Subrogation is when an insurer steps into the shoes of an insured to file a lawsuit, 1) allowing the insured to recover insurance proceeds after a catastrophic event while 2) allowing the insurance company to recover damages from the responsible party or parties and minimize their losses.
In this article, we will look at the recent case of Chubb Lloyds Ins. Co. of Tex. v. Buster Cogdell Builder, LLC and discuss:
- When subrogation rights can be waived by the insured (preventing the insurance company from recovering damages and minimizing their losses),
- Why the subrogation waiver in Chubb Lloyds Ins. Co. of Tex. was enforceable even though the parties did not sign the construction contract, and
- The importance of having your Texas construction law attorney negotiate, draft, and/or review your construction contracts.
What are Subrogation Rights in Texas?
Subrogation rights allow an insurer who pays an insured to recover damages from the responsible party that caused the loss (see, Concierge Nursing Ctrs. v. Antex Roofing, 433 S.W.3d 37, 44-45 (Tex. App.-Houston [1st Dist.] 2013, pet. denied).
Subrogation rights in Texas can be either equitable or contractual (see, Mid-Continent Ins. Co. v. Liberty Mut. Ins. Co., 236 S.W.3d 765, 774 (Tex. 2007). In Chubb Lloyds Ins. Co. of Tex. the subrogation rights in question were determined by contracts between 1) the insured and the insurer and 2) the insured and the builder.
Although the insurance company doesn’t necessarily have an enforceable claim against a builder directly, they can “step into the shoes” of their insured to sue a builder and recover damages that would have been owed to the insured – provided there is an equitable or contractual right to subrogation.
Can Subrogation Rights be Waived by the Insured?
Subrogation rights in Texas can be waived by contract (see, New Hampshire Ins. Co. v. Mora, 500 S.W.3d 132, 137 (Tex. App.-Houston [1st Dist.] 2016, pet. denied)), and subrogation rights can be waived by the insured.
Chubb Lloyds Ins. Co. of Tex. v. Buster & Cogdell Builders, LLC
Chubb Lloyds Ins. Co. of Tex. demonstrates the importance of contractual provisions related to subrogation rights in Texas in both insurance contracts and construction contracts.
In this case, decided on February 2, 2023, the Court of Appeals of Texas, First District, upheld the trial court’s grant of summary judgment to a builder, enforcing a subrogation waiver in the construction contract and preventing an insurer from recovering nearly $4 million in damages.
Summary Judgment Granted to Builder Where Insured Waived Subrogation Rights
When a welding subcontractor caused a fire that resulted in nearly $4 million in damages to the home, the insurer paid the claim, then filed suit against the builder to recover the damages. The court, however, granted summary judgment to the builder and denied the insurer’s claim, based on two contract provisions:
- In the insurance contract between the Meyers (the homeowners) and the insurer (Chubb Lloyds), a subrogation clause says, “[a]n insured may waive in writing before a loss all rights of recovery against any person,” and
- In the construction contract between the Meyers and Buster & Cogdell (the builder who was retained to expand the Meyers’ home), a provision says, “absent a contrary provision in a property-insurance policy, the property owner ‘waives all rights against’ the contractor and any subcontractors ‘for damages caused by fire or other causes of loss to the extent covered by property insurance or other insurance.’”
Mutual Assent Can Create a Binding Contract Even when There are no Signatures
In the end, the Court’s analysis turns on whether the contract between the builder and the homeowner was valid despite being unsigned.
The Court finds that the contract was valid because there was mutual assent (a meeting of the minds) despite the lack of signatures. Signatures can be evidence of mutual assent, but signatures are not necessary for the formation of a contract (most types of contracts in Texas can be valid even if they are not written).
In this case, only one party signed the contract. The written contract was exchanged by email and presumably viewed by all parties. The homeowner then made a 10% downpayment as required by the contract, and the builder began work on the project until they were prevented from completing the project due to the fire. There was an offer, acceptance, consideration, and performance; therefore, there was a valid contract – which included the waiver of subrogation rights.
The Importance of Having Your Construction Law Attorney Negotiate, Draft, and/or Review Your Construction Contracts
The construction contract waived the insurer’s subrogation rights unless the insurance contract prohibited the waiver, and the insurance contract permitted the insured to waive subrogation rights; therefore, the courts found that there was a valid waiver of the insurer’s $4 million claim against the builder – from the insurance company’s point of view, this was a $4 million “slip of the pen” that could have been easily avoided.
According to the Court, the parties used “the Standard Form Agreement Between Owner and Contractor for residential construction projects created by the American Institute of Architects,” which they circulated between the parties, presumably without the involvement of an attorney.
Presumably, no attorney negotiated the terms of the contract, the contracts were not drafted by an attorney, and the contracts were not reviewed by an attorney before work started on the project (without even obtaining the signatures of all parties).
If the insurance company’s contract had included a prohibition of waiver, the exact same language in the construction contract would have been ineffective (“absent a contrary provision in a property-insurance policy, the property owner ‘waives all rights against’ the contractor and any subcontractors ‘for damages caused by fire or other causes of loss to the extent covered by property insurance or other insurance’”).
Apart from the $4 million mistake (from the insurer’s perspective), many different things could have gone wrong with this project, and substantial losses could have fallen on the homeowner or the builder depending on the language in the contract.
Whether you are an insurer, a builder, or a homeowner, do not even consider entering a multi-million-dollar contract or beginning a multi-million-dollar project without involving a business attorney that can negotiate your contracts, draft your contracts, or review your contracts – before signing or the start of work – to ensure that your financial interests are protected.
Please feel free to contact any of our Murray Lobb attorneys for assistance with your construction contracts or other construction law questions so we can help you better protect all your commercial and contractual rights. We also remain available to help you with all your general business, corporate, and estate planning needs.