It is no secret that builder contracts are one sided and that the vast majority of the contract borders on a contract of adhesion. However, I recently reviewed one such contract and stumbled on a provision that raised some serious concerns.
Buried in standard language about half way through this contract, I found a provision that read in relevant part:
“Waiver of Subrogation: Purchaser, for itself and on behalf of its property insurers, homeowners insurers and other insurers, … hereby waives and releases Seller and Builder from liability for all claims, losses and damages of any nature to the extent covered by an insurance policy procured by or on behalf of Purchaser or otherwise applicable to the Property. This provision is intended to waive fully for the benefit of Seller and Builder any and all rights and/or claims which might give rise to a right of subrogation in favor of an insurance carrier providing coverage to Purchaser.”
Subrogation means that in the event an insurer pays out a claim on the insured’s behalf, the insurer “steps into the shoes” of the insured and acquires all of the insured’s rights against the party that caused the loss or damage. Most insurance contracts contain rights of subrogation, including title insurance. What’s more, most insurance contracts also contain language prohibiting the insured from affecting this right. By way of example, here is some sample language from an owner’s title insurance policy:
“When we settle Your claim, We have all the rights and remedies You have against any person or property related to the claim. You must not do anything to affect these rights and remedies.”
So, if a purchaser were to sign a form builder contract that contained the above language, they may be risking the loss of coverage they would otherwise enjoy by virtue of purchasing an owner’s title insurance policy. More troubling is the fact that most builders incentivize purchasers to use the builder’s title company and it is doubtful that this pitfall is brought to the purchaser’s attention by either the builder or the title company issuing the policy of title insurance.
Ideally, a builder would agree to carve out an exception for the owner’s title policy from such a provision. If not, a purchaser may consider bringing such a provision to the attention of the title company and request an endorsement to the title policy maintaining coverage despite the existence of a waiver of subrogation clause.