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Insurers lose subrogation rights due to underlying contract waiver (US)

13 March 2023 Patrick Bracher, Norton Rose Fulbright

After paying about $80 million for claim for an explosion and fire that damaged the glass furnace and associated equipment of the insured’s glass manufacturing plant, the insurers unsuccessfully attempted to pursue subrogation claims against the defendant-contractors who were allegedly responsible for the incident because of negligence and breach of contract. The loss was in the vicinity of $80 million. The claim failed because the contracts between the manufacturer and its contractors included a waiver of subrogation clause.

The parties to the contract “waived all rights against each other … for damages caused by fire or other causes of loss to the extent covered by insurance obtained pursuant to” the agreement. The policies were required to provide for waivers of subrogation but did not do so. It was held that the engineering service agreement clearly and unambiguously established the terms covering the parties’ business relationship. The applicable Michigan law provides that a waiver of subrogation provision will be enforced except if it relates to a gross negligence cause of action. The insurers had no greater rights than those they insured and were bound by the waiver. The only possible cause of action was on the basis of gross negligence. These were preliminary proceedings for summary judgment and the claim for gross negligence was reserved for later adjudication.

In South African law a waiver of subrogation clause will be upheld. It will bind the insurers especially where the intention was to insure all parties to the contract. If there is a waiver of subrogation that the insurer does not know about at the time of entering into the contract, that may be a material non-disclosure.

ACE American Insurance Co v Toledo Engineering Co Inc. case number 2:18-cv-11503 in the US District Court for the Eastern District of Michigan.

First published by: Financial Institutions Legal Snapshot

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