Subrogation Clause Dooms $500M Liability Claim

As real estate and construction professionals know, most construction contracts contain clauses that waive subrogation among project participants up to the amount of applicable insurance. These subrogation waivers are risk-shifting provisions that aim to prevent participants from insuring the same risk, and also reduce litigation among the participants.

The Fifth Circuit recently addressed such a waiver, and ruled that the insurer could not recover over $500,000,000 it paid out due to the potential negligence of a project engineer.  The case is Lloyd’s Syndicate, et al. v. Floatec, L.L.C., and can be found here. 

The project at issue was a floating oil-drilling platform sitting in the Gulf of Mexico and aptly named “Big Foot.” Big Foot sat on four massive columns, which were anchored to the sea floor by steel tendons.  Floatec engineered these tendons.  During installation, several tendons failed, and Underwriters eventually paid Chevron (the project owner) over $500,000,000 in damages.

Underwriters sued Floatec for the amounts paid to Chevron, and claimed it was subrogated to Chevron’s rights under Chevron’s contract with Floatec.

The court ruled that because the insurance policy between Chevron and Underwriters barred subrogation between Underwriters and any party Chevron contracted with relating to the project (“Other Assureds” in policy language), Underwriters was barred under the policy from suing Floatec.

While the subrogation waiver here was part of the insurance policy, they are often found in the prime contract, as well.  Nevertheless, any time a subcontractor or engineer is sued, the first place one should look is to any applicable insurance coverage and the effect on any liability claim due to that coverage.