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School Alliance Insurance Fund v. Fama Construction Company

353 N.J. Super. 1, 801 A.2d 334 (App. Div. 2002)

CONTRACTORS; SUBROGATION WAIVERS —Waiver of subrogation clauses are enforceable as a business person’s common sense approach to allocating risk.

A school board hired a construction manager to supervise the building of a new school. The construction manager hired a general contractor. The general contractor hired a masonry contractor. The masonry contractor constructed certain masonry walls. A severe wind storm knocked down six of those walls. The general contractor advised its liability carrier about the loss, but coverage was denied based upon exclusions in the liability policy. The school board’s insurance company then paid a substantial amount for reconstruction of the walls and sought to be reimbursed, as subrogee of the school board, for clean up, removal, and rebuilding of the collapsed masonry walls. The general contractor, the masonry contractor, and the general contractor’s insurance company sought dismissal of the suit, arguing that the waiver of subrogation clause contained in the general contractor’s contract with the school board barred any claims by a subrogee. The lower court reviewed a number of cases, both inside and outside of New Jersey, dealing with waiver of subrogation provisions. It cited, with favor, a Georgia Supreme Court decision holding such clauses to be valid. It also found an Indiana decision that reached the same result. Further, it cited a New Jersey Supreme Court case that “recognized that the parties to a contract may agree to distribute the risks attendant thereon and to designate who shall obtain the necessary insurance.” There, the Supreme Court pointed out that,“in harmony with the modern judicial view that provisions in leases and other commercial agreements such as that here involved, whether couched in language of indemnity or exculpation or imposing obligations with respect to obtaining insurance, are to be viewed realistically as normal common-sense efforts by businessmen to allocate between them the cost or expense of risks of property damage.” The lower court also cited language from a different New Jersey case which said, “[a]lthough the right of an insurance company to enforce subrogation rights in appropriate cases has long been well established, it is also clear that subrogation is not applicable when its enforcement would be inconsistent with the terms of a contract or where the contract, expressly or by implication, forbids its application.” The Court rejected the insurance company’s contention “that the strict application of the waiver of subrogation” would be unfair to it because it would leave it with no remedy. Consequently, the lower court concluded “that the waiver of subrogation policy is best effectuated by interpreting the clause as effectively abrogating any subrogation right against [the school board’s insurance company] against” the general contractor or the masonry subcontractor.


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