In Lithko Contracting, LLC v. XL Insurance America, Inc., the Supreme Court of Maryland held that petitioners, four subcontractors who were involved in the construction of a warehouse (the “Project”), were not covered by a project wide waiver of subrogation merely because there was a general contract that required that the contractual subrogation waiver be included in all subcontract agreements. Lithko Contracting, LLC v. XL Ins. Am., Inc., 487 Md. 385, 416, 318 A.3d 1221, 1239 (2024). Despite the subcontractors’ argument that such a rule would benefit public policy, the court instead focused on the parties’ right to freely contract. Id. at 1241.

In 2014, Duke Baltimore, LLC (“Duke”) entered into a contract (the “Construction Agreement”) with a subsidiary of Amazon, Amazon.com.dedc, LLC (“Amazon”). Id. at 1226. In the Construction Agreement, Duke agreed to serve as the general contractor and construct certain improvements including a warehouse. Id. Amazon agreed to lease the warehouse and construct certain tenant improvements that would allow Amazon to use the building as a warehouse and distribution center. Id. The Construction Agreement generally included broad mutual indemnities that were subject to the following wavier: “…neither party shall be liable to the other party or to any insurance company (by way of subrogation or otherwise) for any loss of, or damage to, any of its property located within the Project… said mutual waivers shall be in addition to, and not in limitation…of any other waiver or release contained in this Agreement…” Id. at 1233.

The Construction Agreement also required that Duke include the Construction Agreement’s Exhibit 1 language in all subcontract agreements. Id. at 1227. Exhibit 1 included language which stated that the “parties” agreed to indemnify and hold Amazon harmless for any Project related claims for which Amazon was not at fault. Id. at 1227-8.

Approximately four years following the completion of the Project, a windstorm caused a portion of the warehouse roof to detach. Id. at 1228. This detachment also caused a wall to collapse. Id. Amazon’s insurance carrier, XL Insurance America (“XL”), covered Amazon’s losses. Id. XL subsequently brought a subrogation action against the subcontractors to recoup approximately fifty million dollars paid by XL to cover the losses. Id. In response to XL’s action, the subcontractors moved for summary judgment. Id. at 1229. In support of their motion, the subcontractors argued that the subrogation waiver included in the Construction Agreement and attached to their subcontract agreements barred XL’s action because Amazon had waived its subrogation rights against them. Id.

The trial court granted the Subcontractor’s Motion for Summary Judgment. Id. However, the appellate court reversed. Id. At issue before the Maryland Supreme Court was whether Amazon had waived its insurance carrier’s right to subrogation: (1) in its agreement with Duke; (2) in Amazon’s requirement that the subrogation waiver be included in all subcontracts; and (3) in the waiver provision attached to the subcontracts. Id. at 1225. The court recognized that Maryland generally enforces waivers of subrogation and that these waivers were commonly included in construction contracts. Id.

After employing the objective theory of contract interpretation, the court held that the Construction Agreement’s subrogation waiver unambiguously applied only to Duke and Amazon. Id. at 1233. The Construction Agreement did not include language that indicated that Duke and Amazon intended that the subcontractors be either third-party beneficiaries or parties to the Construction Agreement. Id. at 1234. Further, in incorporating Exhibit 1 in the Construction Agreement, the exhibit did not modify the terms of the Construction Agreement. Id. at 1235. This exhibit merely included terms that Duke was required to provide in its subcontracts. Id. Thus, the Court held that Amazon did not waive its right to seek subrogation against the subcontractors in the Construction Agreement.

Waiver of subrogation clauses in construction contracts are an important tool to protect against unknown future liabilities.  Subcontractors should be sure to include those in their own subcontracts rather than expecting that they will flow down from prime contracts.