John L. Mattingly Constr. Co. Inc v. Hartford Underwriters Ins. Co.Wilma L. Phoebus

• Citation: 415 Md. 313,999 A.2d 1066
• Decision Date: 27 July 2010
• Docket Number: 144 Sept. Term,2009.,No. 136,136
• Parties: JOHN L. MATTINGLY CONSTRUCTION CO., INC.v.HARTFORD UNDERWRITERS INSURANCE COMPANY.Wilma L. Phoebus, d/b/a Phoebus Electric Companyv.Hartford Underwriters Insurance Company.
• Court: Maryland Court of Appeals

415 Md. 313
999 A.2d 1066

JOHN L. MATTINGLY CONSTRUCTION CO., INC.
v.
HARTFORD UNDERWRITERS INSURANCE COMPANY.
Wilma L. Phoebus, d/b/a Phoebus Electric Company
v.
Hartford Underwriters Insurance Company.

Nos. 136, 144 Sept. Term, 2009.

Court of Appeals of Maryland.

July 27, 2010.

999 A.2d 1067

COPYRIGHT MATERIAL OMITTED

999 A.2d 1068

David E.C. Grant (O'Conor, Grant & Samuels of Towson, MD), on brief, for petitioners in No. 136, Sept. Term, 2009.

Edward A. Jaeger, Jr. (White and Williams LLP of Philadelphia, PA), on brief, for respondent in Nos. 136 and 144, Sept. Term, 2009.

Sara Anderson Frey (Josh M. Greenbaum of Cozen O'Connor of Philadelphia, PA; Michael J. Schreyer of Seidman & Schreyer, LLC of Waldorf, MD), on brief, for petitioner in No. 144, Sept. Term, 2009.

Argued before BELL, C.J., HARRELL, BATTAGLIA, GREENE, MURPHY and BARBERA, JJ.

BATTAGLIA, J.

In this certiorari case, we are called upon to address whether ambiguity exists in a waivers of subrogation clause in a form contract governing the construction of a restaurant. We have compressed the various questions into one, that being:

Was the Circuit Court correct in granting summary judgment against an insurer on the basis that a waivers of subrogation clause in a form contract plainly and unambiguously encompassed losses sustained after completion of construction and final payment, rather than solely during construction?

Mattingly Constr. v. Hartford, 411 Md. 598, 984 A.2d 243 (2009),¹

999 A.2d 1069

Phoebus v. Hartford, 411 Md. 599, 984 A.2d 243 (2009). ² The Circuit court for Calvert County determined that ambiguity did not exist and granted the contractor's and subcontractor's motions for summary judgment, but we disagree and shall hold that the waivers of subrogation clause was ambiguous and requires further elucidation on remand.

Background and Procedural History

Our focus is whether a waivers of subrogation clause in a form contract, between the contractor and the owner of the real property and the restaurant to be constructed, encompasses losses sustained after completion of construction and final payment.³ “Subrogation,” in this regard, is defined as “[t]he substitution of one party for another whose debt the party pays, entitling the paying party to rights, remedies, or securities that would otherwise belong to the debtor.” Black's Law Dictionary 1563-64 (9th ed. 2009). In the insurance context, “[a]n insurer asserting a subrogation right is usually viewed as ‘standing in the shoes' of the insured so that the insurer's rights are equal to, but no greater than, those of the insured.” Robert E. Keeton and Alan I. Widiss, Insurance Law: A Guide to Fundamental Principles, Legal Doctrines, and Commercial Practices § 3.10, at 219 (student ed. 1988); see also Hill v. Cross Country Settlements, LLC, 402 Md. 281, 312, 936 A.2d 343, 362 (2007) (“Subrogation is the substitution of one person to the position of another, an obligee, whose claim he has satisfied ....”) (internal quotations omitted).

“Waivers of Subrogation,” or waivers of the opportunity to make subrogation claims, which are prevalent in construction contracts, have been aptly described by our intermediate appellate court in this case as follows:

Waivers of Subrogation clauses commonly appear in construction contracts. “Construction contracts often contain provisions which require the parties to waive their right to claim damages against one another up to the amount of insurance coverage available for their losses.” 4 Philip L. Bruner & Patrick J. O'Connor, Jr., Bruner & O'Connor On Construction Law § 11:100, at 306 (2002). A subrogation waiver “is a risk-shifting provision premised upon the recognition that it is economically inefficient for parties to a contract to insure against the same risk.”

999 A.2d 1070

TX. C.C., Inc. v. Wilson/Barnes Gen. Contractors, Inc., 233 S.W.3d 562, 567 (Tex.App.2007). As a matter of policy,

subrogation waiver[s] encourage[ ] parties [to a construction contract] to anticipate risks and to procure insurance covering those risks and also facilitate[ ] and preserve[ ] economic relations and activity. Because a property owner can generally acquire insurance to protect the property against fire and other perils, in the context of a construction contract, the waiver of subrogation clause shifts the ultimate risk of loss resulting from such perils to the owner to the extent damages are covered by insurance....

Id. at [567] (citations omitted). Generally, waivers of subrogation clauses are included in construction contracts “to cut down the amount of litigation that might otherwise arise due to the existence of an insured loss.” 4 Bruner & O'Connor, supra, § 11:100, at 306-07.

Hartford Underwriters Ins. Co. v. Phoebus, 187 Md.App. 668, 677, 979 A.2d 299, 304-05 (2009). Within this framework, we consider the factual circumstances underlying the present controversy.

In 2002, K.B.K., Inc. and John L. Mattingly Construction Co., Inc., Petitioner, entered into an American Institute of Architects (“AIA”) ⁴ form contract number A107-1997,⁵ to build an Arby's Restaurant in Dunkirk, Maryland. The contract designated K.B.K. as the “Owner” and Mattingly as the “Contractor” and provided that “the Project is” the Arby's Restaurant in Dunkirk. Section 16.4, governing “Property Insurance,” required K.B.K. to “purchase and maintain” property insurance “until final payment has been made” or “until no person ... other than [K.B.K.] ha[d] an insurable interest in the property”:

16.4.1. Unless otherwise provided, the Owner shall purchase and maintain, in a company or companies lawfully authorized to do business in the jurisdiction in which the Project is located, property insurance on an “all-risk” policy form, including builder's risk, in the amount of the initial Contract Sum, plus the value of subsequent modifications and cost of materials supplied and installed by others, comprising total value for the entire Project at the site on a replacement cost basis without optional deductibles. Such property insurance shall be maintained, unless otherwise provided in the Contract Documents or otherwise agreed in writing by all persons and entities who are beneficiaries of such insurance, until final payment has been made as provided in Paragraph 14.5 or until no person or entity other

than the Owner has an insurable interest in the property required by this Paragraph 16.4 to be covered, whichever is later. This insurance shall include interests of the Owner, the Contractor, Subcontractors, and sub-subcontractors in the Project.
(Emphasis added). Section 16.5, governing “Waivers of Subrogation,” stated that K.B.K. and Mattingly “waive[d] all rights against ... each other and any of their subcontractors” for damages “covered by property insurance ... applicable to the Work”:

999 A.2d 1071

16.5.1 The Owner and Contractor waive all rights against ... each other and any of their subcontractors, sub-subcontractors, agents and employees, each of the other ... for damages caused by fire or other causes of loss to the extent covered by property insurance obtained pursuant to Paragraph 16.4 or other property insurance applicable to the Work, except such rights as they have to proceeds of such insurance held by the Owner as fiduciary.... The policies shall provide such waivers of subrogation by endorsement or otherwise. A waiver of subrogation shall be effective as to a person or entity even though that person or entity would otherwise have a duty of indemnification, contractual or otherwise, did not pay the insurance premium directly or indirectly, and whether or not the person or entity had an insurable interest in the property damaged.

(Emphasis added). “The Work” was defined in Section 6.3 of the contract as follows:

The term “Work” means the construction and services required by the Contract Documents, whether completed or partially completed, and includes all other labor, materials, equipment and services provided or to be provided by the Contractor to fulfill the Contractor's obligations. The Work may constitute the whole or a part of the Project.

(Emphasis added). Section 14.5, governing “Final Completion and Final Payment,” provided that final payment by K.B.K. constituted a waiver of claims, with limited exceptions:

14.5.3 The making of final payment shall constitute a waiver of claims by the Owner except those arising from:

.1 liens, claims, security interests or encumbrances arising out of the Contract and unsettled;

.2 failure of the Work to comply with the requirements of the Contract Documents; or

.3 terms of special warranties required by the Contract Documents.

(Emphasis added).

Mattingly hired several subcontractors, including Wilma L. Phoebus d/b/a Wilma Phoebus Electric Company, the other Petitioner herein, which performed electrical work. Although Phoebus was not a party to the K.B.K.-Mattingly contract, Section 10.3 of the K.B.K.-Mattingly contract provided that subcontractors, such as Phoebus, were entitled to “all rights, remedies, and redress afforded” to Mattingly:

10.3 Contracts between the Contractor and Subcontractors shall (1) require each Subcontractor, to the extent of the Work to be performed by the Subcontractor, to be bound to the Contractor by the terms of the Contract Documents, and to assume toward the Contractor all the obligations and responsibilities, including the responsibility for safety of the Subcontractor's Work, which the Contractor, by the Contract Document, assumes toward the Owner and Architect, and (2) allow the Subcontractor the benefit of all rights, remedies and redress afforded to the Contractor by these Contract Documents.

(Emphasis added).

Construction was completed and the restaurant opened for business in October, 2003, after which K.B.K. made final payment on the contract. Subsequently, K.B.K. purchased from Hartford Underwriters Insurance Company, Respondent, a policy of property insurance insuring the restaurant,⁶ with effective coverage...