In this blog, presented by SunRay Construction Solutions and Richard M Sissman, Counsel, Fracassi Sussman & Rand, LLP, you will learn in detail about subrogation and notice to cure in Maryland construction contracts.
Subrogation and Release
Let’s assume that you are a contractor who has been hired by a homeowner to perform some work at their home. One of the first things that you should ensure is that you are licensed with the Maryland Home Improvement Commission, and you carry a liability policy to cover specific types of damages that may occur on the job site. If you fail to comply with this, you may find yourself in trouble collecting any and all of your money that you should receive once the work is completed or even during the scope of your contract.
Also, remember that as per the Maryland Home Improvement Law, a contractor can only take one-third of the amount upfront, and the remaining balance can be received based on the payment terms included in your contract with the homeowner.
For this blog, let us take an example where you were hired by a homeowner to install a sewer but one of your workers caused an incident where they failed to cap the sewer line. A rainstorm occurs and suddenly there is flooding within the customer’s home. Here are some key steps that you should take.
a. Step 1 – Immediately contact your liability policy, i.e., your insurance carrier
i. Your insurance carrier will most probably cover you for the damage caused to the homeowner’s home due to the flooding and they may also cover you for any personal injuries.
ii. The homeowner’s carrier will then contact your insurance carrier.
iii. You must ensure that you are informing your carrier in a timely manner based on the policy’s terms. If you do not inform them in time, then you may not be covered.
Typically, the homeowner’s carrier will cover the damages that occurred due to water penetration.
b. Step 2 – The homeowner’s carrier will contact you and you will put them in touch with your carrier
i. The homeowner’s carrier is called a subrogee and the homeowner is called the subroger.
ii. A subrogation means that the insured party, which is the homeowner in this case, is turning all their rights to their carrier, i.e., the subrogee who then steps in on behalf of the homeowner to pursue with the contractor and their carrier.
iii. Once this happens, the homeowner is not the entity that will pursue the claim against you and your carrier. This is known as s/u/b/o (subrogee for use and benefit of the homeowner).
The homeowner will usually have to sign a release once they have all the damages corrected and once this is done, all the rights and obligations are transferred to the homeowner’s insurance company. They will contact your insurance company who will in turn pay the damages back to the homeowner’s insurance company.
Sometimes, there may be situations wherein the homeowner may end up suing you for damages that are not covered by the insurance company. This will put you under litigation and most insurance companies will not represent you which means that you will need to hire independent counsel. But you can always check with your insurance company if they are willing to represent you.
A key point to remember is that if the homeowner decides to sue you, then it is highly recommended that you discuss the release form with your insurance company. You must ensure that the release form has been signed by both the homeowner and the homeowner’s insurance company. If they do not sign, it can be problematic for you where they may state that they never released their rights to sue the contractor for damages that was not incurred. However, since you have installed the sewer pipe, you are entitled to receive compensation for it and your damages will be limited to that of the installation of the pipe.
The release should also include for any and all current and potential damage arising from the damage caused by your worker. You must also check the language of the release and use language that will help you prevent other damage as well. One way to do that is to ensure that in your contract with the homeowner, you can have them waive off any consequential and incidental damages.
Such release forms are acceptable by the Maryland Consumer Protection Act. However, such releases will be accepted only if the type of damages are not considered as unconscionable. So, what is an unconscionable type of provision in your contract? For example, in Maryland, it is unconscionable to waive personal injury claims due to the acts or omissions of you. This falls under unconscionable provision and hence, will not be enforceable.
Consequential damages are damages that are not directly related to the underlying incident. For example, if the homeowner had to take time off from work and stay at home, that would be a consequential damage and not something that would be covered under the insurance policy. So, if you have the language in your contract to waive consequential and incidental damages, then you are not obligated to reimburse the homeowner for loss of income for not going to work.
So, since a person is entitled to subrogation, they stand in place of the homeowner and are entitled to all the remedies of the homeowner. This means that the homeowner’s carrier will come after your insurance company or you, if you do not have insurance to cover those types of damages.
Notice to Cure
Under the Maryland construction law, there is a fundamental concept that it is the right of a contractor to be provided Notice to Cure and the right to cure any alleged deficiencies. It is highly recommended that you should have a provision in your body of contract with the homeowner that in the event there is a part of the subcontractor’s work that is not done properly or if they are claiming back charge, you have the right to be provided with a Notice to Cure within X number of days.
So, if the homeowner does not contact you in a timely manner and if they end up hiring someone else to perform the work, they have waived off their right to pursue you if they are charged a fee by the replacement contractor. However, if the Notice to Cure is provided and you do not want to do the work, then the homeowner can pursue you in the event there is some connection between the damage caused and your work.
Hence, it is recommended that your contract includes the Notice to Cure so that you will have the first right to take care of any alleged damages wherein you can either contest it or repair the damage. The state of Maryland has specific case law related to issues of cure and warranty too.
Hope this blog helps you to better understand the basics of subrogation and Notice to Cure in Maryland construction contracts. One tip that you should always follow as a contractor is to ensure that your contract includes all the necessary language which will help you resolve any conflicts easily and in your favor.