Frozen Pipe Results in Water Damage. Who Should Be Held Liable?

The issue of whether an alarm company should include a waiver of subrogation clause in its agreement with end customers comes up frequently. A recent decision by the United States District Court of Maryland established the validity and purpose of the importance of a Waiver of Subrogation.

In the case at hand, the plaintiff’s insurance company issued a property insurance policy in favor of the defendant, a fire sprinkler business. The defendant had an agreement with its customer to inspect, manage and maintain the sprinkler system. Under the terms of the agreement the sprinkler company was not intended to reveal design or installation flaws or code compliance violations.

The agreement between the fire sprinkler business and its customer included a “waiver of subrogation” provision, which provided:

Company is not an insurer against loss or damage.  Sufficient insurance shall be obtained by and is the sole responsibility of Customer. Customer agrees to rely exclusively on Customer’s insurer to recover for injuries or damage in the event of any loss or injury to the premises or property therein. Customer does hereby, for itself and all others claiming by or through it under this Agreement release and discharge Company from and against all damages covered by Customer’s insurance, it being expressly agreed and understand that no insurance company, insurer or other entity/individual will have any rights of subrogation against Company.

Water accumulated on a section of the sprinkler system at the customer’s premises, leading to a pipe freezing, splitting and then releasing water into the customer’s premises, causing the subject property damage. The plaintiff’s insurance company made payment to the customer for the property damage.

The plaintiff insurance company, as the subrogee, sued the sprinkler company to recover its policy payout to the customer. The defendant filed a motion for summary judgment as to the plaintiff’s insurance company. The court pointed out that the customer owned and operated the business and maintained property insurance through the plaintiff’s insurance company.

The court in its decision indicated it was not persuaded that the waiver of subrogation clause is an unlawful exculpatory clause. The court pointed out that the exculpatory clause may violate Maryland public policy insofar as the provision indemnifies the sprinkler company against its own negligence. The court further stated that it is not persuaded that the same public policy consideration pertained to the waiver of subrogation clause.

The parties agreed that the customer would obtain insurance and rely exclusively on its insurance to recover for damages like that at issue. Unlike exculpatory clauses, the waiver of subrogation “contemplates that the insured party will be able to recover for its losses.”

The insurance company’s allegation that the sprinkler company violated code and industry requirements do not render the waiver of subrogation clause void for public policy or otherwise unenforceable. Because the insurance company waived its right to subrogation, it lacks standing to assert any claims against the sprinkler company on its customer’s behalf.

Therefore, the sprinkler company’s motion for summary judgment was granted.