As I predicted when I first wrote about the Eli Lilly/National Union v. ADT case (http://wp.me/p3fru5-42), ADT has brought a motion to dismiss the lawsuit based on the subrogation waiver in ADT’s contract.   Will the motion to dismiss be successful?  Here is a look at how the court will analyze the subrogation waiver.  And I have some tips you can take away for use in your own contracts.

What is subrogation?

In subrogation, the insurance company steps into the shoes of its insured and can make any claims the insured can make.  This allows the insurance company to recover insurance proceeds it pays against anyone who is arguably responsible for the loss.  In the Eli Lilly v. ADT matter, National Union steps into the shoes of Eli Lilly.  Eli Lilly has alleged claims against ADT for its $60 million loss, and National Union brought those claims against ADT to recover what National Union paid because it was Eli Lilly’s insurer.

What is a subrogation waiver?

Because the insurance company steps into the insured shoes, it is also limited by its insured’s rights.   So if the insured gives up its right to make a claim, the insurance company does not have a claim either.  ADT’s contract with Eli Lilly contained a provision called a subrogation waiver.  That waiver states that Eli Lilly agrees to maintain its own insurance and will look to its own insurance company to compensate it for any losses and that no insurance company will have any right of subrogation against ADT.  Thus, Eli Lilly, through its contract with ADT, has waived National Union’s right to recover in subrogation.

Will the subrogation waiver get ADT out of the lawsuit? 

Subrogation waivers are routinely upheld in many contexts, including construction contracts and leases.  In the alarm context, however, there are two schools of thought:

1.  Some courts uphold subrogation waivers as risk-shifting provisions.  These courts recognize that the parties agreed in their contract to shift the risk of any loss to the customer’s insurer.   And they are persuaded by the alarm company’s arguments that it never agreed to be an insurer; and it would go out of business were it called upon to pay its customer’s losses.

2.  Other courts analyze these waivers just like they do exculpatory clauses (the clauses that say we’re not liable for anything and if we are the amount you can recover is limited to $250).   Recall that exculpatory clauses will not shield you if your conduct is anything more than ordinary negligence– i.e., they don’t apply to conduct alleged to be intentional, willful and wanton, or grossly negligent.  These courts won’t uphold a subrogation waiver where the alleged conduct is intentional, willful and wanton, or gross negligence.  And many times, they hold that it is a question for the jury whether the conduct rises to that level.

ADT will prevail if the judge finds the first school of thought more persuasive.  Stay tuned for the court’s decision, which probably won’t come out for at least 60-90 days.  I will post it at AlarmLaws.com.  (I should note that ADT moved to dismiss on other grounds as well–including its contract term stating lawsuits must be brought within one year.  That topic will be another blog post for another time).

The take-away lesson for your contracts.

Unless your state’s laws clearly fall into the first school in the alarm contract context, you should consider making it explicit in the alarm contract that the subrogation waiver is a risk-shifting provision.  The subrogation waiver should state that it is a risk-shifting provision and not an exculpatory provision.  And it should state that it will apply regardless of the alarm company’s alleged conduct.

It remains to be seen whether courts that are in the second school, will uphold contracts that spell it out like this, but at least you will have done everything you can with your contract to persuade the court your subrogation waiver should be upheld.