Mississippi Supreme Court Applies AIA Subrogation Waiver to Non-Work Property Damage

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In Liberty Mutual Fire Ins. Co. v. Fowlkes Plumbing., L.L.C., No. 2019-FC-10285-SCT, 2020 Miss. LEXIS 44, the Supreme Court of Mississippi considered whether the subrogation waiver in the General Conditions of the Construction Contract, American Institute of Architects (AIA) form A201-2007, applied to claims for damages to property unrelated to the construction work. Siding with the majority of jurisdictions that have addressed this issue, the court interpreted the AIA subrogation waiver to apply to any property damage, whether or not related to the construction work (i.e. the Work), if the property insurance covering the non-Work property also insured the construction work.

In Fowlkes Plumbing, the Chickawsaw County School District hired Sullivan Enterprises, Inc. (Sullivan) in May 2015 to perform restoration work at its attendance center. The school district and Sullivan entered into an AIA contract which incorporated the A201-2007 General Conditions. In pertinent part, section 11.3.7 of A201-2007 states:

The Owner and Contractor waive all rights against… each other and any of their subcontractors… for damages caused by fire or other causes of loss to the extent covered by property insurance obtained pursuant to this Paragraph 11.3 or other property insurance applicable to the Work, expect such rights as they have to the proceeds of such insurance held by Owner as fiduciary.

Subparagraph 11.3.5 states:

If during the Project construction period the Owner insures properties, real or personal or both, at or adjacent to the site by property insurance under policies separate from those insuring the Project,… the Owner shall waive all rights in accordance with the terms of Subparagraph 11.3.7 for damages caused by fire or other causes of loss covered by this separate property insurance.

Sullivan subcontracted Fowlkes Plumbing, Inc. (Fowlkes) and Quality Heat & Air, Inc. (Quality) to assist with the renovations. In July 2015, while renovations were in progress, a fire occurred that completely destroyed the attendance center. The property insurance carrier for the attendance center paid the school district $4.3 million for the damage. The insurer then filed a subrogation action against the contractors seeking to recover the amount it paid the school district. The defendants moved for dismissal on grounds that the AIA contract barred subrogation. The United States District Court for the Northern District of Mississippi found that the waiver of subrogation clause in the AIA contract did not apply to damages to the non-Work property, allowing the insurer to proceed in litigation as to the non-Work property damages. The United States Court of Appeals for the Fifth Circuit allowed an interlocutory appeal and certified the question of whether the subrogation waiver clause applies to non-Work property to the Supreme Court of Mississippi.

Noting that the question was an issue of first impression in Mississippi, the Supreme Court focused on the plain meaning of the contract, holding that the AIA contract language was unambiguous. The court noted that since the contract was unambiguous, “the intention of the contracting parties should be gleaned solely from the wording of the contract.”

In reviewing section 11.3.7 of A201-2007, the court found that the waiver of subrogation operates as a blanket waiver of property damage to the extent the property is covered by insurance. The court held that the phrase “applicable to the Work” refers to any insurance that insures the Work, and does not limit the waiver to only damages to Work property, as a minority of jurisdictions have held. The court noted that the interpretation by the minority, when applied in conjunction with section 11.3.5, is illogical. According to the court, such an interpretation would mean that the waiver clause would apply—and bar subrogation for non-Work damages, if two separate policies were purchased, one for Work property and one for non-Work—but the waiver clause would not apply to non-Work property if a preexisting insurance policy covered both Work and non-Work property. The court agreed that the majority interpretation—which applies the subrogation waiver to all property damage covered by insurance that insures the Work—better captures the plain meaning of the language and furthers the goal of the contract.

The Fowlkes Plumbing case adds yet another kink to the armor of the minority interpretation of the AIA subrogation waiver, which permits subrogation for damage to non-Work property. Unfortunately, the Mississippi Supreme Court joined the majority in holding that the AIA subrogation waiver applies to Work and non-Work property. Subrogation professionals handling cases in Mississippi must consider this decision when handling a construction claim involving a standard AIA contract.

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