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New Jersey Ruling Makes Construction Subrogation Cases More Difficult for Insurers

April 19, 2019

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<p style="text-align: justify;">In <em><a href="https://www.wcmlaw.com/wp-content/uploads/2019/04/Wichot-v.-Allstate.pdf">Wichot v. Allstate</a></em>, the New Jersey appellate court recently held that ACE American Insurance was unable to subrogate its claim against a subcontractor plumber for over $1 million in damages.<span>  </span>In interpreting a standard construction contract, the court held that ACE’s insured waived its right to assert a claim, even though the contracted work had been completed prior to the loss.<span> </span></p>
<p style="text-align: justify;">ACE insured Equinox Development under a policy covering, in part, “property while in the course of construction.”<span>  </span>ACE’s policy with Equinox was effective from September 2012 until September 2013.<span>  </span>It also contained a standard subrogation clause.<span>  </span>Equinox Development contracted with general contractor Grace Construction to build the “core and shell” of a new Equinox gym.<span>  </span>Grace then subcontracted the plumbing work to American Medical Plumbing. <span>    </span>In April 2013, after the contracted work had been completed, a water main broke, flooding the club and causing about $8,000 in damage to the “core and shell” and approximately $1.2 million overall.<span>  </span>ACE then paid Equinox $1.2 million for the total damages and filed suit against AM Plumbing, alleging that they were at fault for the water break.<span> </span></p>
<p style="text-align: justify;">AM Plumbing filed a motion for summary judgment arguing that ACE’s claims were barred by the terms in the A-201 construction contract to which Equinox and AM Plumbing where parties.<span>  </span>The contract required Equinox to obtain builder’s risk insurance and provided for a waiver of subrogation clause which stated that the parties waived their rights with respect to damages “to the extent covered by property insurance applicable to the Work.”<span> </span></p>
<p style="text-align: justify;">Although the damages were almost all unrelated to the “core and shell’ work, the court ultimately held that waiver prevented ACE from suing AM Plumbing because all of the damages were “covered” by “property insurance applicable to the Work.”<span>  </span>The court stated that this was the “majority view” in other jurisdictions.<span>  </span>Further, the court held that additional terms in the contract meant that the waiver applied whether or not AM Plumbing had an insurable interest in the property.<span>  </span>Thus, ACE was unable to recover from AM Plumbing, notwithstanding the fact that the damages occurred after the contracted work had been completed.</p>
<p style="text-align: justify;">This decision creates an additional hurdle for insurers in pursuing subrogation claims against New Jersey contractors.<span>  </span>However, subrogating insurers would be wise to check to see whether, as is frequently the case, the parties modify the standard contract in some way.<span>  </span>Further, the New Jersey Supreme Court has not yet interpreted these provisions, meaning insurers may still be able to distinguish this case on the facts presented.</p>
<p style="text-align: justify;">Thanks to Doug Giombarrese for his contribution to this post. Please email <a href="mailto:chayes@wcmlaw.com">Colleen Hayes</a> with any questions.</p>

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