Subrogation waiver upheld in property insurance dispute

A Travelers Cos. Inc. unit has prevailed in a case decided by the Wisconsin Supreme Court, which upheld the enforceability of a subrogation waiver in a dispute over a damaged barn in a divided ruling.

In 2009, Marshall, Wisconsin-based farm Jim Herman Inc. entered into a contract with Prairie, Minnesota-based Lester Buildings LLC for the design and construction of a barn on its property that included a subrogation waiver for any damages covered by property insurance, according to Monday’s ruling in Rural Mutual Insurance Co. v. Lester Buildings LLC and The Phoenix Mutual Insurance Co. et al.

The barn was completed in June 2010; in May 2013, half of it collapsed because of strong winds, killing or causing catastrophic injuries to a large number of Herman’s cattle.

Herman’s insurer, Madison, Wisconsin-based Rural Mutual, paid $607,000 to rebuild the barn and about $51,000 for losses related to the cattle and other miscellaneous damages, according to the ruling.

Rural Mutual then began a subrogation action against Lester Buildings and its insurer, Travelers Cos. unit Phoenix Insurance Co., alleging Herman had been negligent in the barn’s construction.

Also brought into the litigation was the barn’s concrete provider and its insurer. The contractors asserted the waiver in Lester Building’s contract barred Rural Mutual’s claims against them.

A state circuit court in Madison ruled against Rural Mutual, which was affirmed by a Madison state appeals court. On appeal to the Wisconsin Supreme Court, Rural Mutual argued the subrogation waiver was “an unenforceable exculpatory contract contrary to public policy.”

The Supreme Court in Madison held the subrogation waiver was enforceable. The subrogation waivers “in this case did not exculpate the Contractors from liability, it merely shifted the responsibility for payment of damages,” said the 3-2 ruling.

“If the Contractors were negligent or otherwise at fault, the subrogation waiver shifted recovery of damages for property loss to Herman’s insurer, Rural Mutual, only to the extent covered by Herman’s policy with Rural Mutual.

“Herman could still recover damages not covered by its policy with Rural Mutual from the Contractors, including any deductibles,” the ruling said. “The subrogation waiver in this case does not immunize the allegedly negligent parties from lability or require the injured party to go uncompensated and thus it is not an enforceable exculpatory contract to public policy.”

The dissenting opinion states, “The court’s first error goes to the very concept of torts. The raison d’être of tort law is holding tortfeasors responsible for the damages they cause. The court, however, isn’t so sure.”

Defense attorney Kevin A. Christensen, a partner with Wilson Elser Moskowitz & Dicker LLP in Milwaukee, said, “We think it’s a correct decision, and it’s one that comports with the sort of risk allocation scheme that contractors use in contracts, so from that standpoint, it’s very important.”

Rural Mutual’s attorney could not immediately be reached for comment.

On Feb. 28, the Wisconsin Supreme Court held in a unanimous ruling that an insurer has a duty to defend a medical supply company under its commercial general liability policy’s advertising injury provision in connection with its unauthorized U.S. distribution of another company’s product.