Source: http://www.lexology.com, December 6, 2013
By: Cade J. Laverty and C. Michael Shull III, Frost Brown Todd LLC
It is sometimes difficult to tell whose insurer will be liable for certain occurrences on a construction project. The whole purpose of contracting is to allocate risk—hopefully to the party that is better situated to deal with that risk. In allocating that risk, all parties need to know which party is ultimately responsible for insuring against certain risks. While some court opinions can leave a reader unsure of the ultimate holding and its application, the Indiana Court of Appeals recently issued a clear and concise opinion regarding issues of insurer liability in the context of interpreting an American Institute of Architects (AIA) standard form agreement.
In Allen Cnty. Pub. Library v. Shambaugh & Son, L.P., the court considered issues of liability related to environmental remediation costs incurred as a result of a diesel spill under a standard AIA contract form. The spill was allegedly caused when a line connecting a back-up generator tank to its generator was struck by a certain contractor involved in the renovation of a library. The resultant leak allowed approximately 3,000 gallons of fuel to leak into the ground under the library. This ground was not a part of the scope of Work as defined in the contract. This was a key fact in the Court’s decision.
Both the library and the contractors on the job obtained multiple insurance policies. The library obtained a builders risk policy which contained a specific “coverage extension” for environmental remediation. When the library sued to recover the costs it incurred in cleaning up the diesel spill, the defendant contractors asserted that the library had waived its ability to seek compensation due to one of the provisions contained in the AIA agreement which provides for a waiver of subrogation, as well as the library having obtained its own pollution cleanup insurance.
The Court stated that the issue was simply one of contract interpretation. In looking to prior case law interpreting the same AIA provision from Indiana and elsewhere, the Court noted that the scope of the waiver of subrogation is limited to the Work performed under the contract. Thus, the waiver of subrogation provision did not bar recovery for damage to land and property outside of the scope of Work performed by the contractors.
As set forth in the parties’ agreement, the library was only required to obtain insurance covering the site of the Work, but not the surrounding jobsite and property. However, the contractors were required to procure liability insurance that would provide coverage for damage to property “other than to the Work itself.” Thus, the AIA contract clearly delineated responsibility for insurance such that the project owner was required to provide insurance covering any mishaps that cause harm to the Work itself. The contractors, on the other hand, were required to provide insurance covering mishaps causing harm outside of the “Work.”
The Court strictly construed the contract and applied its terms as written. Therefore, the library could seek recovery from the contractor and its insurer for cleanup costs incurred which had affected the greater library site. The fact that the library had procured its own limited insurance policy covering environmental remediation had no bearing on the obligations of the contractors.
It is refreshing to see a case with such clear reasoning and interpretation. The AIA set of standard form agreements are meant to be easily interpreted and result in predictable results. That is just what occurred in this matter. Risks were clearly allocated during contracting, and the parties received—whether they liked it or not—the benefits and obligations of their respective bargains. The lesson learned from this case is standard form agreements with minimal alterations to key provisions are an effective and fair means to contract in the construction industry.