Subrogation Claims Up In Smoke Following Casino Fire

In Empress Casino Joliet Corporation, et al., v. W.E. O’Neil Construction Co., et al., the Appellate Court of Illinois recently held that a construction contract’s subrogation waiver prevented three insurance companies and Empress Casino Joliet Corporation (“Empress”) from seeking nearly $85 million from contractors, subcontractors and an architect after a fire erupted during a renovation project.

Empress began renovating its Joliet, Illinois casino in 2008. During the renovation, a welder working for the HVAC subcontractor sparked cooking grease and other combustible residue in ductwork above the casino’s kitchen.  The spark quickly spread and destroyed large sections of the casino property. Following the fire, three insurance companies paid more than $80 million for the loss.

Empress and the insurers as subrogees sued the general contractor and HVAC subcontractor, alleging among other things that they did not take proper safety measures to prevent the fire. Claims were also asserted against the project’s architect, the mechanical engineer, and a subcontractor, for not providing a sufficient sprinkler and fire protection system. Empress added its cleaning company, Averus, to the lawsuit, contending that Averus failed to properly clean the ductwork of the combustibles that ignited and caused the fire. Empress’s complaint alleged, among other things, negligence, breach of contract, and willful and wanton misconduct against the defendants. The defendants moved for summary judgment.  The defendants contended that the plaintiffs waived their subrogation rights under the construction contract, and the trial court agreed. Empress and the insurance companies appealed.

The appellate court agreed with the trial court on its central ruling: The plain language of the contract required Empress to insure the project and waive its subrogation rights against the architect, general contractor and its subcontractors. In particular, the contract required Empress to purchase all-risk property insurance covering “without limitation, insurance against the perils of fire,” and Empress to “waive all rights […] for damages caused by fire or other causes of loss.”  Elsewhere in the contract, Empress and the general contractor waived all rights against “(1) each other and any of their subcontractors […] and (2) the Architect, Architect’s consultants […] and any of their subcontractors […] for damages caused by fire or other causes of loss […]” to the property during the renovation.

The appellate court determined that “the parties here agreed that any casualty loss resulting from a fire would be borne solely by Empress’s property insurance and that accordingly Empress expressly waived all claims against the defendants arising from such a loss covered by such insurance.” Thus, Empress and the insurance companies could not bring an action against the general contractor, the mechanical engineer, the architect, or any downstream subcontractors or consultants for damages from the fire.

The appellate court rejected the plaintiffs’ argument that the waiver was an exculpatory clause and the allegations of willful and wanton misconduct dictated that, as a matter of public policy, such an exculpatory clause should not be enforced in the face of such allegations.  Subrogation clauses are not exculpatory clauses that “immunize the wrongdoer,” but instead merely shift the risk of loss and the costs of insuring loss between parties negotiating a contract. The parties involved in the renovation, according to the court, freely contracted to place the risk of loss by fire on Empress, regardless of how that fire started.

The appellate court also found that the subrogation waiver trumped the general contactor’s duty to indemnify Empress.  The appellate court’s reasoning  was premised on two main points: first, the subrogation waiver was tied to Empress’s property insurance whereas the indemnity provision was tied to a separate type of coverage, the general contractor’s liability insurance; and, second, the express language of the subrogation waiver supersedes the indemnity provision when it states that the waiver “shall be effective as to a person or entity even though that person or entity would otherwise have a duty of indemnification, contractual or otherwise, […] and whether or not the person or entity had an insurable interest in the property damage.”

Averus—the cleaning company— did not fare so well.  The appellate court found that the subrogation waivers did not apply to Averus because Averus was not a party to (or subcontractor under) the construction contract. Instead, Averus worked for Empress under a preexisting and separate oral contract it had directly with the casino, rather than with the general contractor. Moreover, the vice president for Averus who negotiated the oral contract admitted during his deposition that he never discussed or contemplated a subrogation waiver. Empress thus never waived subrogation rights in its oral agreement with Averus.