Following the construction industry and related legal topics in the United States.


Thursday, March 1, 2007

What has happened to equitable subrogation?

When one considers the recent case of RLI Ins. Co. v. John H. Hampshire, Inc., 461 F. Supp. 2d 364 (D. Md. 2006), one must ask has anyone even thought about the doctrine of equitable subrogation, which has long been established to assist the surety who is called upon to the benefit of its obligee, in this case the Owner. (See the Construction Channel's treatment here.) In this case, after a contractor abandoned its work, the owner determined that a significant number of exterior panels installed by the contractor had been installed improperly. The contractor’s surety agreed to remove and replace the improperly installed panels. The surety eventually sued the project architect, claiming the architect had a duty to inspect and supervise the work of the contractor and failed to do so. The Court said the architect was not liable to the surety because the architect owed no duty to the surety. But what about the architect's duty to the Owner, into who's shoes the surety is entitled to step under the doctrine of equitable subrogation.

By this case's treatment in the referenced site, it is suggested that in Maryland, when only economic loss is involved, there must be an “intimate nexus” between the parties. Where there is no contract between the parties, the “intimate nexus” requirement can be satisfied by showing an equivalent to contractual privity exists. Here, there was no “intimate nexus” between the surety and architect. The court declined to hold that the inspection and supervision requirements imposed upon the architect were as much for the protection of the surety as for the owner. Again, one must ask what has happened to equitable subrogation, which would arguably have yielded a different and more equitable result. (This entry published by John Springer of Womble Carlyle's construction and real estate development group.)

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