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On May 26, 2020, the Court of Appeals of Maryland issued an opinion in the case of Gables Construction, Inc. v. Red Coats, Inc. that decided an important issue of first impression under Maryland law.  The question before the Court was whether there is a right to joint tort-feasor contribution where waiver of subrogation (common in construction contracts) bars the third-party defendant’s liability to the injured party.  The Court held that there is no such right, securing a major victory not only for Gables Construction (represented by Ferguson, Schetelich & Ballew), but also for all contractors and architects who operate under—and rely upon—the waiver of subrogation framework to allocate risks on construction projects in the State of Maryland.

Gables Construction, Inc. v. Red Coats, Inc. involved a 2014 fire in an uncompleted apartment building in Montgomery County that caused approximately $17.6 million in property damage.  Gables Construction was the general contractor.  Its contract with the owner contained standard AIA clauses by which the owner promised to insure the entire project against fire loss and, in conjunction, to waive all claims against the general contractor, subcontractors, and sub-contractors for damages caused by fire.  The contract also provided for waiver of subrogation by the fire insurer against the general contractor, subcontractors, and sub-contractors.  These waivers, which are prevalent in construction contracts, are the industry’s way of shifting the risk of damage to the Project due to fire or other causes away from the parties and onto insurance companies.  They are designed to cut down on litigation, avoid duplicative insurance obligations, and increase jobsite efficiency.

 

Red Coats was hired by Gables Construction to provide security and fire watch for the project.  Following the fire, Red Coats abandoned its defense that it was entitled to the benefit of the waiver of subrogation, and instead settled with the owner for $14 million.  It then pursued Gables Construction for contribution under the Maryland Uniform Contribution Among Joint Tort-Feasors Act (“UCATA”).

Robert Ferguson and Timothy Dygert briefed and argued the case for Gables Construction in the Court of Appeals.  They asserted that allowing contribution claims against third-party defendants with a waiver of subrogation from the injured party would violate the plain language of the UCATA, which requires both parties to be “liable in tort for the same injury.” Such a reading would have also upended the entire insurance/waiver of subrogation structure that has existed for decades and which Maryland’s appellate courts have endorsed and recognized as essential.

The American Institute of Architects (“AIA”), the Associated General Contractors of America, and the Maryland Associated General Contractors, collectively filed an amicus brief which supported and supplemented the arguments made by Messrs. Ferguson and Dygert.  Their brief contended that “the property insurance and waiver of subrogation approach, adopted over a century ago by AIA, is the best mechanism for fairly allocating the risks addressed.”

The Court of Appeals agreed in an extensive opinion, holding that “[a]llowing contribution claims where a third-party defendant has a defense arising from a contractual waiver of subrogation … would frustrate the risk-shifting provisions that are routinely negotiated in construction contracts and would create duplicate and inefficient insurance obligations.”  The Court reiterated that any defense that pre-exists the injury is a bar to contribution under the UCATA.

This case had been closely watched by contractors and architects alike, and its holding will bestow important benefits on Maryland’s construction industry for years to come.

Ferguson, Schetelich & Ballew maintains an active construction law practice, which represents project owners, contractors, professionals, suppliers, insurers, and sureties.   Information about this case and about FSB’s construction practice can be addressed to Robert Ferguson at rferguon@fsb-law.com.

 

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