Intergovernmental Risk Management v. O'Donnell, Wicklund, Pigozzi & Peterson Architects, Inc.
Annotate this Case
THIRD DIVISION
March 4, 1998
No. 1-96-3159
INTERGOVERNMENTAL RISK MANAGEMENT )
on behalf of THE VILLAGE OF )
BARTLETT, and THE TRAVELERS )
INSURANCE COMPANY as subrogee of )
the INTERGOVERNMENTAL RISK )
MANAGEMENT and THE VILLAGE OF )
BARTLETT, ) APPEAL FROM THE CIRCUIT
) COURT OF COOK COUNTY.
Plaintiffs-Appellants, )
)
v. )
)
O'DONNELL, WICKLUND, PIGOZZI & )
PETERSON ARCHITECTS, INC., )
)
Defendant-Appellee, ) HONORABLE MICHAEL J.
) HOGAN, JUDGE PRESIDING.
and )
)
AMERICAN MECHANICAL, INC., NELSON )
INSULATION COMPANY, and P.B. )
VERDICO, INC., )
)
Defendants. )
JUSTICE GORDON DELIVERED THE OPINION OF THE COURT:
This is a subrogation action filed by the plaintiffs, Intergovernmental
Risk Management (IRMA) on behalf of the Village of Bartlett (the Village) and
The Travelers Insurance Company (Travelers), as subrogee of IRMA and the
Village. IRMA, an insurance pool of Illinois municipalities which included
the Village of Bartlett, and Travelers, who provided insurance coverage to the
Village under the IRMA program, sought to recover monies they had paid the
Village for property damage allegedly caused by the defendants' negligent
acts. That property damage was sustained as a result of a fire that occurred
on January 28, 1994 at the Village's newly constructed police station. That
station was constructed as part of the "Village Hall Expansion Project" (the
Project) which consisted of contiguous construction of a police station, an
addition to and remodeling of the village hall and a connecting link between
the police station and the village hall.
Defendant O'Donnell, Wicklund, Pigozzi and Peterson Architects, Inc.
(O'Donnell), one of the defendants named in the subrogation action, provided
architectural drawings and specifications for the Project. O'Donnell moved to
dismiss the complaint against it pursuant to section 2-619(a)(9) of the Code
of Civil Procedure (735 ILCS 5/2-619(a)(9) (West 1994)) arguing that the
Village had waived its subrogation rights in the contracts for the Project.
The trial court granted O'Donnell's motion to dismiss and in the order of
dismissal made a finding of appealability. The plaintiffs bring this appeal
pursuant to Supreme Court Rule 304(a) (155 Ill. 2d R. 304(a)).
The written contracts relevant to a disposition of the instant appeal
were the Owner-Architect Agreement between the Village and O'Donnell dated
August 16, 1989 and the Owner-Contractor Agreement between the Village and
P.B. Verdico, the general contractor dated May 16, 1991. Paragraph 9.4 of the
Owner-Architect Agreement provided in pertinent part as follows:
"The Owner and Architect waive all rights against each other and
against the contractors, consultants, agents and employees of the
other for damages, but only to the extent covered by property
insurance during construction * * *."
Paragraph 11.3.1 of the general conditions incorporated into the Owner-
Contractor Agreement obligated the Village to purchase and maintain property
insurance "in the amount of the initial Contract Sum as well as subsequent
modifications thereto for the entire Work at the site". It further provided
that the property insurance was to be maintained "until final payment has been
made as provided in Paragraph 9.10 or until no person or entity other than the
Owner has an insurable interest in the property * * * whichever is earlier."
Paragraph 9.10, captioned "Final Completion and Final Payment" provided:
"Upon receipt of written notice that the Work is ready for final
inspection and acceptance and upon receipt of a final Application
for Payment, the Architect will promptly make such inspection and
wh * * *[fn1] Architect finds the Work acceptable under the
Contract Documents and the Contract fully performed, the Architect
will promptly issue a final Certificate for Payment * * * and that
the entire balance found to be due the Contractor and noted in
said final Certificate is due and payable."
Paragraph 11.3.1.1 of the general conditions to the Owner-Contractor
Agreement provided that the property insurance "be on an all-risk policy form
and [that it] insure against the perils of fire and * * * physical loss or
damage." The Owner-Contractor Agreement also contained a waiver of
subrogation provision. It provided in paragraph 11.3.7 of the general
conditions as follows:
"The Owner and Contractor waive all rights against (1) each other
and any of their subcontractors, sub-subcontractors, agents and
employees, each of the other, and (2) the Architect, Architect's
consultants, * * * for damages caused by fire or other perils to
the extent covered by property insurance obtained pursuant to this
Paragraph 11.3 or other property insurance applicable to the Work
* * *. 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."
The fire, which occurred on January 28, 1994 in the garage portion of
the Village's new police station, caused damage in the amount of $114,412.89.
IRMA paid the Village $66,802.74, consisting of $50,000 in property damage
(paid as a deductible); $16,118.74 paid in machinery rental; and $683.88 in
emergency replacement service costs. Travelers paid the Village $47,610.15.
IRMA and Travelers then filed the instant complaint seeking subrogation
against the various defendants for their negligence.
In its motion to dismiss, defendant O'Donnell argued that the
plaintiffs' claims were barred by the Owner-Architect Agreement and the Owner-
Contractor Agreement. Specifically, O'Donnell argued that in accordance with
the general conditions incorporated into the Owner-Contractor Agreement, the
Village was required to purchase and maintain insurance relating to the
Project; that in accordance with the Owner-Architect Agreement, the Village
waived all rights against O'Donnell for damages to the extent covered by
property insurance during construction; and that since the fire occurred
during construction and prior to final payment for the Project the resulting
loss was covered by the Village's insurance policy and thus all claims
relating to that loss had been waived. Attached to its memorandum in support
of the motion to dismiss was the affidavit of Bruce C. Ream, vice president
and principal of O'Donnell. In his affidavit, Ream explained the Project and
identified the contractual documents relative to the Project. He also averred
that the fire on January 28, 1994 occurred at the Project during construction
and prior to final payment to the general contractor. He averred that the
general contractor submitted to O'Donnell its final Application and
Certificate for Payment on or around October 31, 1994 and that final payment
was not made to the general contractor until after April 17, 1995.
In response, the plaintiffs argued that the waiver of subrogation
clauses in the Owner-Architect Agreement and Owner-Contractor Agreement did
not apply to the insurance policies issued by them to the Village because
these policies were not "builder's risk" or construction insurance policies
purchased for the Project and thus were not subject to the waiver provisions
of paragraph 11.3 of the Owner-Contractor Agreement. The plaintiffs also
argued that the waiver of subrogation provisions did not apply because
construction of the Village's police garage was completed and the insurable
interest had passed to the Village. The plaintiff's further argued that the
waiver was in violation of Illinois law and public policy and was prohibited
by language in the Travelers policy which was incorporated into IRMA's policy.
Attached to the plaintiffs' response and memorandum at law was the affidavit
of Timothy T. Van Driska, a subrogation representative at IRMA. Van Driska
averred that IRMA was an insurance pool providing risk management and
insurance to Illinois municipalities including the Village of Bartlett. He
averred that as a member of IRMA the Village was issued a general liability
and property policy in 1983 which has continued in force. Van Driska averred
that the IRMA and Travelers policies were not issued as "'builders risk'" or
construction insurance for the Project and did "not contain any specific
coverage declaration or endorsement for 'the work on this construction project
or the contractors' for the Village of Bartlett village hall expansion
project." He further averred that even though the Project was in progress at
the time of the fire, construction for the police garage facility was fully
complete before the fire. Finally, Van Driska averred that IRMA never waived
any of its subrogation rights and was not privy to the contracts between the
Village and its contractors.
The trial court granted defendant's motion to dismiss finding that,
since the work on the Project was not complete at the time of the fire, the
clear language of the waiver provisions of the contracts barred the
plaintiffs' action.
On appeal, the plaintiffs argue that the trial court abused its
discretion in granting defendant's motion to dismiss because: (1)
construction on the police garage facility was complete at the time of the
fire and the insurable interest as to that building reverted back to the
Village; (2) the waiver of subrogation provisions should not apply where the
damage was caused by the negligent and wrongful acts of the defendant; (3) the
waiver of subrogation provisions should not apply to their policies since
those policies were not issued as "builder's all-risk" insurance; and (4) the
waiver of subrogation provision should not apply because the Travelers
insurance policy contained a specific clause maintaining subrogation rights.
We begin our analysis of the issues by first noting that the standard of
review when an appeal is taken from a motion to dismiss is not abuse of
discretion as the plaintiffs contend. A motion to dismiss pursuant to section
2-619 of the Code of Civil Procedure (735 ILCS 5/2-619 (West 1996)) presents
only a question of law, and an appeal taken from a motion to dismiss is
reviewed de novo. E.g., Kedzie & 103rd Currency Exchange, Inc. v. Hodge, 156 Ill. 2d 112, 619 N.E.2d 732 (1993). On review, the appellate court must
consider whether the existence of a material fact should have precluded the
dismissal or, absent such an issue of fact, whether dismissal was proper as a
matter of law. Hodge, 156 Ill. 2d 112, 619 N.E.2d 732.
The first issue raised in this appeal is whether, as a matter of law,
the fire damaging the police garage facility occurred "during construction".
Paragraph 9.4 of the Owner-Architect Agreement provided that the owner and
architect waived all rights against each other "but only to the extent covered
by property insurance during construction." (Emphasis added.) The plaintiffs
argue that the word construction did not mean construction of the entire
Project. They argue that the Village was not required under the construction
contracts to maintain property insurance for the police garage facility at the
time of the fire because that facility was complete and operational and the
insurable interest in that parcel of property had reverted back to the
Village. They argue that, as a result, the waiver of subrogation provisions
in the contracts were inapplicable.
We disagree. Contracts must be construed as a whole, and it is presumed
that all provisions were inserted for a purpose. Village of Rosemont v.
Lentin Lumber Co., 144 Ill. App. 3d 651, 494 N.E.2d 592 (1986). Here, while
the Project may have consisted of three separate and distinct job segments --
construction of the police station, construction of an addition to and
remodeling of the existing village hall, and a connecting link between the
police station and the village hall -- the contracts in question did not
distinguish between those segments, isolate them, or in any way treat them as
separate and distinct jobs. As set forth above, paragraph 11.3.1 of the
general conditions incorporated into the Owner-Contractor Agreement obligated
the Village to purchase and maintain property insurance "in the amount of the
initial Contract Sum as well as subsequent modifications thereto for the
entire Work at the site." (Emphasis added.) It further provided that the
insurance was to be maintained "until final payment has been made as provided
in Paragraph 9.10 or until no person or entity other than the Owner has an
insurable interest in the property required by this paragraph 11.3 to be
covered, whichever is earlier." Neither provision suggests an intention by
the parties to reduce, on a pro-rata basis, the Village's obligation to
purchase and maintain property insurance during construction in a manner that
corresponds to completion of the various segments of the Project. Neither
provision suggests that insurable interests would revert on a partial, pro-
rata basis as various segments were completed but before completion of the
entire Project; and no other provisions have been highlighted by the
plaintiffs which would allow for or even suggest such a pro-rata obligation by
the Village to maintain insurance on the Project. Absent such express
agreement, the general rule in construction cases is that both the owner and
the contractor have insurable interests in the property until the construction
is complete. See Midwest Lumber Co. v. Dwight E. Nelson Construction Co., 188
Neb. 308, 311, 196 N.W.2d 377, 379 (1972); Annotation, Builder's Risk
Insurance Policies, 94 A.L.R.2d 221 234 (1964).
Paragraph 11.3.1 can be interpreted in one and only one manner -- that
the Village's obligation under the construction contracts to maintain property
insurance ran with the entire Project and remained in effect until final
payment by the Village. This conclusion is further buttressed by the general
purpose of waiver of rights provisions which allow the parties to a
construction contract to exculpate each other from personal liability in the
event of property loss or damage to the work occurring during construction,
relying instead on the insurance purchased by one of the parties to provide
recovery for that loss. Village of Rosemont v. Lentin Lumber Co., 144 Ill.
App. 3d 651, 494 N.E.2d 592 (1986) (waiver of subrogation clauses shift the
risk of loss to the insurance company regardless of which party is at fault).
See also Home Insurance Co. v. Bauman, 291 Ill. App. 3d 834, 684 N.E.2d 828
(1997); Ralph Korte Construction Co. v. Springfield Mechanical Co., 54 Ill.
App. 3d 445, 369 N.E.2d 561 (1977) (upholding waiver provision as a proper
agreement between the parties to assume the risk of loss due to fire or other
perils as between themselves to the extent each party is covered by
insurance); South Tippecanoe School Building Corp. v. Shambaugh & Son, Inc.,
182 Ind. App. 350, 395 N.E.2d 320 (1979) (waiver of subrogation provision
shifts risk of loss to insurance carrier in return for premium payment).
Indeed, as the plaintiffs acknowledge, such provisions allocate risks during
construction to facilitate timely completion of the project by avoiding time-
consuming and expensive litigation. See South Tippecanoe, 182 Ind. App. at
368, 395 N.E.2d at 331; Haemonetics Corp. v. Brophy & Phillips Co., 23 Mass.
App. Ct. 254, 258, 501 N.E.2d 524, 527-28 (1986). As discussed in a case
cited by plaintiffs, Automobile Insurance Co. v. United H.R.B. General
Contractors, Inc., 876 S.W.2d 791 (Mo. Ct. App. 1994), that allocation as well
as the waiver ceases upon final payment. See Automobile Insurance Co., 876 S.W.2d at 794 (waiver of subrogation applies to completed structure up to time
of final payment; once contract has been fully performed, owner's remaining
obligation is to make payment and contractor's remaining interest is receipt
of final payment).[fn2]
Here, there is no language in the construction contracts to suggest
anything other than that the parties intended to allocate all property loss
occurring during construction and prior to completion of the entire Project
and payment to insurance and to limit recovery to the proceeds of that
insurance. Since the fire in the police garage facility occurred while
construction of the Project was continuing and prior to final payment, the
Village's obligation to maintain insurance and its agreement to waive
subrogation rights as to that facet continued despite completion of a portion
of the Project.
The plaintiffs next contend that the trial court erred in granting
defendant's motion to dismiss because the waiver of subrogation provisions
could not apply to damage caused by the negligent and wrongful acts of the
defendant. The plaintiffs contend that the waivers violated public policy by
encouraging negligence. They also contend that the waiver of subrogation
provisions do not specifically refer to damages arising from negligence and
thus do not apply to those types of damages.
Plaintiffs' arguments are incorrect. As discussed above, the purpose of
waiver of subrogation provisions is to allow the parties to a construction
contract to exculpate each other from personal liability in the event of
property loss or damage to the work to the extent each party is covered by
insurance. Village of Rosemont, 144 Ill. App. 3d 651, 494 N.E.2d 592; Ralph
Korte Construction Co., 54 Ill. App. 3d 445, 369 N.E.2d 561. "'[T]he
insurance clause shifts the risk of loss to the insurance company regardless
of which party is at fault.'" Village of Rosemont, 144 Ill. App. 3d at 660,
494 N.E.2d at 597 quoting Tuxedo Plumbing & Heating Co., Inc. v. Lie-Nielsen,
245 Ga. 27, 29, 262 N.E.2d 794 (1980). It avoids the prospect of extended
litigation which would interfere with construction. See South Tippecanoe, 182
Ind. App. at 368, 395 N.E.2d at 331; Haemonetics Corp., 23 Mass. App. Ct. at
258, 501 N.E.2d at 527-28. Thus, it matters not whether the fire loss was
caused by defendant O'Donnell's negligence so long as the loss was a covered
loss that occurred during construction.
We must also reject plaintiffs' argument that the waiver provisions are
violative of public policy in that they act, in essence, as indemnity
agreements holding the defendant harmless from its own negligence. See, e.g.,
Transcontinental Insurance Co. v. National Union Fire Insurance Co., 278 Ill.
App. 3d 357, 662 N.E.2d 500 (1996) (subcontractor's agreement to indemnify
general contractor for the latter's negligence and to purchase insurance for
this obligation was an indemnity agreement void under the Construction
Contract Indemnification for Negligence Act (Ill. Rev. Stat. 1989, ch. 29,
pars. 61, 63 now at 740 ILCS 35/1, 35/3 (West 1996))); G T E North, Inc. v.
Henkels & McCoy, Inc., 245 Ill. App. 3d 322, 612 N.E.2d 1375 (1993)
(contractor's obligation to indemnify owner for owner's own negligence was
void indemnity agreement). Plaintiff's very argument was rejected in Ralph
Korte Construction Co. v. Springfield Mechanical Co., 54 Ill. App. 3d 445, 369 N.E.2d 561 (1977). That case reviewed the policy considerations for the
legislature's prohibition of indemnity agreements used by the construction
industry and the desire to protect construction workers and the public given
the indemnified contractor's lessened motivation due to indemnification. As
the Korte court found, those considerations were not affected by waiver of
rights provisions which "do not involve injury suffered by a construction
worker or a member of the general public but instead, damage suffered by one
of the contracting parties due to the alleged negligence of another." Korte,
54 Ill. App. 3d at 447, 369 N.E.2d at 562. With respect to waiver of rights
agreements, the court stated:
"Both sides benefit from the arrangement and such benefit under
the circumstances does not come at the expense of a third party.
The agreement, as here applied, does not remove or reduce any
incentives to protect workers and others from injury since it does
not involve any question of liability to a third party. Under the
agreement, Korte waived his right to sue Springfield for
Springfield's negligence which resulted in a loss to Korte,
because Korte had insurance covering the loss and, in fact, such
loss was fully paid for by Korte's insurer. Under these
circumstances, Springfield's avoidance of the burden of liability
did not effect any prejudice to the interest in the safety of
workers and members of the general public." Korte, 54 Ill. App.
3d at 447, 369 N.E.2d at 562-63.
For similar reasons, we find that the waiver agreements here at issue
were not violative of the public policy considerations which outlawed
indemnity agreements. The property insurance provisions and waiver provisions
in the construction agreements here at bar limited the parties' recovery only
to property loss sustained by the parties to the agreement and only to the
extent that it was covered by insurance. See Village of Rosemont, 144 Ill.
App. 3d at 661, 494 N.E.2d at 598; Korte, 54 Ill. App. 3d at 448, 369 N.E.2d
at 563, citing 614 Third Avenue Corp. v. Grand Iron Works, Inc., 44 A.D.2d 531, 353 N.Y.S.2d 458 (1974). Moreover, even if the agreement extended to
third-party liability, arguably, it would not constitute an agreement to
indemnify a party for its negligence but, rather, it would be an agreement to
procure insurance on that party's behalf. As recognized in Capua v. W.E.
O'Neil Construction Co., 67 Ill. 2d 255, 367 N.E.2d 669 (1977), section 3 of
the Construction Contract Indemnification for Negligence Act (740 ILCS 35/0.01
et seq. (West 1996)) preserves enforceability of such agreements to procure
insurance. Capua stated:
"[Section 3] protects the interests of construction workers and
members of the general public who may suffer injury through
improper construction or maintenance by preserving supplemental
sources of compensation for injured persons, namely insurance and
indemnifying and hold-harmless agreements in construction bonds."
67 Ill. 2d at 260, 367 N.E.2d at 671.
See also Zettel v. Paschen Contractors, Inc., 100 Ill. App. 3d 614, 617-18,
427 N.E.2d 189, 191-92 (1981), stating
"An agreement to obtain insurance is not an agreement of
insurance; a person promising to obtain insurance does not by that
promise become an insurer although he may assume the liabilities
of one if he breaches the agreement. [Citations.] * * * Under an
indemnity agreement, the promisor agrees to assume all
responsibility and liability for any injuries or damages. Under
an agreement to obtain insurance the promisor merely agrees to
procure the insurance and pay the premium on it. Once the
insurance is obtained, the promisor bears no responsibility in the
event of injury or damage, even if the insurer should breach the
insurance agreement through no fault of the promisor."
Accord Duffy v. Poulos Brothers Construction Co., 225 Ill. App. 3d 38, 587 N.E.2d 1038 (1991); Jokich v. Union Oil Co., 214 Ill. App. 3d 906, 574 N.E.2d 214 (1991).
The plaintiffs next contend that the waiver of rights provisions do not
apply to damages arising from negligence because the Village was not required
to obtain property insurance covering that type of damage. In support of this
argument, the plaintiffs cite to two provisions in the Owner-Contractor
Agreement, paragraphs 11.3.7 and 11.3.1.1 of the general conditions.
Paragraph 11.3.7 states that the owner and contractor waive all rights "for
damages caused by fire or other perils to the extent covered by property
insurance obtained pursuant to this Paragraph 11.3 or other property insurance
applicable to the Work." Section 11.3.1.1 provides that the property
insurance shall
"insure against the perils of fire and extended coverage and
physical loss or damage including, without duplication of
coverage, theft, vandalism, malicious mischief, collapse,
falsework, temporary buildings and debris removal including
demolition occasioned by enforcement of any applicable legal
requirements, and shall cover reasonable compensation for
Architect's services and expenses required as a result of such
insured loss. Coverage for other perils shall not be required
unless otherwise provided in the Contract Documents."
The plaintiffs argue that paragraph 11.3.1.1 does not specifically require
insurance coverage for damages arising from negligence and that, thus, damages
resulting from negligence would fall under "other perils" not required to be
insured against. They therefore contend that, since paragraph 11.3.7 provides
for waiver of damages to the extent covered by property insurance obtained
pursuant to paragraph 11.3, and since paragraph 11.3.1 does not require
insurance for damages relating to negligence, then the waiver does not apply
to those damages. See Viacom International, Inc. v. Midtown Realty Co., 193 A.D.2d 45, 602 N.Y.S.2d 326 (1993) (a waiver of subrogation clause cannot be
enforced beyond the scope specified; waiver applied to tort liability, not
contract claims).
We disagree. Paragraph 11.3.1.1 identifies the types of perils that
could cause property damage and loss. It identifies fire as a distinct peril.
It does not differentiate between the manner in which that peril arises, that
is, whether by acts of God or by the intentional or unintentional, negligent
or reckless acts of human beings. In point of fact, fire loss could result
from any of these acts, although as noted in one case it "nearly always [is]
caused by negligence" (Board of Education v. Hales, 566 P.2d 1246, 1247 (Utah
1977)). To the extent that this provision does purport to enumerate different
types of human conduct which could cause losses of property, it does so with
respect to non-fire related physical loss or damage; and, even there, it
purports only to be inclusive, not preclusive. Moreover, strong argument can
be made that even with respect to those property losses the focus is not upon
the differing human motivations behind the conduct causing the damage but upon
the different types of hazards resulting from categories of human conduct
conventionally treated as separate underwriting coverages.
The express language of the contract shows that it required the Village
to obtain property insurance that insured against damage to property caused by
fire regardless of the fire's origin or cause. Thus, coverage for fire caused
by negligent conduct clearly was required; and the waiver of rights provisions
extended to the fire loss that occurred in the instant case.
Next, the plaintiffs argue that the waiver of subrogation provisions
should not apply to their policies because those policies were not "builder's
all-risk" policies purchased specifically for the Project. In support of this
argument, the plaintiffs cite to paragraph 11.3.1 of the general conditions
incorporated into the Owner-Contractor Agreement, which obligated the Village
"to purchase and maintain * * * property insurance in the amount of the
initial Contract Sum as well as subsequent modifications thereto for the
entire Work at the site." They cite to paragraph 11.3.1.1 of that Agreement
which provided that the "[p]roperty insurance shall be on an all-risk policy
form and shall insure against the perils of fire and extended coverage and
physical loss or damage * * *." Finally, they cite to paragraph 11.3.7, the
waiver of subrogation provision, which stated that the Owner and Contractor
waived all rights against each other and the architect "for damages caused by
fire or other perils to the extent covered by property insurance obtained
pursuant to this Paragraph 11.3 or other property insurance applicable to the
Work." In reliance on these provisions, the plaintiffs argue that their
policies were not "applicable to the Work" because they were "policies issued
to cover for the general liability, vehicles, property and personnel insured
by the Village."
We disagree with plaintiffs' interpretation of the phrase "or other
property insurance applicable to the Work." The plaintiffs argue that their
policies did not meet that criterion because they were not construction
insurance policies and because they were not obtained specially for the
Project, having been issued in 1983 more than ten years before the Project
commenced. First we note that were one to accept the plaintiffs'
interpretation, it would render the phrase "or other property insurance
applicable to the Work" redundant as to the immediately preceding phrase
"property insurance obtained pursuant to this Paragraph 11.3." That latter
phrase, "property insurance obtained pursuant to this Paragraph 11.3," allows
for the purchase of construction insurance or a "builder's risk" policy
obtained solely for the Project. Plaintiffs' suggestion that "or other
insurance applicable to the Work" also requires the purchase of construction
insurance specifically for "the Work" would not allow for any alternative form
of insurance implied by the word "or."
More convincingly, however, courts in other jurisdictions have
interpreted similar provisions in owner/contractor agreements to find that
all-risk policies, obtained prior to execution of the construction contracts,
were "other property insurance applicable to the Work" subject to waiver of
subrogation provisions in the agreements. In Lloyd's Underwriters v. Craig &
Rush, Inc., 26 Cal. App. 4th 1194, 32 Cal. Rptr. 2d 144 (1994), for example,
the construction contract required the owner to "purchase and maintain,
property insurance in the amount of the initial Contract Sum * * * for the
entire Work at the site." The construction contract further provided that the
owner and contractor waived "all rights against each other * * * for damages
caused by fire or other perils to the extent covered by property insurance
obtained pursuant to this Paragraph 17.3 or other property insurance
applicable to the Work." Lloyd's Underwriters, 26 Cal. App. 4th at 1197, 32 Cal. Rptr. 2d at 146. In that case, the owner, who had coverage under an
existing all-risk property insurance policy, did not purchase a separate
builder's risk policy. The court held that the waiver of subrogation
provision applied to prevent the insurer under the all-risk policy from
recovering against the contractor. See also E. C. Long, Inc. v. Brennan's of
Atlanta, Inc., 148 Ga. App. 796, 252 S.E.2d 642 (1979); Haemonetics Corp. v.
Brophy & Phillips Co., 23 Mass. App. Ct. 254, 501 N.E.2d 524 (1986); Chadwick
v. CSI, Ltd., 137 N.H. 515, 629 A.2d 820 (1993) (owner's existing all-risk
policy is "other property insurance applicable to the Work").
The plaintiffs attempt to distinguish these cases by arguing that the
insurance and risk management policies provided by IRMA and Travelers were not
"all-risk" policies[fn3] but, instead, general liability policies.[fn4] We
disagree. The issue is not whether the policies are called "all-risk" or
"general liability" policies but whether those policies cover the risks and
losses delineated in the construction agreements between the Village and the
architect and contractor. The Travelers policy which was attached to
plaintiffs' memorandum in support of their response to defendant's motion to
dismiss, shows that regardless of its classification, that policy qualified as
"other property insurance applicable to the Work." That policy insured
"against risks of direct physical loss to covered property commencing during
the policy period." Covered property included buildings, structures and
personal property. Covered buildings and structures were those buildings or
structures "(1) owned by the Insured; (2) in which the Insured had an
insurable interest; or (3) in which the Insured has agreed in writing before
loss to insure." That policy also provided that it covered "the interest of
the Insured in buildings, structures and personal property at newly
constructed, acquired or leased locations or any Builders Risk within the
territorial limits of this policy, which have been previously undeclared."
These provisions show that the policy covered contractors' (or builder's)
risks associated with construction of Village buildings. It covered property
that the Village agreed in writing to insure before loss, regardless of the
Village's insurable interest in that property. That policy provided "other
property insurance applicable to the Work" even though it was purchased many
years prior to construction of the Project and even though it did not
reference the Project.[fn5]
We also disagree with plaintiffs' insistence that the IRMA and Travelers
policies could not be considered "other property insurance" applicable to the
police facility loss because the entire insurable interest in the police
garage facility had reverted back to the Village. For the reasons discussed
above, the construction contracts did not provide any type of pro-rata
reversion of interests back to the Village as various segments to the Project
were completed. While the Village, as owner of the buildings that were the
subject of the Project, had an insurable interest in the buildings at all
times, the defendant architects and the contractor also had insurable
interests in those buildings, at least during the course of construction. See
Midwest Lumber Co., 188 Neb. at 311, 196 N.W.2d at 379; Annotation, Builder's
Risk Insurance Policies, 94 A.L.R.2d at 234.
As their final argument, the plaintiffs contend that the waiver of
subrogation provision was unenforceable because it conflicted with and
prejudiced plaintiffs' rights of subrogation reserved in their insurance
policies. In support of this argument, the plaintiffs quote the following
language from the Travelers policy:
"This insurance shall not be invalidated should the Insured waive
by specific written agreement prior to a loss any or all right of
recovery against any party for loss insured against by this
policy."
Plaintiffs' reliance on this clause wholly unwarranted. The thrust of
the quoted paragraph is not that waiver of subrogation is invalid but that
waiver of subrogation would not invalidate the policy. The clause does not
protect the insurer's right of subrogation; rather it protects the insured's
right to recover under the policy even if the insured waived its right to
recover against a third party. The clause specifically allows the insured to
waive the insurer's right of subrogation.
In Commerce & Industry Insurance Co. v. Orth, 254 Or. 226, 458 P.2d 926
(1969), a similar clause in an insurance policy was interpreted to show that
the insurer expressly allowed the insured owner of the property to release
various contractors from liability for loss to the owner's building under
construction. In Orth, the owner and the general contractor had entered into
a written construction agreement, similar to the one in the instant case,
which required the owner to carry insurance to protect the work during
construction. The construction agreement also contained a waiver of rights
provision which stated: "The Owner, Contractor, and all subcontractors waive
all rights, each against the others, for damages caused by fire or other
perils covered by insurance provided under the terms of this article * * *."
Orth, 254 Or. at 228, 458 P.2d at 927-28. The insurance policy provided:
"Without prejudice to this insurance the insured may, prior to loss, release
others from liability for loss to the described property from whatever cause
arising * * *." Orth, 254 Or. at 229, 458 P.2d at 928.
The Orth court affirmed the grant of judgment on the pleadings to the
contractors and against the insurer/subrogee stating:
"On the record in this case, it is not harsh to hold that the
insurer waived its subrogation rights against the various
contractors; we are merely recognizing the bargain made between
the insurer and the owner. The owner and the contractor had
agreed that the owner would furnish the insurance and would not
look to the contractors for recovery for losses covered by
insurance. The insurer accepted the situation thus created. An
insurance scheme allowing the insurer to bring subrogation actions
against contractors would defeat the purpose of the construction
contract and would be inconsistent with the terms of the policy."
254 Or. at 232, 458 P.2d at 929.
Here, as in Orth, the Village agreed to furnish property insurance and not
look to O'Donnell for recovery for losses covered by that insurance. In
addition, as in Orth, the insurer expressly allowed the Village to release
"any party for loss insured against by this policy" and agreed to compensate
the Village for designated losses for which subrogation would not be
available.[fn6] Thus, the waiver of subrogation clauses did not conflict
with the insurance policy provision which allowed such waiver by the insured
nor were the insurers prejudiced by the construction contracts since the
insurers independently waived their rights of subrogation.
Moreover, to maintain that the policy language could override the waiver
clauses in the construction agreements would belie the principle that the
insurer acquires only those rights possessed by its subrogor/insured and is
vulnerable to all defenses which might have been raised to the claim of the
subrogor/insured. Insurance Co. of North America v. Morgan Dyeing & Bleaching
Co., 262 F.2d 916 (7th Cir. 1959); Dix Mutual Insurance Co. v. LaFramboise,
149 Ill. 2d 314, 597 N.E.2d 622 (1992). Here, the insured, the Village,
waived any right of recovery against defendant O'Donnell for any property loss
caused by O'Donnell during construction of the Project. The plaintiffs, as
the Village's subrogees, could only assert the Village's right of recovery
against the defendant; and since the Village waived its right of recovery
against the defendant, the plaintiffs/subrogees were as vulnerable as the
Village to the defendant's assertion of its waiver defense.
For the foregoing reasons, the judgment of the Circuit Court of Cook
County is affirmed.
Affirmed.
LEAVITT, P.J. and COUSINS, J., concur.
[fn1]An omission of several letters exists in the copy of
this document due to the binding of the record on appeal. A
further copy included in the appendix to the Brief of the
Defendant-Appellee, contained a similar omission.
[fn2]Although Automobile Insurance Co. v. United H.R.B.
General Contractors, Inc., 876 S.W.2d 791 (Mo. Ct. App. 1994)
stands for the proposition cited in the main text, it is clearly
distinguishable from the case at bar and does not support the
plaintiff's position. In that subrogation case, the court
reversed the grant of summary judgment in the contractor's favor
finding that the waiver of subrogation clause did not apply to
the fire loss that occurred almost 20 months after completion of
the project (construction of a new sanctuary and educational
facilities for a church) and five months after final payment had
been made. In the case at bar, on the other hand, the Project
was not completed and final payment had not been made at the time
of the fire loss.
[fn3]"All risk" insurance policies insure against all
fortuitous losses, unless specifically excluded, not resulting
from the wilful misconduct or fraud of the insured. Board of
Education of Maine Township High School District 207 v.
International Insurance Co., 292 Ill. App. 3d 14, 684 N.E.2d 978
(1997). See generally 5 J. Appelman, Insurance Law & Practice
3093 (1970); 13A Couch on Insurance 2d 48:141 (rev. 1982).
[fn4]The plaintiffs also attempt to distinguish Chadwick v.
CSI, Ltd., 137 N.H. 515, 629 A.2d 820 (1993) because in that case
the insured raised the limits on its preexisting property
insurance policy. We do not believe that distinguishing fact is
load bearing. In Chadwick, the preexisting property insurance,
without the raised limits, would not have qualified as other
property insurance applicable to the construction work given its
lower limits. Moreover, in the other cases cited in the main
text, preexisting property insurance was applicable to the
construction loss and was subject to the waiver of subrogation
provision without, apparently, any increase in limits or policy
amendments.
[fn5]While not raised by the parties, it would appear that
the Village relied on its pre-existing insurance policies issued
by the plaintiffs to satisfy its contractual obligation to obtain
property insurance for the Project since neither party has
averred that the Village notified the Contractor prior to
commencement of the work that it did not intend to purchase the
required property insurance. See Owner-Contractor Agreement,
General Conditions of the Contract for Construction, par.
11.3.1.2 (requiring owner to notify the contractor in writing
prior to commencement of the work if owner did not intend to
purchase such property insurance so that contractor could effect
insurance at the owner's expense).
[fn6]
March 4, 1998
No. 1-96-3159
INTERGOVERNMENTAL RISK MANAGEMENT )
on behalf of THE VILLAGE OF )
BARTLETT, and THE TRAVELERS )
INSURANCE COMPANY as subrogee of )
the INTERGOVERNMENTAL RISK )
MANAGEMENT and THE VILLAGE OF )
BARTLETT, ) APPEAL FROM THE CIRCUIT
) COURT OF COOK COUNTY.
Plaintiffs-Appellants, )
)
v. )
)
O'DONNELL, WICKLUND, PIGOZZI & )
PETERSON ARCHITECTS, INC., )
)
Defendant-Appellee, ) HONORABLE MICHAEL J.
) HOGAN, JUDGE PRESIDING.
and )
)
AMERICAN MECHANICAL, INC., NELSON )
INSULATION COMPANY, and P.B. )
VERDICO, INC., )
)
Defendants. )
JUSTICE GORDON DELIVERED THE OPINION OF THE COURT:
This is a subrogation action filed by the plaintiffs, Intergovernmental
Risk Management (IRMA) on behalf of the Village of Bartlett (the Village) and
The Travelers Insurance Company (Travelers), as subrogee of IRMA and the
Village. IRMA, an insurance pool of Illinois municipalities which included
the Village of Bartlett, and Travelers, who provided insurance coverage to the
Village under the IRMA program, sought to recover monies they had paid the
Village for property damage allegedly caused by the defendants' negligent
acts. That property damage was sustained as a result of a fire that occurred
on January 28, 1994 at the Village's newly constructed police station. That
station was constructed as part of the "Village Hall Expansion Project" (the
Project) which consisted of contiguous construction of a police station, an
addition to and remodeling of the village hall and a connecting link between
the police station and the village hall.
Defendant O'Donnell, Wicklund, Pigozzi and Peterson Architects, Inc.
(O'Donnell), one of the defendants named in the subrogation action, provided
architectural drawings and specifications for the Project. O'Donnell moved to
dismiss the complaint against it pursuant to section 2-619(a)(9) of the Code
of Civil Procedure (735 ILCS 5/2-619(a)(9) (West 1994)) arguing that the
Village had waived its subrogation rights in the contracts for the Project.
The trial court granted O'Donnell's motion to dismiss and in the order of
dismissal made a finding of appealability. The plaintiffs bring this appeal
pursuant to Supreme Court Rule 304(a) (155 Ill. 2d R. 304(a)).
The written contracts relevant to a disposition of the instant appeal
were the Owner-Architect Agreement between the Village and O'Donnell dated
August 16, 1989 and the Owner-Contractor Agreement between the Village and
P.B. Verdico, the general contractor dated May 16, 1991. Paragraph 9.4 of the
Owner-Architect Agreement provided in pertinent part as follows:
"The Owner and Architect waive all rights against each other and
against the contractors, consultants, agents and employees of the
other for damages, but only to the extent covered by property
insurance during construction * * *."
Paragraph 11.3.1 of the general conditions incorporated into the Owner-
Contractor Agreement obligated the Village to purchase and maintain property
insurance "in the amount of the initial Contract Sum as well as subsequent
modifications thereto for the entire Work at the site". It further provided
that the property insurance was to be maintained "until final payment has been
made as provided in Paragraph 9.10 or until no person or entity other than the
Owner has an insurable interest in the property * * * whichever is earlier."
Paragraph 9.10, captioned "Final Completion and Final Payment" provided:
"Upon receipt of written notice that the Work is ready for final
inspection and acceptance and upon receipt of a final Application
for Payment, the Architect will promptly make such inspection and
wh * * *[fn1] Architect finds the Work acceptable under the
Contract Documents and the Contract fully performed, the Architect
will promptly issue a final Certificate for Payment * * * and that
the entire balance found to be due the Contractor and noted in
said final Certificate is due and payable."
Paragraph 11.3.1.1 of the general conditions to the Owner-Contractor
Agreement provided that the property insurance "be on an all-risk policy form
and [that it] insure against the perils of fire and * * * physical loss or
damage." The Owner-Contractor Agreement also contained a waiver of
subrogation provision. It provided in paragraph 11.3.7 of the general
conditions as follows:
"The Owner and Contractor waive all rights against (1) each other
and any of their subcontractors, sub-subcontractors, agents and
employees, each of the other, and (2) the Architect, Architect's
consultants, * * * for damages caused by fire or other perils to
the extent covered by property insurance obtained pursuant to this
Paragraph 11.3 or other property insurance applicable to the Work
* * *. 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."
The fire, which occurred on January 28, 1994 in the garage portion of
the Village's new police station, caused damage in the amount of $114,412.89.
IRMA paid the Village $66,802.74, consisting of $50,000 in property damage
(paid as a deductible); $16,118.74 paid in machinery rental; and $683.88 in
emergency replacement service costs. Travelers paid the Village $47,610.15.
IRMA and Travelers then filed the instant complaint seeking subrogation
against the various defendants for their negligence.
In its motion to dismiss, defendant O'Donnell argued that the
plaintiffs' claims were barred by the Owner-Architect Agreement and the Owner-
Contractor Agreement. Specifically, O'Donnell argued that in accordance with
the general conditions incorporated into the Owner-Contractor Agreement, the
Village was required to purchase and maintain insurance relating to the
Project; that in accordance with the Owner-Architect Agreement, the Village
waived all rights against O'Donnell for damages to the extent covered by
property insurance during construction; and that since the fire occurred
during construction and prior to final payment for the Project the resulting
loss was covered by the Village's insurance policy and thus all claims
relating to that loss had been waived. Attached to its memorandum in support
of the motion to dismiss was the affidavit of Bruce C. Ream, vice president
and principal of O'Donnell. In his affidavit, Ream explained the Project and
identified the contractual documents relative to the Project. He also averred
that the fire on January 28, 1994 occurred at the Project during construction
and prior to final payment to the general contractor. He averred that the
general contractor submitted to O'Donnell its final Application and
Certificate for Payment on or around October 31, 1994 and that final payment
was not made to the general contractor until after April 17, 1995.
In response, the plaintiffs argued that the waiver of subrogation
clauses in the Owner-Architect Agreement and Owner-Contractor Agreement did
not apply to the insurance policies issued by them to the Village because
these policies were not "builder's risk" or construction insurance policies
purchased for the Project and thus were not subject to the waiver provisions
of paragraph 11.3 of the Owner-Contractor Agreement. The plaintiffs also
argued that the waiver of subrogation provisions did not apply because
construction of the Village's police garage was completed and the insurable
interest had passed to the Village. The plaintiff's further argued that the
waiver was in violation of Illinois law and public policy and was prohibited
by language in the Travelers policy which was incorporated into IRMA's policy.
Attached to the plaintiffs' response and memorandum at law was the affidavit
of Timothy T. Van Driska, a subrogation representative at IRMA. Van Driska
averred that IRMA was an insurance pool providing risk management and
insurance to Illinois municipalities including the Village of Bartlett. He
averred that as a member of IRMA the Village was issued a general liability
and property policy in 1983 which has continued in force. Van Driska averred
that the IRMA and Travelers policies were not issued as "'builders risk'" or
construction insurance for the Project and did "not contain any specific
coverage declaration or endorsement for 'the work on this construction project
or the contractors' for the Village of Bartlett village hall expansion
project." He further averred that even though the Project was in progress at
the time of the fire, construction for the police garage facility was fully
complete before the fire. Finally, Van Driska averred that IRMA never waived
any of its subrogation rights and was not privy to the contracts between the
Village and its contractors.
The trial court granted defendant's motion to dismiss finding that,
since the work on the Project was not complete at the time of the fire, the
clear language of the waiver provisions of the contracts barred the
plaintiffs' action.
On appeal, the plaintiffs argue that the trial court abused its
discretion in granting defendant's motion to dismiss because: (1)
construction on the police garage facility was complete at the time of the
fire and the insurable interest as to that building reverted back to the
Village; (2) the waiver of subrogation provisions should not apply where the
damage was caused by the negligent and wrongful acts of the defendant; (3) the
waiver of subrogation provisions should not apply to their policies since
those policies were not issued as "builder's all-risk" insurance; and (4) the
waiver of subrogation provision should not apply because the Travelers
insurance policy contained a specific clause maintaining subrogation rights.
We begin our analysis of the issues by first noting that the standard of
review when an appeal is taken from a motion to dismiss is not abuse of
discretion as the plaintiffs contend. A motion to dismiss pursuant to section
2-619 of the Code of Civil Procedure (735 ILCS 5/2-619 (West 1996)) presents
only a question of law, and an appeal taken from a motion to dismiss is
reviewed de novo. E.g., Kedzie & 103rd Currency Exchange, Inc. v. Hodge, 156 Ill. 2d 112, 619 N.E.2d 732 (1993). On review, the appellate court must
consider whether the existence of a material fact should have precluded the
dismissal or, absent such an issue of fact, whether dismissal was proper as a
matter of law. Hodge, 156 Ill. 2d 112, 619 N.E.2d 732.
The first issue raised in this appeal is whether, as a matter of law,
the fire damaging the police garage facility occurred "during construction".
Paragraph 9.4 of the Owner-Architect Agreement provided that the owner and
architect waived all rights against each other "but only to the extent covered
by property insurance during construction." (Emphasis added.) The plaintiffs
argue that the word construction did not mean construction of the entire
Project. They argue that the Village was not required under the construction
contracts to maintain property insurance for the police garage facility at the
time of the fire because that facility was complete and operational and the
insurable interest in that parcel of property had reverted back to the
Village. They argue that, as a result, the waiver of subrogation provisions
in the contracts were inapplicable.
We disagree. Contracts must be construed as a whole, and it is presumed
that all provisions were inserted for a purpose. Village of Rosemont v.
Lentin Lumber Co., 144 Ill. App. 3d 651, 494 N.E.2d 592 (1986). Here, while
the Project may have consisted of three separate and distinct job segments --
construction of the police station, construction of an addition to and
remodeling of the existing village hall, and a connecting link between the
police station and the village hall -- the contracts in question did not
distinguish between those segments, isolate them, or in any way treat them as
separate and distinct jobs. As set forth above, paragraph 11.3.1 of the
general conditions incorporated into the Owner-Contractor Agreement obligated
the Village to purchase and maintain property insurance "in the amount of the
initial Contract Sum as well as subsequent modifications thereto for the
entire Work at the site." (Emphasis added.) It further provided that the
insurance was to be maintained "until final payment has been made as provided
in Paragraph 9.10 or until no person or entity other than the Owner has an
insurable interest in the property required by this paragraph 11.3 to be
covered, whichever is earlier." Neither provision suggests an intention by
the parties to reduce, on a pro-rata basis, the Village's obligation to
purchase and maintain property insurance during construction in a manner that
corresponds to completion of the various segments of the Project. Neither
provision suggests that insurable interests would revert on a partial, pro-
rata basis as various segments were completed but before completion of the
entire Project; and no other provisions have been highlighted by the
plaintiffs which would allow for or even suggest such a pro-rata obligation by
the Village to maintain insurance on the Project. Absent such express
agreement, the general rule in construction cases is that both the owner and
the contractor have insurable interests in the property until the construction
is complete. See Midwest Lumber Co. v. Dwight E. Nelson Construction Co., 188
Neb. 308, 311, 196 N.W.2d 377, 379 (1972); Annotation, Builder's Risk
Insurance Policies, 94 A.L.R.2d 221 234 (1964).
Paragraph 11.3.1 can be interpreted in one and only one manner -- that
the Village's obligation under the construction contracts to maintain property
insurance ran with the entire Project and remained in effect until final
payment by the Village. This conclusion is further buttressed by the general
purpose of waiver of rights provisions which allow the parties to a
construction contract to exculpate each other from personal liability in the
event of property loss or damage to the work occurring during construction,
relying instead on the insurance purchased by one of the parties to provide
recovery for that loss. Village of Rosemont v. Lentin Lumber Co., 144 Ill.
App. 3d 651, 494 N.E.2d 592 (1986) (waiver of subrogation clauses shift the
risk of loss to the insurance company regardless of which party is at fault).
See also Home Insurance Co. v. Bauman, 291 Ill. App. 3d 834, 684 N.E.2d 828
(1997); Ralph Korte Construction Co. v. Springfield Mechanical Co., 54 Ill.
App. 3d 445, 369 N.E.2d 561 (1977) (upholding waiver provision as a proper
agreement between the parties to assume the risk of loss due to fire or other
perils as between themselves to the extent each party is covered by
insurance); South Tippecanoe School Building Corp. v. Shambaugh & Son, Inc.,
182 Ind. App. 350, 395 N.E.2d 320 (1979) (waiver of subrogation provision
shifts risk of loss to insurance carrier in return for premium payment).
Indeed, as the plaintiffs acknowledge, such provisions allocate risks during
construction to facilitate timely completion of the project by avoiding time-
consuming and expensive litigation. See South Tippecanoe, 182 Ind. App. at
368, 395 N.E.2d at 331; Haemonetics Corp. v. Brophy & Phillips Co., 23 Mass.
App. Ct. 254, 258, 501 N.E.2d 524, 527-28 (1986). As discussed in a case
cited by plaintiffs, Automobile Insurance Co. v. United H.R.B. General
Contractors, Inc., 876 S.W.2d 791 (Mo. Ct. App. 1994), that allocation as well
as the waiver ceases upon final payment. See Automobile Insurance Co., 876 S.W.2d at 794 (waiver of subrogation applies to completed structure up to time
of final payment; once contract has been fully performed, owner's remaining
obligation is to make payment and contractor's remaining interest is receipt
of final payment).[fn2]
Here, there is no language in the construction contracts to suggest
anything other than that the parties intended to allocate all property loss
occurring during construction and prior to completion of the entire Project
and payment to insurance and to limit recovery to the proceeds of that
insurance. Since the fire in the police garage facility occurred while
construction of the Project was continuing and prior to final payment, the
Village's obligation to maintain insurance and its agreement to waive
subrogation rights as to that facet continued despite completion of a portion
of the Project.
The plaintiffs next contend that the trial court erred in granting
defendant's motion to dismiss because the waiver of subrogation provisions
could not apply to damage caused by the negligent and wrongful acts of the
defendant. The plaintiffs contend that the waivers violated public policy by
encouraging negligence. They also contend that the waiver of subrogation
provisions do not specifically refer to damages arising from negligence and
thus do not apply to those types of damages.
Plaintiffs' arguments are incorrect. As discussed above, the purpose of
waiver of subrogation provisions is to allow the parties to a construction
contract to exculpate each other from personal liability in the event of
property loss or damage to the work to the extent each party is covered by
insurance. Village of Rosemont, 144 Ill. App. 3d 651, 494 N.E.2d 592; Ralph
Korte Construction Co., 54 Ill. App. 3d 445, 369 N.E.2d 561. "'[T]he
insurance clause shifts the risk of loss to the insurance company regardless
of which party is at fault.'" Village of Rosemont, 144 Ill. App. 3d at 660,
494 N.E.2d at 597 quoting Tuxedo Plumbing & Heating Co., Inc. v. Lie-Nielsen,
245 Ga. 27, 29, 262 N.E.2d 794 (1980). It avoids the prospect of extended
litigation which would interfere with construction. See South Tippecanoe, 182
Ind. App. at 368, 395 N.E.2d at 331; Haemonetics Corp., 23 Mass. App. Ct. at
258, 501 N.E.2d at 527-28. Thus, it matters not whether the fire loss was
caused by defendant O'Donnell's negligence so long as the loss was a covered
loss that occurred during construction.
We must also reject plaintiffs' argument that the waiver provisions are
violative of public policy in that they act, in essence, as indemnity
agreements holding the defendant harmless from its own negligence. See, e.g.,
Transcontinental Insurance Co. v. National Union Fire Insurance Co., 278 Ill.
App. 3d 357, 662 N.E.2d 500 (1996) (subcontractor's agreement to indemnify
general contractor for the latter's negligence and to purchase insurance for
this obligation was an indemnity agreement void under the Construction
Contract Indemnification for Negligence Act (Ill. Rev. Stat. 1989, ch. 29,
pars. 61, 63 now at 740 ILCS 35/1, 35/3 (West 1996))); G T E North, Inc. v.
Henkels & McCoy, Inc., 245 Ill. App. 3d 322, 612 N.E.2d 1375 (1993)
(contractor's obligation to indemnify owner for owner's own negligence was
void indemnity agreement). Plaintiff's very argument was rejected in Ralph
Korte Construction Co. v. Springfield Mechanical Co., 54 Ill. App. 3d 445, 369 N.E.2d 561 (1977). That case reviewed the policy considerations for the
legislature's prohibition of indemnity agreements used by the construction
industry and the desire to protect construction workers and the public given
the indemnified contractor's lessened motivation due to indemnification. As
the Korte court found, those considerations were not affected by waiver of
rights provisions which "do not involve injury suffered by a construction
worker or a member of the general public but instead, damage suffered by one
of the contracting parties due to the alleged negligence of another." Korte,
54 Ill. App. 3d at 447, 369 N.E.2d at 562. With respect to waiver of rights
agreements, the court stated:
"Both sides benefit from the arrangement and such benefit under
the circumstances does not come at the expense of a third party.
The agreement, as here applied, does not remove or reduce any
incentives to protect workers and others from injury since it does
not involve any question of liability to a third party. Under the
agreement, Korte waived his right to sue Springfield for
Springfield's negligence which resulted in a loss to Korte,
because Korte had insurance covering the loss and, in fact, such
loss was fully paid for by Korte's insurer. Under these
circumstances, Springfield's avoidance of the burden of liability
did not effect any prejudice to the interest in the safety of
workers and members of the general public." Korte, 54 Ill. App.
3d at 447, 369 N.E.2d at 562-63.
For similar reasons, we find that the waiver agreements here at issue
were not violative of the public policy considerations which outlawed
indemnity agreements. The property insurance provisions and waiver provisions
in the construction agreements here at bar limited the parties' recovery only
to property loss sustained by the parties to the agreement and only to the
extent that it was covered by insurance. See Village of Rosemont, 144 Ill.
App. 3d at 661, 494 N.E.2d at 598; Korte, 54 Ill. App. 3d at 448, 369 N.E.2d
at 563, citing 614 Third Avenue Corp. v. Grand Iron Works, Inc., 44 A.D.2d 531, 353 N.Y.S.2d 458 (1974). Moreover, even if the agreement extended to
third-party liability, arguably, it would not constitute an agreement to
indemnify a party for its negligence but, rather, it would be an agreement to
procure insurance on that party's behalf. As recognized in Capua v. W.E.
O'Neil Construction Co., 67 Ill. 2d 255, 367 N.E.2d 669 (1977), section 3 of
the Construction Contract Indemnification for Negligence Act (740 ILCS 35/0.01
et seq. (West 1996)) preserves enforceability of such agreements to procure
insurance. Capua stated:
"[Section 3] protects the interests of construction workers and
members of the general public who may suffer injury through
improper construction or maintenance by preserving supplemental
sources of compensation for injured persons, namely insurance and
indemnifying and hold-harmless agreements in construction bonds."
67 Ill. 2d at 260, 367 N.E.2d at 671.
See also Zettel v. Paschen Contractors, Inc., 100 Ill. App. 3d 614, 617-18,
427 N.E.2d 189, 191-92 (1981), stating
"An agreement to obtain insurance is not an agreement of
insurance; a person promising to obtain insurance does not by that
promise become an insurer although he may assume the liabilities
of one if he breaches the agreement. [Citations.] * * * Under an
indemnity agreement, the promisor agrees to assume all
responsibility and liability for any injuries or damages. Under
an agreement to obtain insurance the promisor merely agrees to
procure the insurance and pay the premium on it. Once the
insurance is obtained, the promisor bears no responsibility in the
event of injury or damage, even if the insurer should breach the
insurance agreement through no fault of the promisor."
Accord Duffy v. Poulos Brothers Construction Co., 225 Ill. App. 3d 38, 587 N.E.2d 1038 (1991); Jokich v. Union Oil Co., 214 Ill. App. 3d 906, 574 N.E.2d 214 (1991).
The plaintiffs next contend that the waiver of rights provisions do not
apply to damages arising from negligence because the Village was not required
to obtain property insurance covering that type of damage. In support of this
argument, the plaintiffs cite to two provisions in the Owner-Contractor
Agreement, paragraphs 11.3.7 and 11.3.1.1 of the general conditions.
Paragraph 11.3.7 states that the owner and contractor waive all rights "for
damages caused by fire or other perils to the extent covered by property
insurance obtained pursuant to this Paragraph 11.3 or other property insurance
applicable to the Work." Section 11.3.1.1 provides that the property
insurance shall
"insure against the perils of fire and extended coverage and
physical loss or damage including, without duplication of
coverage, theft, vandalism, malicious mischief, collapse,
falsework, temporary buildings and debris removal including
demolition occasioned by enforcement of any applicable legal
requirements, and shall cover reasonable compensation for
Architect's services and expenses required as a result of such
insured loss. Coverage for other perils shall not be required
unless otherwise provided in the Contract Documents."
The plaintiffs argue that paragraph 11.3.1.1 does not specifically require
insurance coverage for damages arising from negligence and that, thus, damages
resulting from negligence would fall under "other perils" not required to be
insured against. They therefore contend that, since paragraph 11.3.7 provides
for waiver of damages to the extent covered by property insurance obtained
pursuant to paragraph 11.3, and since paragraph 11.3.1 does not require
insurance for damages relating to negligence, then the waiver does not apply
to those damages. See Viacom International, Inc. v. Midtown Realty Co., 193 A.D.2d 45, 602 N.Y.S.2d 326 (1993) (a waiver of subrogation clause cannot be
enforced beyond the scope specified; waiver applied to tort liability, not
contract claims).
We disagree. Paragraph 11.3.1.1 identifies the types of perils that
could cause property damage and loss. It identifies fire as a distinct peril.
It does not differentiate between the manner in which that peril arises, that
is, whether by acts of God or by the intentional or unintentional, negligent
or reckless acts of human beings. In point of fact, fire loss could result
from any of these acts, although as noted in one case it "nearly always [is]
caused by negligence" (Board of Education v. Hales, 566 P.2d 1246, 1247 (Utah
1977)). To the extent that this provision does purport to enumerate different
types of human conduct which could cause losses of property, it does so with
respect to non-fire related physical loss or damage; and, even there, it
purports only to be inclusive, not preclusive. Moreover, strong argument can
be made that even with respect to those property losses the focus is not upon
the differing human motivations behind the conduct causing the damage but upon
the different types of hazards resulting from categories of human conduct
conventionally treated as separate underwriting coverages.
The express language of the contract shows that it required the Village
to obtain property insurance that insured against damage to property caused by
fire regardless of the fire's origin or cause. Thus, coverage for fire caused
by negligent conduct clearly was required; and the waiver of rights provisions
extended to the fire loss that occurred in the instant case.
Next, the plaintiffs argue that the waiver of subrogation provisions
should not apply to their policies because those policies were not "builder's
all-risk" policies purchased specifically for the Project. In support of this
argument, the plaintiffs cite to paragraph 11.3.1 of the general conditions
incorporated into the Owner-Contractor Agreement, which obligated the Village
"to purchase and maintain * * * property insurance in the amount of the
initial Contract Sum as well as subsequent modifications thereto for the
entire Work at the site." They cite to paragraph 11.3.1.1 of that Agreement
which provided that the "[p]roperty insurance shall be on an all-risk policy
form and shall insure against the perils of fire and extended coverage and
physical loss or damage * * *." Finally, they cite to paragraph 11.3.7, the
waiver of subrogation provision, which stated that the Owner and Contractor
waived all rights against each other and the architect "for damages caused by
fire or other perils to the extent covered by property insurance obtained
pursuant to this Paragraph 11.3 or other property insurance applicable to the
Work." In reliance on these provisions, the plaintiffs argue that their
policies were not "applicable to the Work" because they were "policies issued
to cover for the general liability, vehicles, property and personnel insured
by the Village."
We disagree with plaintiffs' interpretation of the phrase "or other
property insurance applicable to the Work." The plaintiffs argue that their
policies did not meet that criterion because they were not construction
insurance policies and because they were not obtained specially for the
Project, having been issued in 1983 more than ten years before the Project
commenced. First we note that were one to accept the plaintiffs'
interpretation, it would render the phrase "or other property insurance
applicable to the Work" redundant as to the immediately preceding phrase
"property insurance obtained pursuant to this Paragraph 11.3." That latter
phrase, "property insurance obtained pursuant to this Paragraph 11.3," allows
for the purchase of construction insurance or a "builder's risk" policy
obtained solely for the Project. Plaintiffs' suggestion that "or other
insurance applicable to the Work" also requires the purchase of construction
insurance specifically for "the Work" would not allow for any alternative form
of insurance implied by the word "or."
More convincingly, however, courts in other jurisdictions have
interpreted similar provisions in owner/contractor agreements to find that
all-risk policies, obtained prior to execution of the construction contracts,
were "other property insurance applicable to the Work" subject to waiver of
subrogation provisions in the agreements. In Lloyd's Underwriters v. Craig &
Rush, Inc., 26 Cal. App. 4th 1194, 32 Cal. Rptr. 2d 144 (1994), for example,
the construction contract required the owner to "purchase and maintain,
property insurance in the amount of the initial Contract Sum * * * for the
entire Work at the site." The construction contract further provided that the
owner and contractor waived "all rights against each other * * * for damages
caused by fire or other perils to the extent covered by property insurance
obtained pursuant to this Paragraph 17.3 or other property insurance
applicable to the Work." Lloyd's Underwriters, 26 Cal. App. 4th at 1197, 32 Cal. Rptr. 2d at 146. In that case, the owner, who had coverage under an
existing all-risk property insurance policy, did not purchase a separate
builder's risk policy. The court held that the waiver of subrogation
provision applied to prevent the insurer under the all-risk policy from
recovering against the contractor. See also E. C. Long, Inc. v. Brennan's of
Atlanta, Inc., 148 Ga. App. 796, 252 S.E.2d 642 (1979); Haemonetics Corp. v.
Brophy & Phillips Co., 23 Mass. App. Ct. 254, 501 N.E.2d 524 (1986); Chadwick
v. CSI, Ltd., 137 N.H. 515, 629 A.2d 820 (1993) (owner's existing all-risk
policy is "other property insurance applicable to the Work").
The plaintiffs attempt to distinguish these cases by arguing that the
insurance and risk management policies provided by IRMA and Travelers were not
"all-risk" policies[fn3] but, instead, general liability policies.[fn4] We
disagree. The issue is not whether the policies are called "all-risk" or
"general liability" policies but whether those policies cover the risks and
losses delineated in the construction agreements between the Village and the
architect and contractor. The Travelers policy which was attached to
plaintiffs' memorandum in support of their response to defendant's motion to
dismiss, shows that regardless of its classification, that policy qualified as
"other property insurance applicable to the Work." That policy insured
"against risks of direct physical loss to covered property commencing during
the policy period." Covered property included buildings, structures and
personal property. Covered buildings and structures were those buildings or
structures "(1) owned by the Insured; (2) in which the Insured had an
insurable interest; or (3) in which the Insured has agreed in writing before
loss to insure." That policy also provided that it covered "the interest of
the Insured in buildings, structures and personal property at newly
constructed, acquired or leased locations or any Builders Risk within the
territorial limits of this policy, which have been previously undeclared."
These provisions show that the policy covered contractors' (or builder's)
risks associated with construction of Village buildings. It covered property
that the Village agreed in writing to insure before loss, regardless of the
Village's insurable interest in that property. That policy provided "other
property insurance applicable to the Work" even though it was purchased many
years prior to construction of the Project and even though it did not
reference the Project.[fn5]
We also disagree with plaintiffs' insistence that the IRMA and Travelers
policies could not be considered "other property insurance" applicable to the
police facility loss because the entire insurable interest in the police
garage facility had reverted back to the Village. For the reasons discussed
above, the construction contracts did not provide any type of pro-rata
reversion of interests back to the Village as various segments to the Project
were completed. While the Village, as owner of the buildings that were the
subject of the Project, had an insurable interest in the buildings at all
times, the defendant architects and the contractor also had insurable
interests in those buildings, at least during the course of construction. See
Midwest Lumber Co., 188 Neb. at 311, 196 N.W.2d at 379; Annotation, Builder's
Risk Insurance Policies, 94 A.L.R.2d at 234.
As their final argument, the plaintiffs contend that the waiver of
subrogation provision was unenforceable because it conflicted with and
prejudiced plaintiffs' rights of subrogation reserved in their insurance
policies. In support of this argument, the plaintiffs quote the following
language from the Travelers policy:
"This insurance shall not be invalidated should the Insured waive
by specific written agreement prior to a loss any or all right of
recovery against any party for loss insured against by this
policy."
Plaintiffs' reliance on this clause wholly unwarranted. The thrust of
the quoted paragraph is not that waiver of subrogation is invalid but that
waiver of subrogation would not invalidate the policy. The clause does not
protect the insurer's right of subrogation; rather it protects the insured's
right to recover under the policy even if the insured waived its right to
recover against a third party. The clause specifically allows the insured to
waive the insurer's right of subrogation.
In Commerce & Industry Insurance Co. v. Orth, 254 Or. 226, 458 P.2d 926
(1969), a similar clause in an insurance policy was interpreted to show that
the insurer expressly allowed the insured owner of the property to release
various contractors from liability for loss to the owner's building under
construction. In Orth, the owner and the general contractor had entered into
a written construction agreement, similar to the one in the instant case,
which required the owner to carry insurance to protect the work during
construction. The construction agreement also contained a waiver of rights
provision which stated: "The Owner, Contractor, and all subcontractors waive
all rights, each against the others, for damages caused by fire or other
perils covered by insurance provided under the terms of this article * * *."
Orth, 254 Or. at 228, 458 P.2d at 927-28. The insurance policy provided:
"Without prejudice to this insurance the insured may, prior to loss, release
others from liability for loss to the described property from whatever cause
arising * * *." Orth, 254 Or. at 229, 458 P.2d at 928.
The Orth court affirmed the grant of judgment on the pleadings to the
contractors and against the insurer/subrogee stating:
"On the record in this case, it is not harsh to hold that the
insurer waived its subrogation rights against the various
contractors; we are merely recognizing the bargain made between
the insurer and the owner. The owner and the contractor had
agreed that the owner would furnish the insurance and would not
look to the contractors for recovery for losses covered by
insurance. The insurer accepted the situation thus created. An
insurance scheme allowing the insurer to bring subrogation actions
against contractors would defeat the purpose of the construction
contract and would be inconsistent with the terms of the policy."
254 Or. at 232, 458 P.2d at 929.
Here, as in Orth, the Village agreed to furnish property insurance and not
look to O'Donnell for recovery for losses covered by that insurance. In
addition, as in Orth, the insurer expressly allowed the Village to release
"any party for loss insured against by this policy" and agreed to compensate
the Village for designated losses for which subrogation would not be
available.[fn6] Thus, the waiver of subrogation clauses did not conflict
with the insurance policy provision which allowed such waiver by the insured
nor were the insurers prejudiced by the construction contracts since the
insurers independently waived their rights of subrogation.
Moreover, to maintain that the policy language could override the waiver
clauses in the construction agreements would belie the principle that the
insurer acquires only those rights possessed by its subrogor/insured and is
vulnerable to all defenses which might have been raised to the claim of the
subrogor/insured. Insurance Co. of North America v. Morgan Dyeing & Bleaching
Co., 262 F.2d 916 (7th Cir. 1959); Dix Mutual Insurance Co. v. LaFramboise,
149 Ill. 2d 314, 597 N.E.2d 622 (1992). Here, the insured, the Village,
waived any right of recovery against defendant O'Donnell for any property loss
caused by O'Donnell during construction of the Project. The plaintiffs, as
the Village's subrogees, could only assert the Village's right of recovery
against the defendant; and since the Village waived its right of recovery
against the defendant, the plaintiffs/subrogees were as vulnerable as the
Village to the defendant's assertion of its waiver defense.
For the foregoing reasons, the judgment of the Circuit Court of Cook
County is affirmed.
Affirmed.
LEAVITT, P.J. and COUSINS, J., concur.
[fn1]An omission of several letters exists in the copy of
this document due to the binding of the record on appeal. A
further copy included in the appendix to the Brief of the
Defendant-Appellee, contained a similar omission.
[fn2]Although Automobile Insurance Co. v. United H.R.B.
General Contractors, Inc., 876 S.W.2d 791 (Mo. Ct. App. 1994)
stands for the proposition cited in the main text, it is clearly
distinguishable from the case at bar and does not support the
plaintiff's position. In that subrogation case, the court
reversed the grant of summary judgment in the contractor's favor
finding that the waiver of subrogation clause did not apply to
the fire loss that occurred almost 20 months after completion of
the project (construction of a new sanctuary and educational
facilities for a church) and five months after final payment had
been made. In the case at bar, on the other hand, the Project
was not completed and final payment had not been made at the time
of the fire loss.
[fn3]"All risk" insurance policies insure against all
fortuitous losses, unless specifically excluded, not resulting
from the wilful misconduct or fraud of the insured. Board of
Education of Maine Township High School District 207 v.
International Insurance Co., 292 Ill. App. 3d 14, 684 N.E.2d 978
(1997). See generally 5 J. Appelman, Insurance Law & Practice
3093 (1970); 13A Couch on Insurance 2d 48:141 (rev. 1982).
[fn4]The plaintiffs also attempt to distinguish Chadwick v.
CSI, Ltd., 137 N.H. 515, 629 A.2d 820 (1993) because in that case
the insured raised the limits on its preexisting property
insurance policy. We do not believe that distinguishing fact is
load bearing. In Chadwick, the preexisting property insurance,
without the raised limits, would not have qualified as other
property insurance applicable to the construction work given its
lower limits. Moreover, in the other cases cited in the main
text, preexisting property insurance was applicable to the
construction loss and was subject to the waiver of subrogation
provision without, apparently, any increase in limits or policy
amendments.
[fn5]While not raised by the parties, it would appear that
the Village relied on its pre-existing insurance policies issued
by the plaintiffs to satisfy its contractual obligation to obtain
property insurance for the Project since neither party has
averred that the Village notified the Contractor prior to
commencement of the work that it did not intend to purchase the
required property insurance. See Owner-Contractor Agreement,
General Conditions of the Contract for Construction, par.
11.3.1.2 (requiring owner to notify the contractor in writing
prior to commencement of the work if owner did not intend to
purchase such property insurance so that contractor could effect
insurance at the owner's expense).
[fn6]
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