Nebraska Supreme Court Upholds Subrogation Waiver Clause in Construction Contract

The Nebraska Supreme Court recently upheld a subrogation waiver clause between an owner and contractor despite allegations of gross negligence.  The facts revealed that a television tower under construction collapsed and caused damage to property.  The Court held that the contractor was not liable for damages to the construction and other property to the subrogated insurance company, even when the subrogated insurance company complained that gross negligence caused the accident. Lexington Ins. Co. v. Entrex Comm. Servs., S-06-1452, 275 Neb. 702 (2008).   The Court held "the danger with exculpatory clauses is that a party injured by another’s gross negligence will be unable to recover its losses."  But such danger is not present in cases involving waivers of subrogation because the waiver only applies to losses covered by insurance, so “there is no risk that an injured party will be left uncompensated.”

The Court further held that waivers of subrogation serve to avoid disruption of construction projects and reducing litigation among parties to complicated construction contracts. Concluding that waivers of subrogation cannot be enforced against gross negligence claims would undermine this underlying policy by encouraging costly litigation to contest whether a party’s conduct was grossly negligent. The Court, therefore, concluded that “public policy favors enforcement of waivers of subrogation even in the face of gross negligence [claims] . . . ."  The Court also held that applying the waiver to all losses covered by the owner’s property insurance policy eliminates litigation over liability issues and whether the claimed loss was damage to the Work or non-Work property.  The Court referred to its position as the "majority approach" but acknowledged that other jurisdictions do not follow this same position.   

In short, Nebraska will uphold subrogation waiver clauses between an owner and construction contractor even if the contractor was grossly negligent.  Other jurisdictions, however, may not follow this same rule.