Behr v. Hook
Annotate this Case
Behr v. Hook (2000-223); 173 Vt. 122; 787 A.2d 499
[Filed 28-Sep-2001]
[Motion for Reargument Denied 14-Nov-2001]
NOTICE: This opinion is subject to motions for reargument under
V.R.A.P. 40 as well as formal revision before publication in the Vermont
Reports. Readers are requested to notify the Reporter of Decisions,
Vermont Supreme Court, 109 State Street, Montpelier, Vermont 05609-0801 of
any errors in order that corrections may be made before this opinion goes
to press.
No. 2000-223
Peter and Marjorie Behr Supreme Court
On Appeal from
v. Windsor Superior Court
Norman Hook, d/b/a Norm's Painting, June Term, 2001
Dead River Company of Maine and
Jaynes and Berge, Inc.
Alan W. Cheever, J.
Richard J. Windish, Jr. of Eaton & Hayes, Woodstock, and Richard C. Glazer of
Cozen and O'Connor, Philadelphia, Pennsylvania, for Plaintiffs-Appellants.
James E. Preston of Pierson, Wadhams, Quinn & Yates, Burlington, for
Defendant-Appellee Hook
Kimberly L. Carboneau of Boylan & Richards, P.C., Springfield, for
Defendant-Appellee Dead River Company of Maine.
PRESENT: Amestoy, C.J., Morse, Johnson and Skoglund, JJ., and Cook, D.J.,
Specially Assigned
SKOGLUND, J. Plaintiffs Peter and Marjorie Behr, whose newly
constructed home was destroyed by fire shortly before they were to move
into it, appeal the superior court's summary judgment ruling upholding a
waiver-of-subrogation provision contained in the construction contract
entered into between the Behrs and their general contractor. Under the
court's ruling, the Behrs' insurer - the real party in interest in this
subrogation action - may not recoup from defendant
subcontractors, who are alleged to have caused the fire, the $1.4 million
the insurer paid the Behrs for the fire loss. We reject plaintiffs'
arguments that (1) given their allegations of gross negligence, public
policy considerations precluded the superior court from enforcing the
waiver-of-subrogation provision; (2) apart from considerations of public
policy, the provision should not apply because the general contractor
failed to obtain waivers from the subcontractors, as required by the
contract; and (3) a portion of the damages were outside the scope of the
provision, even if it was applicable. Accordingly, we affirm the superior
court's grant of summary judgment in favor of defendants.
In March 1995, the Behrs contracted with Jaynes & Berge, Inc. for the
construction of their new home. They signed a standard contract published
by the American Institute of Architects (AIA). The contract required the
Behrs to purchase and maintain property insurance in the amount of the
initial contract plus any later modifications for work done at the site.
The contract explicitly required the policy to insure against the perils
of fire, among other things. The contract also included a
waiver-of-subrogation provision that required the Behrs and the general
contractor to waive all rights against each other and any of their
subcontractors for damages caused by fire to the extent covered by
insurance obtained pursuant to the contract. Further, the provision
required that the insurance policies obtained pursuant to the contract
provide waivers of subrogation, as set forth in the contract, by
endorsement or otherwise. (FN1)
Construction on the home proceeded through the summer and fall of
1995. Then, in the early morning hours of December 8, 1995, the Behrs'
recently completed home was destroyed by fire. The state police fire
marshal determined that a propane heater owned by one subcontractor and
left unattended by another subcontractor was the most probable source of
the ignition that caused the fire. The Behrs' insurer paid the Behrs $1.4
million for the loss and initiated a subrogation action, in the Behrs'
name, against the subcontractor who owned the heater, Dead River Company of
Maine d/b/a Leonard's Gas & Electric Service (hereinafter Dead River), and
the painting subcontractor who left the heater unattended, Norman Hook
d/b/a Norm's Painting. Plaintiffs alleged that the painting subcontractor
acted in a grossly negligent manner by leaving the heater unattended
propped near a freshly painted porch to accelerate the drying process on a
cold night. Plaintiff also alleged both ordinary and gross negligence
against Dead River, claiming that the heating subcontractor failed to
instruct others how to use the heater safely around combustible material,
failed to place proper
warnings on the heater, and failed to provide an appropriate guard or other
safety device on the heater to prevent ignition of combustible materials.
Both defendants filed motions for summary judgment based upon the
waiver-of-subrogation provision contained in the construction contract.
After hearing oral argument, the superior court granted the motions.
Relying on Fairchild Square Co. v. Green Mountain Bagel Bakery, Inc., 163
Vt. 433, 658 A.2d 31 (1995), the court concluded that the intent of the
contractual language was unambiguous, and that public policy
considerations did not preclude the waiver of subrogation contained in the
contract. On appeal from a decision granting summary judgment, we apply
the same standard applied by the trial court - we will affirm the judgment
if there is no genuine issue as to any material fact and the moving party
is entitled to judgment as a matter of law. See Hamelin v. Simpson Paper
Co., 167 Vt. 17, 19, 702 A.2d 86, 88 (1997).
I.
Plaintiffs' primary argument on appeal is that public policy
considerations preclude applying a waiver-of-subrogation provision when
gross, as opposed to ordinary, negligence is alleged. In making this
argument, plaintiffs concede that parties in Vermont may contractually
exculpate themselves from their negligent conduct in certain
circumstances, but contend that public policy should not allow a party to
contractually waive responsibility for reckless conduct that imperils the
public. We conclude that, given the circumstances of this case, the
instant waiver-of-subrogation provision does not violate public policy.
While acknowledging that exculpatory clauses are traditionally
disfavored and subject to exacting judicial scrutiny, Fairchild Square,
163 Vt. at 437, 658 A.2d at 33, we have recognized that such clauses
should be upheld when they are freely and fairly made between parties in an
equal
bargaining position and do not interfere with any social interest, Dalury
v. S-K-I, Ltd., 164 Vt. 329, 332, 670 A.2d 795, 797 (1995) (citing
Restatement (Second) of Torts § 496B comment b). Among the relevant
considerations in determining the appropriateness of applying a particular
exculpatory clause are (1) whether the contract concerns a business
suitable for public regulation; (2) whether the party seeking exculpation
is performing a service of great importance to the public; (3) whether that
party holds itself out as willing to perform the service for any member of
the public; (4) whether, as a result of the essential nature of the
service, that party has a decisive bargaining position; (5) whether that
party confronts the public with a standardized adhesion contract of
exculpation; (6) whether the contract was fairly entered into; and (7)
whether the parties' intent is expressed in clear and unambiguous
language. Dalury, 164 Vt. at 332-33, 670 A.2d at 797. Because the context
of the contract is critical, Fairchild Square, 163 Vt. at 437, 658 A.2d at
33, the determination of whether an exculpatory clause violates public
policy depends ultimately upon "the totality of the circumstances . . .
against the backdrop of current societal expectations.'" Dalury, 164 Vt.
at 333-34, 670 A.2d 778; see New Light Co. v. Wells Fargo Alarm, 525 N.W.2d 25, 30 (Neb. 1994) (whether particular exculpatory clause in
contractual agreement violates public policy depends upon parties involved
and facts and circumstances of agreement; "the greater the threat to the
general safety of the community, the greater the restriction on the
party's freedom to contractually limit the party's liability").
The instant case concerns a standardized waiver-of-subrogation clause
in a construction contract between private parties in relatively equal
bargaining positions. Such clauses are intended to allows the parties "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."
IRMA v. O'Donnell,
Wicklund, Pigozzi & Peterson Architects, Inc., 692 N.E.2d 739, 744 (Ill.
App. Ct. 1998). By shifting the risk of loss to the insurance company
regardless of which party is at fault, these clauses seek to avoid "the
prospect of extended litigation which would interfere with construction."
Id.; see Tokio Marine & Fire Ins. Co. v. Employers Ins. of Wausau, 786 F.2d 101, 104 (2d Cir. 1986) (waiver-of-subrogation clause is useful in
construction projects "because it avoids disruption and disputes among the
parties to the project" by eliminating need for lawsuits and protecting
contracting parties from loss by bringing all property damage under
builder's all-risk property insurance).
Courts have allowed such clauses on public policy grounds because they
limit a party's recovery "only to property loss . . . and only to the
extent that [the loss] was covered by insurance." IRMA, 692 N.E.2d at
745; see Chadwick v. CSI, Ltd., 629 A.2d 820, 825-26 (N.H. 1993) (waiver-
of-subrogation provisions in construction contracts are not designed to
unilaterally relieve one party from effects of its future negligence,
thereby foreclosing another party's avenue of recovery; rather, such
provisions are aimed at ensuring that damages incurred during construction
projects are covered by appropriate types of insurance); Viacom Intern. v.
Midtown Realty, 602 N.Y.S.2d 326, 331 (N.Y. App. Div. 1993) ("such clauses
merely reflect [the parties'] allocation of the risk of liability, as
between themselves, to third parties through the device of insurance"); see
also S. Turner, Insurance Coverage of Construction Disputes § 5:7, at 14
(2d ed. 2001) ("waivers of subrogation are quite common in construction
contracts as to the subrogation rights of property insurance insurers. . .
. and case law has upheld these waivers, against . . . the subrogated
insurer"). The courts have recognized that because the clauses typically
require insurance policies to acknowledge the insureds' waiver of
subrogation rights, the insurers presumably take this fact into account in
fixing premiums. See Kaf-Kaf, Inc. v. Rodless Decorations, 687 N.E.2d 1330, 1333 (N.Y. 1997).
This Court has also treated such clauses favorably in a similar
context. In Fairchild Square, we upheld a waiver-of-subrogation provision
in a commercial lease agreement that allocated the responsibility of
purchasing fire insurance to the landlord and contemplated that the parties
would be reimbursed for fire loss through that policy. 163 Vt. at 435-37,
658 A.2d at 34-35. In affirming the trial court's determination that the
landlord had waived recovery for damages from a fire negligently caused by
the tenant, we noted that the waiver-of-subrogation clause was plainly
"intended to distribute the risk of loss by fire in a predictable way so
that two commercial entities could insure against potential harm in the
most logical and economic way," and that public policy considerations
favored an agreement that avoided higher overall costs resulting from the
multiplicity of insurance policies and overlapping coverage. Id. at 442,
658 A.2d at 36.
Plaintiffs attempt to distinguish Fairchild Square solely on the basis
that defendants' conduct was allegedly grossly negligent. (FN2) This sole
distinction, in light of the circumstances of this case, does not convince
us that the challenged provision violates public policy. Plaintiffs
attempt to equate an allegation of gross negligence with wilful and wanton
conduct, but this Court has explained that gross negligence
falls short of being such reckless disregard of probable
consequences as is equivalent to a wilful and intentional wrong.
Ordinary and gross negligence differ in degree of inattention,
while both differ in kind
from wilful and intentional conduct, which is or ought to be known
to have a tendency to injure.
Shaw, Admr. v. Moore, 104 Vt. 529, 531-32, 162 A. 373, 374 (1932); see
Agra-By-Products, Inc. v. Agway, Inc., 347 N.W.2d 142, 151 (N.D. 1984)
(even grossest negligence of insured cannot be equated with wilful
conduct; gross negligence is not wilful as matter of law).
We have recognized that juries must often determine the unclear
dividing line between ordinary and gross negligence. See Hardingham v.
United Counseling Serv., 164 Vt. 478, 483, 487, 672 A.2d 480, 484, 486
(1995) (J. Dooley, dissenting) ("Like many other courts, we found that the
only reasonable course of action was to leave the decision of whether gross
negligence was present to the jury except in the most extreme cases.").
If we were to accept plaintiffs' argument, plaintiffs in later cases would
be able to negate waiver-of-subrogation provisions, and the public policy
considerations supporting them in contexts such as the instant one, merely
by alleging gross negligence and trusting that the trial court would allow
the jury to determine if the defendants' conduct sunk to that uncertain
level. We decline to adopt this position. Notwithstanding plaintiffs'
allegations of gross negligence against defendants, we conclude that, in
the context of this case, the instant waiver-of-subrogation provision does
not violate public policy. Cf. Agra-By-Products, Inc., 347 N.W.2d at 151
(upholding waiver-of-subrogation provision and concluding that, because
gross negligence cannot be equated with wilful conduct, trial court did
not err in refusing to allow plaintiff to amend complaint to allege fire
was caused by defendants' gross negligence).
Indeed, plaintiffs have utterly failed to demonstrate how the public
would be adversely affected by upholding such clauses in circumstances
similar to those present here. Nor are we persuaded to adopt plaintiffs'
position based on cases, cited by plaintiffs, that involve substantially
different circumstances or that fail to provide a reasonable basis for the
stance they have taken. See, e.g., Indiana Ins. Co. v. Erhlich, 880 F. Supp. 513, 521 (W.D. Mich. 1994) (summary judgment not appropriate "at
this juncture" because defendants have not addressed issue of gross
negligence); Butler Mfg. Co. v. Americold Corp., 841 F. Supp. 1107, 1111
(D. Kan. 1993) (exculpatory provisions of leasehold contract deemed
invalid to extent that they can be read to limit defendants' liability for
gross negligence or wilful or wanton conduct); Federal Ins. Co. v.
Honeywell, Inc., 641 F. Supp. 1560, 1562 (S.D.N.Y. 1986) (public policy
voids any provision in burglar alarm contract exculpating party from
liability for gross negligence or wilful or wanton misconduct); Zavras v.
Capeway Rovers Motorcycle Club, 687 N.E.2d 1263, 1265 (Mass. App. Ct. 1997)
(substantial authority, often in racetrack context, take position that
while party may contract against liability for harm caused by its
negligence, it may not do so with respect to its gross negligence).
II.
Next, plaintiffs argue that the waiver-of-subrogation provision should
not have been enforced against them because the general contractor failed
to obtain waivers from its subcontractors, as required by the provision.
In relevant part, the construction contract provides that the owner and
contractor waive all rights against (1) each other and their agents or
subcontractors and (2) the Architect, the Architect's consultants, and
separate consultants and their subcontractors for damages caused by fire
to the extent covered by property insurance obtained pursuant to the
contract. The owner or contractor, "as appropriate, shall require of the
Architect, Architect's consultants, separate contractors . . . and the
subcontractors . . . of any of them, similar waivers each in favor of other
parties enumerated herein." According to plaintiffs, by not obtaining
waivers from defendants, the
general contractor materially breached the contract, thereby preventing
defendants from enforcing the waiver-of-subrogation provision.
We do not find this argument persuasive. We first note that the
quoted sentence from the waiver clause is, at best from plaintiffs'
perspective, ambiguous as to whether it applies to the subcontractors or
to the general contractor. In requiring the owner or contractor to obtain
waivers, the quoted language appears to track only those persons and
entities designated in the second group, which does not include
subcontractors to the general contractor. In any event, the contract does
not make obtaining the waivers from subcontractors a condition precedent
to application of the waiver-of-subrogation provision. Indeed, rather
than specify any consequences to follow from failure to obtain waivers
from the subcontractors, the contract provides that a "waiver of
subrogation shall be effective" even against those persons or entities
that "would otherwise have a duty of indemnification" or "did not pay the
insurance premium directly or indirectly."
The plain intent of the parties was to make the Behrs' insurer bear
the risk of property damage resulting from fire or other perils. Because
the waiver-of-subrogation provision required that the waiver be recognized
in the insurance policy, the insurer knew the risk when it insured
plaintiffs and presumably set the rates based on that risk. The absence
of mutual waivers with respect to the subcontractors was not a material
breach affecting the primary purpose of the provision, which was to
protect the contractor and its subcontractors from liability for accidental
property loss. Cf. Indiana Ins. Co., 880 F. Supp. at 520 (even if failure
to include waiver-of-subrogation provision in contract with separate
contractor could somehow remove that contractor from definition of
"separate contractor" in primary contract, separate contractor would
nonetheless
fall under protection of waiver-of-subrogation clause contained in latter
contract by virtue of separate contractor's status as third-party
beneficiary).
III.
Finally, plaintiffs argue that, even if the waiver-of-subrogation
provision is effective, a portion of their damages was outside the scope
of the clause. According to plaintiffs, because the contract provisions
require them to obtain property insurance only "in the amount of the
initial Contract Sum as well as subsequent modifications thereto for the
entire Work," the waiver-of-subrogation provision is not applicable to
$181,840 in costs stemming from services - kitchen and pantry cabinets,
plumbing fixtures, and landscaping - that were specifically excluded from
the contract.
Again, we disagree. The waiver-of-subrogation provision explicitly
applies to the extent that there is "property insurance obtained pursuant
to" the contract. The contract requires insurance coverage for the
"entire Work at the site on a replacement cost basis." It is undisputed
that plaintiffs obtained insurance coverage that compensated them for
their entire loss. Therefore, the waiver-of-subrogation provision applies
to the extent of that coverage. See Lloyd's Underwriters v. Craig & Rush,
Inc., 26 Cal. App. 4th 1194, 1198-99 (1994) (standard AIA
waiver-of-subrogation provision applies to extent of any insurance
coverage required under contract, even if that insurance extends beyond
that required by contract); Haemonetics Corp. v. Brophy & Philips Co., 501 N.E.2d 524, 526 (Mass. App. Ct. 1986) (same); Employers Mut. Cas. Co. v.
A.C.C.T., Inc., 580 N.W.2d 490, 493-94 (Minn. 1998) (agreeing with Lloyd's
Underwriters and citing majority of jurisdictions that concur); cf.
Fairchild Square, 163 Vt. at 440-41, 658 A.2d at 35 (rejecting landlord's
argument that it waived recovery for fire damage only to tenant's
apartment and not adjoining apartments, and noting that
it "does not make sense to hold tenant responsible for damage to nondemised
premises even though landlord would purchase fire insurance to cover these
premises"). But see Town of Silverton v. Phoenix Heat Source, 948 P.2d 9,
12 (Colo. Ct. App. 1997) (scope of waiver-of-subrogation provision is
limited to value of work performed under contract - installation of new
roof on town hall). The Behrs had a right under the contract to make
separate agreements with other contractors for different aspects of the
construction project, but only under conditions imposed by the contract,
including those contained in the waiver-of-subrogation provision.
Affirmed.
FOR THE COURT:
_______________________________________
Associate Justice
------------------------------------------------------------------------------
Footnotes
FN1. The waiver-of-subrogation provision, in its entirety, provides as
follows:
Waivers of Subrogation. 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, separate contractors
described in Article 6, if any, and any of their subcontractors,
sub-subcontractors, agents and employees, 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, except such rights as they have
to proceeds of such insurance held by the Owner as fiduciary.
The Owner or Contractor, as appropriate, shall require of the
Architect, Architect's consultants, separate contractors
described in Article 6, if any, and the subcontractors, sub-
subcontractors, agents and employees of any of them, by
appropriate agreements, written where legally required for
validity, similar waivers each in favor of other parties
enumerated herein. 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.
FN2. Although plaintiffs alleged gross negligence against Dead River in
their complaint, they failed to renew this claim in their response to
defendants' motions for summary judgment. Indeed, plaintiffs stated at
the summary judgment hearing that there was no allegation of gross
negligence against Dead River, and the trial court found the same.
Consequently, plaintiffs have waived any claim that the superior court
should have denied Dead River's motion for summary judgment because of
their allegation of gross negligence. They have not waived this argument
with respect to Norm's Painting, however.
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