will not waive the insurer‘s subrogation rights. It could obtain reinsurance to compensate for any waiver of subrogation rights. Or the insurer could insert an exclusion into its policies that permits it to deny coverage if an insured waives subrogation rights.

The Court‘s proposed methods of protection present a variety of challenges to insurers. Raising premiums could negatively impact an insurer‘s business, particularly if its competitors do not institute a similar policy. Investigating waiver of subrogation issues prior to the issuance of a policy may not protect the insurer in all cases. In light of the adhesive nature of many Waiver of Subrogation contract provisions, Courts may rule that the insurer is not permitted to deny coverage based on an insured‘s breach of a warranty regarding such provisions. Reinsurance may not fully compensate an insurer for the loss of subrogation rights in all cases.

At this time, it appears as though the best way for insurers to protect themselves from Waiver of Subrogation provisions is to insert clear, thorough and unambiguous exclusions into all of their policies providing that if an insured enters into a contract containing a Waiver of Subrogation provision, the insurer may deny coverage for any loss based on which it would have been entitled to subrogation rights if not for the provision. Absent such an exclusion, insurers are likely to encounter frequent cases in which their insurers have contracted away any chance at a subrogation recovery.

This article was edited by Jeffrey A. Wothers, Partner at Niles, Barton & Wilmer, LLP who practices in the litigation department concentrating in property insurance law, related first party insurance matters and commercial litigation. Mr. Wothers is admitted to practice in Pennsylvania, Maryland, West Virginia and the District of Columbia.

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