U.S. Automatic Sprinkler Corp. v. Erie Ins. Exch.

Decision Date06 March 2023
Docket Number22S-CT-264
PartiesU.S. Automatic Sprinkler Corporation, Appellant v. Erie Insurance Exchange, et al., Appellees
CourtSupreme Court of Indiana

Argued: October 11, 2022

Interlocutory Appeal from the Marion Superior Court 49D12-1706-CT-24859 The Honorable David J. Dreyer, Judge

On Petition to Transfer from the Indiana Court of Appeals No 21A-CT-580

ATTORNEYS FOR APPELLANT U.S . AUTOMATIC SPRINKLER CORPORATION Crystal G. Rowe Katherine E. Tapp Kightlinger & Gray LLP New Albany, Indiana Thomas J. Jarzyniecki, Jr. Kightlinger & Gray LLP Indianapolis, Indiana

ATTORNEYS FOR APPELLEE TRAVELERS INDEMNITY COMPANY OF CONNECTICUT A/ S /O SYCAMORE SPRINGS SURGICAL CENTER James M. Weck Clausen Miller P.C. Michigan City, Indiana Joseph J. Ferrini Clausen Miller P.C. Chicago, Illinois

ATTORNEYS FOR APPELLEE ERIE INSURANCE EXCHANGE James M. Weck Clausen Miller P.C. Michigan City, Indiana Kevin L. Moyer Moyer Law Firm, P.C. Indianapolis, Indiana

ATTORNEYS FOR APPELLEES 3D EXHIBITS, INC. & DR. NANCY PRUETT, DDS Nelson A. Nettles J. Kirk Leblanc Leblanc Nettles Law, LLC Brownsburg, Indiana Matt R. Leffler Evans & Dixon St. Louis, Missouri

Justices Massa, Slaughter, and Molter concur. Justice Goff concurs in part and dissents in part with separate opinion.

OPINION

Rush, Chief Justice.

Indiana courts have a long history of safeguarding the freedom to contract. With this freedom, contracting parties have the opportunity to forecast whether and to what extent they can recover loss. But when a non-contracting party suffers a loss, we must look elsewhere, such as statutes or common law, to ascertain whether recovery is available. The central question before us today is whether commercial tenants-one connected by contract and the others not so connected-can recover for their respective property damages.

Here, after a contractor performed work on a sprinkler system, the system malfunctioned and a flood ensued. The company that had the system installed and other commercial tenants in the building sustained property damage. While the contractor and the company were connected by contract, the other commercial tenants did not share any contractual relationship with the company. The company's insurer subsequently sued the contractor for subrogation recovery. And the other commercial tenants sued the contractor to recover their property damages. Seeking summary judgment, the contractor contended that all parties were barred from recovery as a matter of law-but the trial court disagreed.

We hold that the contractor is entitled to summary judgment against the insurer and the other commercial tenants. Under the contract's broad subrogation waiver and agreement to insure, the company waived its insurer's right to recover through subrogation. And under our common law, the absence of contractual privity between the contractor and the other commercial tenants precludes them from recovery because the contractor's allegedly negligent work posed a risk to only property and the commercial tenants suffered only property damage. We therefore reverse and remand for the trial court to enter summary judgment in favor of the contractor.

Facts and Procedural History

The Sycamore Springs Office Complex ("Landlord") leased office space to four commercial tenants: Surgery Center, Dr. Chen, Dr. Pruett, and 3D Exhibits. Surgery Center requested the Landlord's permission to install a sprinkler system at the office complex. The Landlord agreed but amended Surgery Center's lease agreement by requiring the tenant to be "solely" responsible for maintenance of the system and to maintain "adequate insurance coverage in the event any damage is caused by the failure of said sprinkler system to its leased premises and other leased premises which are situated directly under the sprinkler equipment."

Surgery Center contracted with U.S. Automatic Sprinkler Corporation to both install the sprinkler system and conduct periodic inspections and testing. This contract (the "Inspection Agreement") contained specific terms regarding the scope of Automatic Sprinkler's work and the conditions under which it would be held liable for any damage. The scope of work was limited to "the inspection and testing of the devices and equipment detailed in the Equipment List and accepted in the Scope of Work section." Although that section excluded "[r]epair, replacement, and emergency services," each could be performed "upon request and authorization of [Surgery Center] at [Automatic Sprinkler's] market prices." As to damages, the Inspection Agreement provided, in relevant part, that "[n]o insurer or other third party will have any subrogation rights against" Automatic Sprinkler and that Surgery Center "will be responsible for maintaining all liability and property insurance."

Before conducting scheduled inspections of the system, Automatic Sprinkler generally contacted a Surgery Center employee to set up a date and time. Upon arrival, the employee would give an Automatic Sprinkler employee a key to access the riser room, which stored the system's components. Following the inspection, the Automatic Sprinkler employee would return the key and provide their findings to a Surgery Center employee who would sign off on the findings.

On November 28, 2016, Automatic Sprinkler performed a scheduled inspection and identified no issues. However, on December 12, the Landlord's maintenance employee discovered water leaking from a main drain connected to the sprinkler system. Although the Landlord, by Surgery Center's lease agreement, retained the right to "enter the Premises to make inspections or repairs in or to the Premises . . . at any time in the event of an emergency," the maintenance employee did not perform any work on the system and, instead, asked Automatic Sprinkler to come take a look at the leak.

An employee from Automatic Sprinkler came to the property and "messed with some valves" connected to the sprinkler system but ultimately observed that the air pressure and water pressure were normal. Neither the maintenance employee nor Automatic Sprinkler received Surgery Center's approval before examining the system that day.

Less than a week later, water in the sprinkler system froze and ruptured the pipes, causing flooding and property damage to all four tenants-each of whom had procured insurance for their respective properties. Travelers Indemnity Company covered Surgery Center's losses, and Erie Insurance Company covered Dr. Chen's.

Travelers filed a subrogation action against Automatic Sprinkler seeking to recover their losses, contending they were the result of Automatic Sprinkler's allegedly negligent work. Likewise, seeking recovery for their property damages, Dr. Pruett, 3D Exhibits, and Erie on behalf of Dr. Chen (the "Non-Contract Tenants"), sued Automatic Sprinkler. These actions were consolidated.

Automatic Sprinkler sought summary judgment against both Travelers and the Non-Contract Tenants. Against Travelers, Automatic Sprinkler argued the Inspection Agreement's subrogation waiver and agreement to insure precluded the subrogation action. Against the Non-Contract Tenants, Automatic Sprinkler argued it owed no duty to these parties and thus was not liable for their damages. The trial court denied both motions. Automatic Sprinkler moved to certify the orders for interlocutory appeal, which the trial court granted.

After accepting jurisdiction over the interlocutory appeal, the Court of Appeals affirmed in part and reversed in part. U.S. Auto. Sprinkler Corp. v. Erie Ins. Exch., 185 N.E.3d 445, 446-47 (Ind.Ct.App. 2022). The panel affirmed the trial court's denial of Automatic Sprinkler's motion against Travelers, finding that the Inspection Agreement did not apply because the allegedly negligent work fell outside the agreement's scope. Id. at 449. And the panel reversed the trial court's denial of Automatic Sprinkler's motion against the Non-Contract Tenants, reasoning that Automatic Sprinkler did not owe them a duty due to the lack of contractual privity. Id. at 450-51.

Automatic Sprinkler and the Non-Contract Tenants separately petitioned for transfer, which we granted, vacating the Court of Appeals' Opinion. Ind. Appellate Rule 58(A).

Standard of Review

We review summary judgment decisions de novo, applying the same standard as the trial court. See, e.g., Lake Cnty. Bd. of Comm'rs v. State, 181 N.E.3d 960, 962 (Ind. 2022). To prevail, Automatic Sprinkler-the moving party-must show that the designated evidence reveals no genuine issue of material fact and that it is entitled to judgment as a matter of law. Id.; Ind. Trial Rule 56(C).

Here, there is no dispute as to any genuine issue of material fact. Automatic Sprinkler performed work on Surgery Center's sprinkler system on December 12. And though the parties dispute the nature and extent of this work, it is undisputed that the work was completed without Surgery Center's "request and authorization." It is also undisputed that Automatic Sprinkler and the Non-Contract Tenants do not share a contractual relationship, that the alleged negligence did not pose a risk of personal injury, and that the Non-Contract Tenants seek recovery for only property damages and loss of business income.[1]

Accordingly, whether Automatic Sprinkler is entitled to summary judgment turns on two questions of law: (1) whether the Inspection Agreement precludes Travelers from pursuing its subrogation action against Automatic Sprinkler; and (2) whether Automatic Sprinkler owed a duty to the Non-Contract Tenants, such that they can seek recovery for their property damages.

Discussion and Decision

We first address whether the Inspection Agreement precludes Travelers from pursuing its subrogation action against...

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