Rural Mutual Insurance Co. v. Lester Buildings, LLC (Subrogation Waiver)

In Rural Mutual Insurance Co. v. Lester Buildings, LLC (2019 WI 70), the Wisconsin Supreme Court determined that a subrogation waiver did not violate Wis. Stat. § 895.447, which provides that any provision to limit tort liability in a construction contract is against public policy and void.

Jim Herman, Inc. and Lester Building entered into a contract to build a barn. The contract contained a subrogation waiver requiring both parties to waive all rights against each other and their subcontractors. Lester then contracted with a concrete provider in the building process. When a storm caused half of the barn to collapse due to improper installation of the concrete, Herman’s insurer Rural Mutual alleged breach of contract and negligence against Lester and its contractors. Lester argued the claims were barred because of the subrogation wavier.

In this case, the Supreme Court found that the subrogation waiver’s provision to “waive all rights against each other…for the recovery of any damages…to the extent covered by property insurance” did not eliminate tort liability in violation of Wis. Stat. § 895.447. Instead, the waiver left the parties to the contract liable beyond whatever damages were covered by property insurance policies like the Rural Mutual policy.

Furthermore, the court determined that the waiver was not an unenforceable exculpatory contract contrary to public policy. An exculpatory contract is one which relieves a party from liability for its own negligence. In this case, the subrogation waiver did not relieve Lester’s liability but instead shifted the payment of damages for Lester’s liability to the insurer. Beyond the insurance policy, Lester would be liable for its own damages.

For these reasons, the court affirmed the court of appeals decision preventing Rural Mutual from recovering from Lester and its contractors. Justice Dallet, Chief Justice Roggensack, and Justice R. Bradley made up the majority in this 3-2 decision.

In a dissent, Justice Kelly (joined by Justice Walsh Bradley) argued that the court conflated wholeness in recovery of damages with full tort liability. Rural Mutual was Herman’s casualty insurer and did not contract to cover Herman’s tort liability, so using Rural Mutual’s payments for property damage as a stand-in for some of the tort liability owed by Lester and its contractors did limit their liability in violation of Wis. Stat. § 895.447.

Justices Abrahamson and Ziegler did not participate in the case.