Where Insurance and Contracts Collide in Construction

Location in the Commonwealth of Virginia

Location in the Commonwealth of Virginia (Photo credit: Wikipedia)

As has been said a “few” times here at Construction Law Musings, the courts of the Commonwealth of Virginia strictly interpret the actual terms of a construction contract. A recent case in the Circuit Court for the City of Richmond provides yet another example of this fact.

In Fixture Specialists Inc. v. MGT Construction Mgmt. Inc., the Court looked at whether a waiver clause in the prime contract between the owner, Cedar Street Genesis, and the general contractor, MGT Construction Management, Inc. (“MGT”) can be extended to protect a plumbing subcontractor and acknowledged third party beneficiary of the all risk insurance policy carried by the owner. In this case, MGT withheld approximately $130,000.00, an amount over and above any insurance coverage, from Fixture Specialists to cover damages incurred due to a water leak alleged to have been caused by Fixture Specialist’s negligent performance of its scope of work.

Fixture Specialists argued that the following clause protected it and precluded MGT from withholding any funds:

The Owner and Contractor waive all rights against (1) each other and the Subcontractors, Sub-subcontractors, agents and employees each of the other, and (2) the Architect and separate contractors, if any, and their subcontractors, sub-subcontractors, agents and employees, for damages caused by fire or other peril to the extent covered by insurance obtained pursuant to this Paragraph 12.3 or any other property insurance applicable to the Work, except such rights as they may have to the proceeds of such insurance held by the Owner as trustee. The foregoing waiver afforded the Architect, his agents and employees shall not extend to the liability imposed by Subparagraph 4.18.3. The Owner or the Contractor, as appropriate, shall require of the Architect, separate contractors, Subcontractors and Sub-subcontractors by appropriate agreements, written where legally required for validity, similar waivers each in favor of all other parties enumerated in this Subparagraph 12.3 .6.

Fixture Specialists filed a motion for partial summary judgment and argued two points, both of which were rejected. The first was that this waiver clause applies to FSI to preclude any damage claim by MGT against FSI. The second was that even if the Waiver Clause did not apply, MGT’s exclusive remedy for the water damage was to turn to the all risk policy even in the event that the damage exceeded the limits of the policy because it was a third party beneficiary to the prime contract.

The Court rejected the first argument stating:

It is clear to the court that the Waiver Clause precludes Cedar Street Genesis and MGT, the only parties to the contract, from bringing suit against each other and each other’s subcontractors and sub-subcontractors. It does not apply to claims that MGT may have against its own subcontractors, including FSI.

The Court then went on to state that the second argument failed because 1. MGT had no contractual obligation to provide insurance for FSI and 2. MGT required FSI to carry its own insurance, therefore a plain reading of the contract precludes FSI’s second argument.

In short, the Court looked at the construction contracts between the owner and MGT and the subcontract between MGT and FSI and read them as written to deny FSI’s motion for summary judgment and allow the trial to go forward.

As always I recommend that you read the case (linked above) for yourself. I also recommend finding a local experienced construction attorney to assist you in the drafting and negotiation of your construction contracts to be sure that you are protected in a case such as this.

As always, I welcome and encourage your comments below, please share your thoughts. Also, please subscribe to keep up with the latest Construction Law Musings.

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