Contra Proferentem and Ambiguity Preclude Subrogation Recovery
Here’s a typical scenario. The general contractor or owner takes out a all-risk builder’s policy to cover a construction project. Subcontractors are included as additional insureds where required by their subcontracts, but only “as their respective interests may appear.” The policy has a subrogation clause, but the clause includes a provision precluding subrogation against additional insureds. A loss occurs to the property allegedly caused by the sole negligence of a subcontractor. The insurer pays the loss and brings a subrogation action against the subcontractor. The subcontractor claims that the insurer has no right of subrogation. Who prevails? As in many cases, the answer depends on the jurisdiction.
In Certain Underwriters at Lloyd’s of London v. Sunbelt Rentals, Inc., No. 18-5617 (6th Cir. Oct. 30, 2019) (Not Recommended for Full-Text Publication), the circuit court reversed a district court’s declaratory judgment holding that the insurer could recover its claim payments through subrogation against the subcontractor. The district court, while noting that the insurance contract precluded subrogation against an additional insured like the subcontractor, held that the subcontractor was only an additional insured on a limited basis for property damage to its equipment and was not an additional insured for liability purposes. Therefore, the court held that subrogation on the liability claim was not precluded.
In reversing, the circuit court noted that there were two lines of case law on this issue. One line supported the district court’s determination. See Turner Const. Co. v. John B. Kelly Co., 442 F. Supp. 551, 555 (E.D. Pa. 1976). The other line of cases goes the other way and precludes subrogation against a subcontractor for the subcontractor’s negligence. See Baugh-Belarde Const. Co. v. Coll. Utilities Corp., 561 P.2d 1211, 1216 (Alaska 1977). Because Tennessee had not ruled on this issue, the court invoked Tennessee contract interpretation rules. The court held that the builder’s risk policy was ambiguous about whether subrogation was permitted in this case and applied contra proferentem principles to construe the policy in favor of the additional insured and against the insurance company.
The court did make another relevant observation. The court noted that many insurance policies routinely exclude coverage for losses stemming from the sole negligence of an additional insured, but no such exclusion was present in this policy. But the real decision point was the finding of an ambiguity on this issue and construing the policy in favor of the additional insured. Given the split of authority on this issue, one can expect to see more modifications to builder’s risk policies to make it clear whether subcontractor’s sole negligence is covered under the policies.