Is Gross Negligence Covered?

VOLUME 34 NUMBER 4 JANUARY 27, 2020

Adventures in Contracting: Is Gross Negligence Covered?

ne of the main goals of contracting — liable for the should be free to al- at least where no personal injuries are involved. whether personally or commercially consequences n Commentary n Commentary locate risk to insurance See, e.g., Colson v. Lloyd’s of London, 435 S.W.2d — is predictability. You want to un- of conduct companies, which 42, 47 (Mo. Ct. App. 1968); Mo. Public Entity derstand what you are giving up and which would are paid large sums Risk Mgmt. Fund v. Investors Ins. Co. of Am., Owhat you are getting in exchange. For many otherwise be of money to assume 451 F.3d 925, 929 (8th Cir. 2006) (applying of our service-based clients, a good portion of negligent.” Id, that risk. Without Missouri law). Also, Missouri courts do not that consideration is the allocation of risk, and at *4, (citing waivers of subrogation, recognize “gross negligence” separate and in particular, which side bears the risk in the BJ’s Wholesale a subrogated insurer apart from ordinary negligence. See Milligan event of loss or damage to person or property. Club, Inc. v. receives a windfall v. Chesterfield Village GP LLC, 239 S.W.3d The tools available to help predict and allo- Rosen, 435 because it was paid 613, 618 n.5 (Mo. Ct. App. 2007) (noting that cate risk contractually range from exculpatory Md. 714, 80 premiums but did not [Missouri’s] general tort law does not recognize provisions, limitation of damages provisions, A.3d 345, 351 By Erin By Jason R. truly have to cover the degrees of negligence). These two well-estab- waiver of consequential damages provisions, (2013). Because Fishman Scott loss. Courts following lished Missouri principles suggest that grossly insurance and indemnity allocation provisions, they have the the majority rule sup- negligent conduct is likely insurable. If willful and waivers of subrogation. But many of these effect of “shield[ing]” a party from liability for port similar policy considerations. See St. Paul conduct receives insurance, less culpable negli- tools are ineffective against claims of gross its reckless or wanton acts, Maryland courts Fire & Marine Ins. Co., 317 F.Supp.2d at 341; gent conduct may merit protection as well. negligence or willful or wanton misconduct. A refuse to enforce exculpatory provisions against see also Reliance National Indem., 868 A.2d at Additionally, contracting parties in Missouri bit of creative pleading can allow an otherwise- allegations of gross negligence. Id. (citing 226. These jurisdictions also acknowledge how are free to negotiate the terms of insurance barred claim to move past the pleading stage Wolf v. Ford, 333 Md. 525 (1994)). By contrast, easily an insurance company could vitiate the contracts. As long as the terms do not violate into discovery, summary judgment and trial, waivers of subrogation “specifically contem- subrogation waiver simply by alleging gross public policy, “an insured and an insurer where the bulk of litigation expense lies. This plate[] that the injured party will be able to negligence. See Behr, 787 A.2d at 504. are free to define and limit coverage by their commentary focuses on the one tool that can recover for its losses” by shifting the risk of loss agreement.” Buehne v. State Far Mut. Auto. Ins. be effective even against claims of gross negli- from the injured party to the party’s insurance The Minority Rule Co., 232 S.W.3d 603, 606 (Mo. Ct. App. 2007); gence: waiver of subrogation provision. carrier. Id. at *4. Thus, even in the face of gross- A few jurisdictions have negated waivers see also Ullrich v. Owners Insurance Company, Jurisdictions differ as to whether public negligence claims, the injured party is not left of subrogation against allegations of gross 2013 WL 2111667 (W.D. Mo). In that light, policy favors enforcement of waiver of subroga- uncompensated for its losses when an insurer is negligence. Most recently, the Michigan Court Missouri courts honor waivers of subrogation. tion provisions against gross negligence claims. precluded from pursuing a subrogation action. of Appeals held that while “a waiver of subroga- See Netherlands Ins. Co. v Cellar Advisors LLC., While the majority of jurisdictions enforce While the insurer will not be reimbursed, the tion clause bars [] claims . . . [other than] gross 2019 WL 296536, at *4 (E.D. Mo. 2019) (“Under these waivers, a consistent minority do not. injured party is made whole. As the Supreme negligence . . . a party may not, by contract, Missouri law, ‘contract provisions waiving Missouri courts and the 8th U.S. Circuit Court Judicial Court of Maine stated in Reliance protect itself from liability for gross negligence subrogation rights are valid and enforceable.’”) of Appeals have not specifically addressed National Indemnity, “there is no risk that an or willful or wanton misconduct.” Lexington (quoting Messner v. Am. Union Ins. Co., 119 whether a waiver of subrogation precludes a injured party will be left uncompensated, and Ins. Co. v. Alan Grp., 2016 WL 4203610 at *3 S.W.3d 644,649 (Mo. Ct. App. 2003). Similar to gross-negligence claim, but relevant tort law it is irrelevant to the injured party whether it is (Mich. Ct. App. Aug. 9, 2016) (unpublished). other jurisdictions that favor subrogation waiv- suggests that Missouri is likely to side with compensated by the grossly negligent party or Similarly, courts in Georgia, Kansas and ers, Missouri courts endorse the public policies the majority of jurisdictions and enforce these an insurer.” 868 A.2d at 226. Indiana have held that waivers of subrogation achieved by such waivers. See RLI Ins. Co. v. waivers against claims of gross negligence. The 4th Circuit in National Insurance are unenforceable against gross-negligence Southern Union Co., 341 S.W.3d 821, 830-31 Company recognized that enforcing subroga- claims. These jurisdictions equate waivers (noting that a waiver of subrogation is a mecha- The Majority Rule tion waivers against claims of gross negligence of subrogation with exculpatory clauses and nism for reducing litigation). Importantly, no The majority of courts across the country promotes important public policy. Waivers of characterize both as provisions which permit a Missouri case explicitly characterizes a subro- that have addressed the issue hold that waivers subrogation provide certainty, deter litiga- party to excuse its own liability for intentional gation waiver as an exculpatory clause. of subrogation extend to claims arising out tion and allow injured parties quick resolu- harms and gross negligence. This distinction, coupled with Missouri’s of alleged gross negligence. Courts in Maine, tion of claims. See id. (“Making subrogation refusal to recognize gross negligence as sepa- New York, Nebraska, Vermont, California, waivers . . . unenforceable against claims of Missouri rate from ordinary negligence and the state’s Connecticut and Massachusetts, for example, gross negligence would undercut one of the The 8th Circuit and Missouri courts have willingness to permit individuals to obtain consistently uphold waivers of subrogation in well-recognized purposes of such waivers: to declined to address the validity of subrogation insurance coverage for willful acts, heavily these cases. Most recently, in United National reduce litigation over insured losses sustained waivers against claims of gross negligence. suggests that Missouri will enforce waivers of Insurance Company v. Peninsula Roofing, the during construction projects.”) Put another However, a review of relevant case law discuss- subrogation against claims of gross negligence. 4th Circuit enforced a waiver of subrogation way, a subrogation waiver “substitutes the ing the ability to contract for insurance to cover against a gross-negligence claim. No. 18-1427, protection of insurance for the uncertain and gross negligence or willful or wanton miscon- Jason R. Scott is a partner at Shook, Hardy 2019 WL 2524253 (4th Cir. 2019). Applying expensive protection of liability litigation.” TX. duct provides some indication of how Missouri & Bacon. He advises clients nationally on Maryland law, the 4th Circuit distinguished C.C. Inc. v. Wilson/Barnes Gen. Contractors courts will treat this issue. risk-mitigation techniques to avoid or minimize waivers of subrogation from exculpatory Inc., 233 S.W.3d 562, 567-68 (Tex. App. 2007). First, while Missouri courts have not yet litigation. clauses, holding that with exculpatory clauses, Such efficiencies are particularly important ruled on whether individuals are permitted Erin Fishman is an associate at Shook, Hardy “the parties expressly . . . agree in advance that in construction contracts where litigation can to insure against their own grossly negligent & Bacon. She defends Fortune 500 companies the defendant is under no obligation of care cause significant delay in project completion. conduct, in limited circumstances, individuals sued for product for the benefit of the plaintiff, and shall not be Furthermore, sophisticated commercial parties may obtain insurance coverage for willful acts, and premises liability.