There are situations where an owner sues its property insurer (or builders risk insurer) in addition to suing its contractor or design professional for defects / damage. Sometimes, the owner’s lawsuit against its insurer is filed simultaneously with the lawsuit against its contractor and sometimes it is filed before or after it settles its dispute with its contractor. The contractor, if it knows the owner is suing its insurer, wants to ensure that once it settles with an owner, that the owner’s insurer will not pursue a subrogation claim against it. (In a subrogation claim, an insurer that pays its insured can stand in the shoes of the insured and sue third parties deemed liable for the claim.)
If a contractor settles with an owner and obtains a well-written release (that would release the contractor for all claims [known and unknown], damages, etc. arising out of or relating to the project and subject matter of the lawsuit/claim, etc.) the insurer will be precluded from asserting a subrogation claim against the contractor. The reason being is that the insured owner already released the contractor. See, e.g., Landmark American Ins. Co. v. Santa Rosa Beach Development Corp., 107 So.3d 1135 (Fla. 1st DCA 2012) (condominium development’s agreement with developer and contractor that was interpreted as containing release barred development’s insurer from seeking subrogation claim).
However, if the insurer is already suing the contractor in a subrogation claim or has perfected its rights, the contractor cannot try to settle with the owner and obtain a release thinking that the insurer’s claim would then be barred. The insurer cannot be prejudiced like this, especially if it already perfected its subrogation rights. For instance, in Twin City Fire Ins. Co. v. Jones, 918 So.2d 403 (Fla. 5th DCA 2006), an insurer paid an insured’s claim and then sued the defendants in a subrogation claim. The insured also filed a separate lawsuit against the defendants. The insured settled with the defendants and released the defendants. The defendants used the release to argue that the insurer should be barred from its subrogation claim. The Fifth District held that “a settlement executed by the insured cannot act as a bar to an action for subrogation by the insurer against a third party tortfeasor if, prior to the settlement, the tortfeasor learns of the insurer’s perfected subrogation rights. Twin City Fire Ins. Co., 918 So.2d at 404 quoting Lincoln Nat’l Health & Cas. Ins. Co. v. Mitsubishi Motor Sales of Am., Inc., 666 So.2d 159, 163 (Fla. 5th DCA 1995).
Understanding an insurer’s subrogation rights is important in construction. Oftentimes, there are waiver of subrogation rights that are set forth in contracts. Sometimes, these provisions are either stricken or the contract does not contain a waiver of subrogation. It is important to consider subrogation as a contractor if you have knowledge that the party suing you is also suing an insurer and/or you are being sued by an insurer in a subrogation claim (or the insurer has taken steps to perfect subrogation rights) so that you know your rights and options as the dispute progresses to settlement.