ATTORNEYS FOR APPELLANTS: ATTORNEYS FOR APPELLEES:
CHARLES T. JENNINGS JAMES L. PETERSEN
THOMAS R. HALEY III Ice Miller
Jennings Taylor Wheeler & Bouwkamp Indianapolis, Indiana
PHILIP L. FORTUNE
Smith Currie & Hancock
IN THE COURT OF APPEALS OF INDIANA
THE MIDWESTERN INDEMNITY ) COMPANY, as subrogee of ACTION ) STEEL, INC., and LOUISE LITWACK, ) ) Appellants-Plaintiffs, ) ) vs. ) No. 49A02-0304-CV-287 ) SYSTEMS BUILDERS, INC., ) VARCO-PRUDEN BUILDINGS and ) A/E TECHNOLOGIES, INC., ) ) Appellees-Defendants. )
APPEAL FROM THE MARION SUPERIOR COURT
The Honorable Kenneth H. Johnson, Judge
Cause No. 49D02-9707-CP-969
January 14, 2004
OPINION - FOR PUBLICATION
Whether the waiver of insurance and subrogation provisions of the construction contract bar
recovery for amounts paid for damages to the contents of the building; and
Whether there is evidence to create a genuine issue of fact as to
whether the cause of the collapse of the building addition was an act
or omission of Varco-Pruden.
We affirm in part, reverse in part, and remand.
The relevant facts designated by the parties follow. Litwack, in her capacity as the owner of Action Steel, entered into a contract with Systems Builders for the construction of an addition to a commercial building. Systems Builders was the general contractor and agreed to erect a building designed and manufactured by Varco-Pruden. The construction contract was an A201 standard form contract issued by the American Institute of Architects (AIA). Section 11.3 of the construction contract, which dealt with property insurance, provided, in relevant part, that:
11.3.1 Unless otherwise provided, the Owner shall purchase and maintain, in a company or companies lawfully authorized to do business in the jurisdiction in which the Project is located, property insurance . . . . This insurance shall include interests of the Owner, the Contractor, Subcontractors and Sub-subcontractors in the Work.
Appellants Appendix at 262-263.
The construction of the building addition was completed in the summer of 1995.
On January 16, 1996, a snowstorm hit the Indianapolis area and a
portion of the addition collapsed. Action Steel was insured by Midwestern under
a policy issued after completion of the construction. Midwestern paid $1,391,818.90 to
Action Steel for the loss. $44,971.21 of the $1,391,818.90 was for damage
to the contents of the building. The remaining portion of the payment
was for the loss of the building and loss of business income.
On January 16, 1998, Midwestern, as subrogee of Action Steel, filed an amended complaint for damages to recover what it had paid. The complaint asserted four claims against Varco-Pruden: (1) Count I, negligence; (2) Count II, breach of express warranty; (3) Count III, breach of contract; and (4) Count IV, breach of implied warranties.
Varco-Pruden filed two motions for summary judgment. On January 28, 2002, Varco-Pruden filed its first motion for partial summary judgment, arguing that: (1) Midwesterns claim of negligence against Varco-Pruden, with the exception of $44,971.21, [was] precluded as a matter of law due to Indianas adoption of the economic loss doctrine; and (2) any recovery . . . in contract [was] barred by the valid waiver of subrogation. Id. at 96. Midwestern filed a cross-motion for summary judgment, and, on August 26, 2002, Varco-Pruden filed its second motion for partial summary judgment, wherein it argued that: (1) Midwesterns claim for negligence was barred because Midwestern could not show a causal connection between the loss and Varco-Prudens conduct; (2) Midwesterns breach of contract claim was barred by lack of privity; (3) Midwesterns breach of express warranty claim was barred by lack of privity, lack of express warranty, and lack of proof of cause of the loss; and (4) Midwesterns breach of implied warranty claim was barred by lack of privity and lack of proof of the cause of the loss. Id. at 285-291. With respect to Varco-Prudens argument that Midwestern failed to show a causal connection between the loss and Varco-Prudens conduct, Varco-Pruden argued that:
[Midwestern] alleges in Count I that the damages are the result of Varco-Prudens negligent design of the building addition. Yet, [Midwestern] has provided no expert testimony directly showing such causation. By his own testimony, [Midwesterns] expert was not even engaged to investigate the cause of the collapse. Furthermore, Mr. Sapsford has not shown with any specific evidence that Varco-Prudens design did not meet the applicable building code. His testimony is supposition with no calculations to support his conclusions. In the end, [Midwestern] has failed to advance any evidence regarding the cause of the collapse, much less any evidence that demonstrates Varco-Prudens actions caused the collapse. Such a failure is appropriate for review under Trial Rule 56. The absence of expert testimony on an essential element makes the entry of summary judgment entirely appropriate.
Id. at 286-287 (internal citations omitted).
In Midwesterns response to Varco-Prudens second motion for summary judgment, it relied upon the deposition testimony of its engineering expert, Simon Sapsford. Specifically, Midwestern noted that Sapsford concluded that the building addition was inadequately designed, that the roof was inadequately braced or improperly supported, that this failure led to the collapse of the roof when it had snow on it, and that the building additions roof failed to meet the Indiana building code in effect at the time of the construction. Id. at 295. Midwestern also noted that Sapsford concluded that the purlins, which were metal beams that attempted to support the roof, were improper, and that these purlins were not capable of providing sufficient strength of stiffness for this condition. They would be dangerously over stressed and far too flexible as simple span members. Id. at 296 (quoting Exhibit D, p.3). Midwestern also noted that Sapsford ultimately concluded that Varco-Pruden failed to meet the building code specified bracing requirements and that the roof collapse . . . was caused by the failure of these purlins to support the roof. Id. at 297.
The trial court granted Varco-Prudens first motion for partial summary judgment and denied Midwesterns cross-motion for summary judgment, effectively limiting Midwesterns claim to $44,971.21 for damage to building contents under its negligence claim in Count I. However, the trial court also granted Varco-Prudens second motion for summary judgment. The trial courts order provided, in relevant part, that:
Varco-Pruden has shown that there is no genuine issue of material fact regarding the issue of causation of Plaintiffs injuries and damages. Varco-Pruden was supplied specifications which referred to and incorporated the basic design load criteria contained in the 1991 Uniform Building Code (Construction Contract Specification, page 6, Section 13.4.) Varco-Pruden complied with these specifications in that Varco-Pruden met the standard set forth in the 1991 Uniform Building Code (Dr. James Fisher Depo. P. 35.) Plaintiffs have not come forth with admissible evidence which places the issue of Varco-Prudens compliance with the 1991 Uniform Building Code in dispute. (Plaintiffs experts guesses, supposition and conjecture are not sufficient to create a genuine issue of material fact to defeat summary judgment. Hayden v. Paragon Steakhouse, 731 N.E.2d 456, 458 (Ind. Ct. App. 2000)).
A contractor is not liable if it has merely carried out the plans, specifications, and directions supplied to it, since in that case the responsibility is assumed by the employer, at least when the plans are not so obviously dangerous that no reasonable contractor would follow them. . . . For this reason, Varco-Prudens motion for summary judgment dated August 23, 2002, is GRANTED.
Id. at 22-23. The combined summary judgments of the trial court gave
Varco-Pruden summary judgment against Midwestern as to all negligence claims as well as
to all other claims.
Likewise, the Georgia Court of Appeals also addressed a similar issue in Colonial Props. Realty, L.P. v. Lowder Constr. Co., Inc., 567 S.E.2d 389, 390-393 (Ga. Ct. App. 2002). Again, the contract at issue in Colonial was a form agreement drafted by the AIA and is nearly identical to the contract at issue here. There, Colonial had hired Lowder, a general contractor, to construct an apartment complex. Id. at 390. One year after the apartment complex was completed, a fire that was inadvertently started by a resident extensively damaged the complex. Id. Colonials insurance company paid for the loss, and, the insurance company, in the name of Colonial, brought a subrogation action against Lowder. Id. Lowder moved for summary judgment, arguing that the contract it had executed with Colonial provided that Colonial had waived its subrogation rights for damages that occurred to the property after final payment. Id. Lowder relied, in part, upon Section 11.3.5 of the construction contract, which provided that:
[I]f after final payment property insurance is to be provided on the completed Project through a policy or policies other than those insuring the Project during the construction period, the Owner shall waive all rights in accordance with the terms of Subparagraph 11.3.7 for damages caused by fire or other perils covered by this separate property insurance.
Id. Colonial argued that in accordance with Section 11.3.1 of the construction
contract it was not required to maintain insurance after completion of the construction
project and, therefore, had not waived subrogation at the time the loss had
occurred. Id. at 391. The trial court granted Lowders motion for
summary judgment. Id.
On appeal, the Georgia Court of Appeals held that Town of Silverton was squarely on point and recognized that it must endeavor to harmonize all relevant provisions of the contract at issue. Id. Further, the appeals court, relying upon section 11.3.5, rejected Colonials argument and noted that:
Subparagraph 11.3.5 permitted, but did not require, Colonial to obtain a separate policy covering the completed project after final payment was made to Lowder. If Colonial obtained such a policy, then pursuant to this clause and Subparagraph 11.3.7, Colonial waived all subrogation rights for damages attributable to fire or other perils covered by this separate insurance.
Id. at 392.
Furthermore, in South Tippecanoe Sch. Bldg. Corp. v. Shambaugh & Son, Inc., 182
Ind. App. 350, 360, 363, 395 N.E.2d 320, 326-328 (1979), we addressed the
issue of waiver of subrogation in the context of a similar AIA construction
contract. There, the loss occurred during construction. Id. at 352-353, 395
N.E.2d at 322. However, we noted that the construction contract indicated an
intent to place any risk of loss on the Work on insurance, and
that the requirement of waivers, . . . [was] consistent with an
intent to place the risk of loss on insurance. Id. at 360,
395 N.E.2d at 326. Moreover, we reasoned that provisions of Article 11
of the General Conditions reveal a studied attempt by the parties to require
construction project risks to be covered by insurance and to allocate among the
parties the burden of acquiring such insurance. Id. Ultimately, we
held that certain parties were intended insureds and could, therefore, enforce the construction
contracts waiver of subrogation clause. Id. at 362-363, 395 N.E.2d at 327-328.
Here, we find Town of Silverton and Colonial persuasive. Like the Georgia Court of Appeals, we also find that Section 11.3.5 of the AIA construction contract is controlling. As previously mentioned, Section 11.3.5 provides, in part, that:
If during the Project construction period the Owner insures properties, . . . or if after final payment property insurance is to be provided on the completed Project through a policy or policies other than those insuring the Project during the construction period, the Owner shall waive all rights in accordance with the terms of Subparagraph 11.3.7 for damages caused by fire or other perils covered by this separate property insurance.
Appellants Appendix at 263. Thus, although Varco-Pruden had completed its construction on
the project, Section 11.3.5 of the contract provides that Action Steel shall waive
all rights in accordance with the terms of Subparagraph 11.3.7. Id. at
263. Therefore, even though this insurance was purchased after completion of construction,
Action Steel, and thus Midwestern, was bound to waive all rights against Varco-Pruden
for damages covered by the insurance and the policy was required to waive
Midwestern also argues that even if the waiver of subrogation clause is applicable, Varco-Pruden cannot enforce it because Varco-Pruden is not a third party beneficiary of the contract. In Shambaugh, we addressed the issue of whether certain subcontractors were beneficiaries of the waiver of subrogation clause contained within the construction contract. 182 Ind. App. at 354, 395 N.E.2d at 323. There, we held that:
The construction contract here explicitly required that the property insurance procured by South Tippecanoe include the interests of the various contracting parties. That the protection thereby afforded was intended to constitute the exclusive source for redress of damages sustained is buttressed by the waiver provisions discussed above. Therefore, these provisions convincingly lead to the conclusion that the parties were to be limited in recovery for property damages to the proceeds of the insurance required to be carried under the contract, rather than to the individual assets of a negligent Defendant.
Id. at 362-363, 395 N.E.2d at 327-328. In reaching this conclusion, we
relied, in part, upon section 11.3.1 of the construction contract, which provided that
[t]his insurance shall include interests of the Owner, the Contractor, Subcontractors and Sub-subcontractors
in the Work. Id. at 355, 395 N.E.2d at 323.
Here, the construction contract includes language indicating that if Action Steel obtained property insurance after project completion it would waive its rights against contractors and subcontractors. Specifically, as previously mentioned, Section 11.3.5 of the construction contract discusses the acquisition of property insurance after project completion and provides that if after final payment property insurance is to be provided on the completed Project through a policy or policies other than those insuring the Project during the construction period, the Owner shall waive all rights in accordance with the terms of Subparagraph 11.3.7. Appellants Appendix at 263. Further, Section 11.3.1 addresses the extent of property insurance and provides that [t]his insurance shall include interests of the Owner, the Contractor, Subcontractors and Sub-subcontractors in the Work. Id. at 262. Varco-Pruden, as the designer, manufacturer, and supplier of the pre-engineered building system used in the construction of the building addition, was a subcontractor within the meaning of Section 11.3.1 of the construction contract. Moreover, Section 11.3.7, the waiver of subrogation clause, provides that [t]he Owner and Contractor waive all rights against (1) each other and any of their subcontractors, sub-subcontractors, agents and employees. Id. at 263. Accordingly, like the subcontractors in Shambaugh, Varco-Pruden is a beneficiary of the waiver of subrogation clause contained within the construction contract executed between Midwestern and Action Steel.
Midwestern also argues that Varco-Pruden has failed to satisfy the third party beneficiary analysis outlined in Miller v. Partridge, 734 N.E.2d 1061 (Ind. Ct. App. 2000), trans. denied. A person or entity who is not a party to a contract may directly enforce that contract as a third party beneficiary if: (1) the parties intend to benefit a third party; (2) the contract imposes a duty on one of the parties in favor of the third party; and (3) the performance of the terms of the contract renders a direct benefit to the third party. Id. at 1064.
Varco-Pruden argues that it has satisfied the first element, which requires that the parties intended to benefit a third party. The plain reading of the construction contract indicates that Action Steel intended to benefit Varco-Pruden. As previously mentioned, the construction contract provides for the acquisition of property insurance after project completion and indicates that the insurance shall include the interest of . . . subcontractors. Appellants Appendix at 262. Furthermore, the contract provides that if Action Steel acquired insurance after project completion, it shall waive all rights in accordance with the terms of Subparagraph 11.3.7, which provides that [t]he Owner and Contractor waive all rights against (1) each other and any of their subcontractors, sub-subcontractors, agents and employees. Id. at 263. Accordingly, the first element is satisfied because when Action Steel purchased property insurance after the project was completed, it intended that subcontractors, such as Varco-Pruden, would benefit from the waiver of subrogation clause.
Varco-Pruden also argues that it has satisfied the second element, which requires that the contract impose a duty upon one of the parties in favor of the third party. Here, as we have already addressed, Section 11.3.5 of the construction contract provides that if Action Steel purchased property insurance after project completion, it agreed to waive its right with regard to subrogation with respect to subcontractors such as Varco-Pruden. Accordingly, the second element is satisfied because the construction contract imposed a duty upon Action Steel in favor of Varco-Pruden.
Finally, Varco-Pruden argues that it has satisfied the final element, which requires that the performance of the terms of the contract render a direct benefit to a third party. Again, the construction contract provides that if Action Steel purchased property insurance after project completion it would waive its right of subrogation with regard to subcontractors, thereby requiring that it render a direct benefit to those subcontractors, namely Varco-Pruden. Varco-Pruden has satisfied all three elements of the third party beneficiary test. Thus, Varco-Pruden is a third party beneficiary and can enforce the waiver of subrogation clause contained within the construction contract. See, e.g., Miller, 734 N.E.2d at 1064-1065 (affirming the trial courts determination that the children were third party beneficiaries).
Baker, Judge, dissenting in part
Though I agree with the majoritys holding in Parts III and IV, I respectfully dissent from its determination that the waiver of subrogation clause in the parties building contract applied to a completed building. Because insurance was not required by the building contract after construction was completed, I fail to see how the policy issued by Midwestern was contemplated to protect both parties.
Midwestern argues that the subrogation waiver clause applies only to insurance obtained while a building is being constructed. Midwestern notes that the contracts General Conditions sections states that insurance coverage must be maintained until final payment has been made as provided in Paragraph 9.10 or until no person or entity other than Owner has an insurable interest in the property. Appellants App. p. 86. The part of the contract that waives subrogation applies to property insurance applicable to the Work. Appellants Br. p. 11. Midwestern reasons, quite logically, that the waiver of subrogation could not possibly apply to a finished building because the contract itself only requires that an owner hold an insurance policy until final payment is made. Thus, Midwestern contends that the scope of the subrogation waiver cannot exceed that of the insurance requirement itself.
On the other hand, Varco-Pruden claims that the subrogation waiver is a widely used, standard provision taken directly from the American Institute of Architects document A201. Appellees Br. p. 8. Varco-Pruden notes that several courts in other jurisdictions have stated that the clause bars an insurer from suing under its right of subrogation.
For instance, in Town of Silverton v. Phoenix Heat Source System, Inc., 948 P.2d 9 (Colo. Ct. App. 1997), the Colorado Court of Appeals was presented with the same question before us today. The town of Silverton entered into a construction contractcontaining subrogation language nearly identical to that of the contract in this casewith Phoenix for the installation of a new roof on the town hall. The roofing was completed, and a final payment was made to Phoenix. More than one year later, a fire damaged the roof. The Colorado public agency that insured the town hall exercised its right of subrogation and brought an action against Phoenix, alleging contract-based claims. The trial court entered summary judgment for Phoenix because it found the subrogation waiver barred the suit. The Colorado Court of Appeals found that the Towns claim was barred by the subrogation waiver and held that there was a difference between regular property insurance and insurance an owner is required to procure under paragraph 11.3.1. Id. at 12-13. The insurance called for under section 11.3.1, the court held, was a type of policy that ended upon final payment for the construction. Id. at 13. The insurance referred to in section 11.3.7 as other property insurance applicable to the Work was, the court held, regular property insurance that may continue in force even after construction is complete. Id. The court then reasoned that because property insurance applicable to the work, other than that obtained pursuant to paragraph 11.3.1, may remain in effect after the final completion date, so too may a waiver of subrogation. Id. Because the town [did] not claim it obtained [the] insurance to comply with the [construction] agreement, the insurance policy provided by the public agency was deemed to be other property insurance applicable to the work, and, thus, recovery was barred. Id.
The Georgia Court of Appeals took up the same issue in Colonial Properties Realty, L.P. v. Lowder Construction Co., Inc., 567 S.E.2d 389 (Ga. Ct. App. 2002), and reached a similar result. In that case, Colonial hired Lowder to build an apartment complex, entering into a contract similar to that at issue here. One year after the apartments were built and placed into service, a fire destroyed part of a building.
[W]here parties to a business transaction mutually agree that insurance will be provided as a part of the bargain, such agreement must be construed as providing mutual exculpation to the bargaining parties who must be deemed to have agreed to look solely to the insurance in the event of loss and not to liability on the part of the opposing party.
Id. at 392.
Varco-Pruden also argues that Indiana precedent provides for the allocation of risk through a waiver of subrogation clause. I am mindful that this court has addressed the issue of waiver of subrogation in South Tippecanoe School Bldg. Corp. v. Shambaugh & Son, Inc., 182 Ind. App. 350, 395 N.E.2d 320 (1979). In that case, Shambaugh, a builder, constructed a school for the Building Corporation. As part of the construction contract, which was an earlier version of the AIAs document A201, the Building Corporation was required to obtain property insurance upon the entire Work at the site to the full insurable value thereof. This insurance shall include the interests of the Owner, the Contractor, Subcontractors and Sub-subcontractors in the Work and shall insure against the peril of Fire, Extended Coverage, Vandalism and Malicious Mischief. Id. at 323. The contract also provided for the waiver of subrogation rights. The Building Corporation purchased builders risk insurance, which, by its own terms, extended coverage only during the construction process. A fire damaged the building during construction, andafter indemnifying the Building Corporationthe insurer sought damages from Shambaugh under a negligence theory. We held that the insurer could not recover because a severe conflict of interest would exist if an insurer were permitted to recover from one of its own insureds. Id. at 182 Ind. App. at 364, 395 N.E.2d at 329 (quoting Baugh-Belarde, 561 P.2d at 1214). Shambaugh was an insured because the contract required the Building Corporation to obtain insurance to protect the interests of the Owner, the Contractor, Subcontractors and Sub-subcontractors in the Work. Id. at 182 Ind. App. at 354, 395 N.E.2d at 323 (emphasis added).
In my view, this case is inapposite to Silverton and Shambaugh because the policy issued by Midwestern was purchased after construction was completed. In Silverton, the town hall was insured at all timesbefore and after constructionby a state agency. Thus, the same instrumentality of insurance was providing coverage for the town hall from construction until the fire. In Shambaugh, the insurance contracta builders risk insurance policywas issued before construction began. In both of these cases, the insurer issued its policy at a time when insurance was required by the building contract. A waiver of subrogation is appropriate in such instances, as recognized by the Shambaugh court, because a severe conflict of interest would exist if an insurer were permitted to recover from one of its own insureds. Id. at 364, 395 N.E.2d at 329 (quoting Baugh-Belarde, 561 P.2d 1211 at 1214). Moreover, requiring that insurance be procured before construction begins demonstrates that the parties have agreed to look solely to the insurance in the event of loss. Louder, 567 S.E.2d at 392. Thus, it is reasonable to conclude that when insurance is required before construction begins, it is meant to protect both parties. See id. at 371, 395 N.E.2d at 333.
Here, however, Varco-Pruden is attempting to assert the subrogation waiver clause against Midwestern even though insurance was not necessary. The contract only required that insurance be maintained until construction ended. Appellants App. p. 86. I fail to see how the insurance policy issued by Midwestern was contemplated to protect both parties, as it was not even required by the building contract.
The majority notes that Section 11.3.5 of the contract provides, in relevant part, that [I]f after final payment property insurance is to be provided on the completed Project through a policy or policies other than those insuring the Project during the construction period, the Owner shall waive all rights in accordance with the terms of Subparagraph 11.3.7 for damages . . . . Appellants App. p. 263. The majority reasons, then, that since insurance was procured to insure the completed building after final payment, Action Steel, and thus Midwestern, was bound to waive all rights against Varco-Pruden for damages . . . . Slip. op. p. 14.
The majority would undoubtedly be correct if insurance was required after building completion. An insurance requirement in the contract would show that the parties agreed to look solely to the insurance to recover any losses. Lowder, 567 S.E.2d at 392. A statement such as It shall be the duty of the Owner to procure insurance after completion could have been included, and, thus, a waiver of subrogation would appropriately bind both parties because the parties intent was evident. Here, however, the contract expressly required insurance only during construction. Appellants App. p. 86. Such a requirement shows that the parties intent was to protect both parties only during construction.
Moreover, the phrase if insurance is to be provided on the completed Project is key to Section 11.3.5. The qualifier to be is used to express intention, obligation, or future action. Am. Heritage Dictionary 155 (4th ed. 2000) (emphasis added). Thus, the phrasing in Section 11.3.5 simply means that if the construction contract creates an obligation in the owner to purchase insurance after construction is completed, then a waiver of subrogation results. Here, though, there is no obligation in the contract that insurance be provided after construction is completed. To the contrary, only insurance during construction was necessary. Hence, it is apparent to me that the provision in Section 11.3.5 cannot be read to extend a waiver of subrogation clause.
In sum, both parties did not agree to look solely to the insurance to recover any losses. Thus, I would reverse the trial courts entry of summary judgment for System Builders and Varco-Pruden on Midwesterns contract claim and remand this case for trial on the merits.