Wis. Stat. section 895.447 has existed in its current form since passage in 1977, without having been subjected to serious judicial scrutiny.
The Wisconsin Supreme Court’s recent decision in Rural Mutual Ins. Co. v. Lester Buildings, LLC,1 provides some clarity as to the statute’s intended effect, but also calls into question the enforceability of other common risk transfer and limitation clauses in construction contracts – namely, limitation of liability clauses, waiver of consequential damages clauses, and additional insured requirements.2
History
Wis. Stat. section 895.49,3 the precursor to today’s section 895.447, was first introduced in 1977, and appears to have been modeled on anti-indemnity statutes similar to those being passed in statehouses throughout the country beginning in the 1970s.4
These statutes invalidated indemnification clauses in construction contracts as void against public policy, as there was concern that lower-tier contractors – who had weaker bargaining power – were being required to indemnify indemnitees for the indemnitees’ own negligence.
Included in the drafting notes for the statute was the following, upon which the statute was presumably based:5
Hold harmless agreements. A covenant, promise, agreement or understanding in, or in connection with or collateral to a contract or agreement relative to the construction, alteration, repair or maintenance of a building, structure, appurtenance or appliance, including moving, demolition and excavating connected therewith, purporting to indemnify or hold harmless the promisee against liability for damages arising out of bodily injury to persons or damage to property caused or resulting from the sole negligence of the promisee or indemnitee, including his agents or employees, is against public policy and is void and unenforceable; …
The version ultimately passed and signed into law bore little resemblance to the above, and removed any reference to indemnification or hold harmless obligations.
As a result, section 895.447 (“Certain agreements to limit or eliminate tort liability void”) (2019-20), provides in the relevant part:
(1) Any provision to limit or eliminate tort liability as a part of or in connection with any contract, covenant or agreement relating to the construction, alteration, repair or maintenance of a building, structure, or other work related to construction, including any moving, demolition or excavation, is against public policy and void.
(2) This section does not apply to any insurance contract or worker’s compensation plan.
Until Lester Bldgs, the only reported case at any level in Wisconsin addressing the effect of section 895.447 was the Wisconsin Court of Appeals’ decision in Gerdmann v. United States Fire Ins. Co.6
Ruling that an indemnification clause was not void as a result of the statute, the Wisconsin Court of Appeals in Gerdmann observed that, as the statute limits the common law right to freely contract, it “must interpret it narrowly, placing the least possible restriction on the common law right.”7
The court reasoned the indemnification clause at issue neither limited nor eliminated the indemnitees’ “tort liability to third parties” but instead made the indemnitor “the insurer should damages result.”8
Scott J. Thomsen, Drake 2003, is an in-house counsel in Milwaukee for the Forest County Potawatomi Community, where he practices in commercial contracting and transactions including construction and real estate development.
As such, the court viewed the indemnification clause – a common contractual risk shifting provision between construction parties – as not invalidated by section 895.447, so long as such provisions did not limit or eliminate tort liability to third parties, which in Gerdmann was an injured employee of a subcontractor. The indemnification clause simply reallocated the economic responsibility to pay for such liability.
Despite the seeming importance to the construction industry, it would be another 35 years before the Wisconsin courts would publish another opinion on the statute in Lester Bldgs.9
Background: Rural Mutual Ins. Co. v. Lester Buildings, LLC
Jim Herman, Inc. (Herman), as owner, entered into a design-build contract with Lester Buildings, LLC (Lester) for a new barn.10
The contract contained a mutual waiver of subrogation clause, whereby each party (and all of its downstream subcontractors, design professionals, and suppliers) waived all rights against the other to the extent that the loss was covered by property insurance.11
Herman separately contracted with Van Wyks, Inc. (Van Wyks) to pour concrete pursuant to specifications provided by Lester.12 The barn was covered by a property policy issued by Rural Mutual Inc. Co. (Rural), which allowed its insureds to enter into such waivers before a loss.13
Nearly three years after completion, the barn collapsed from strong winds.14 Rural paid the property loss claim and brought a subrogation action against Lester and its insurer and Van Wyks’ insurer, asserting that the concrete piers supporting the barn’s roof contained improperly placed steel rebar cages.15
The circuit court held that Rural’s claims against the contractors were barred by the contractual subrogation waiver contained in its insured’s contract with Lester and, consistent with the reasoning in Gerdmann, section 895.447, did not render such a clause void.16
The court of appeals affirmed the circuit court’s decision, and Rural petitioned the Wisconsin Supreme Court.17
Wisconsin Supreme Court’s Analysis
In determining that the waiver of subrogation clause was not void as a result of section 895.447, the Supreme Court, in a 3-2 decision, first acknowledged that the statute did not define the term “tort liability.”18 Turning to Black’s Law Dictionary for assistance, the Court concluded “‘tort liability’ is the legal obligation or responsibility to another resulting from a civil wrong or injury for which a remedy may be obtained.”19
As applied to the facts of the case, the Supreme Court held that the waiver did not limit or eliminate tort liability, but, like in Gerdmann, shifted the responsibility for payment of damages from the contractors to Rural.20 The Court also held that the contractor parties could be held liable for damages not covered by the property insurance policy, including deductibles.21
In a separate but related ruling, the Supreme Court held that the subrogation waiver did not amount to an unenforceable exculpatory contract, reasoning that the contract did not exculpate the contractors from liability, but “merely shifted the responsibility for payment of damages.”22 Importantly, the contractors could still be liable for any damages not covered by Rural’s policy.23
Common Construction Contract Clauses and Question of Enforceability
As a result of Gerdmann and Lester Bldgs, Wisconsin law is now established that indemnification and waiver of subrogation clauses are not per se void as against public policy under section 895.447.
Left unresolved, however, are the types of situations where the statute would invalidate a contract provision if it limits or eliminates tort liability.
The court in Gerdmann was concerned about the rights of injured third parties having recourse.24 The end of the majority’s opinion in Lester Bldgs may be instructive. In enforcing the waiver of subrogation clause, the Supreme Court stated the clause “does not immunize the allegedly negligent parties from liability or require the injured party to go uncompensated.”25
Given the absence of clear case law and guidance on the topic, one is left attempting to reconcile the decision in Lester Bldgs with common construction clauses, which arguably limit or eliminate tort liability, as well as limit damages that an injured party may otherwise be entitled. A non-exclusive list includes limitation of liability clauses, waiver of consequential damages clauses, and additional insured requirements.
Limitation of Liability Clauses
While not contained in standard form construction contracts, such as those published by the American Institute of Architects (AIA), limitation of liability clauses are routinely used to control risk exposure, particularly in design professionals’ contracts, where there can be a large disparity between risk (uncapped damage exposure) and reward (the party’s fee).
Such clauses establish the maximum financial liability a party would be exposed to in the event of a claim, often expressed in terms of a stated dollar figure or tied to the amount of liability insurance available or the parties’ fee under the contract.
A limitation of liability clause, by its very name, suggests it might fall within section 895.447. However, by limiting the liability of the party in whose favor the clause operates, the risk of loss is effectively reallocated to the other party – not unlike an indemnification or waiver of subrogation clause.
Stated another way, arguably the parties are not eliminating or limiting “tort liability,” but rather agreeing up front in the contract how to allocate the damages stemming from a breach of contract and/or tort liability. As such, it could be argued that such clauses do not run afoul of section 895.447 – however, it is difficult to predict how Wisconsin courts would treat limitation of liability clauses in light of the statute and Lester Bldgs.
Outside of the context of construction, and without a clause such as in section 895.447, it is important to note that the Wisconsin Supreme Court has upheld “limitation of liability” or “limitation of damages” clauses (terming them “stipulated damages” clauses) as a permissible contractual restriction on recoverable damages, subject only to a determination of whether the clause is reasonable under the totality of the circumstances, and does not amount to an exculpatory clause.26
Waiver of Consequential Damages Clauses
Waiver of consequential damages clauses are frequently contained in construction agreements and can be found throughout the AIA’s family of contract documents, including, for example, Section 15.1.7 of AIA Document A201-2017, General Conditions of the Contract for Construction. Generally speaking, these clauses have the effect of waiving a party’s right to collect damages for indirect or special damages which are occasioned by a breach of contract or tortious conduct and frequently include items such as lost profits and loss of use.
Arguably such a waiver has the potential effect of “limiting or eliminating” “tort liability.” However, like a limitation of liability clause and the discussion above, waiver of consequential damages clauses might be viewed as a permissible contractual restriction on recoverable damages not affected by section 895.447.
Additional Insured Requirements
Additional insured (AI) clauses in construction contracts are a common risk transfer and mitigation mechanism. Through such clauses, project owners typically place an obligation upon a contractor to name the owner and others as additional insureds on the contractor’s general liability insurance. This obligation is typically passed down to lower-tier contractors in subcontracts. By way of example, section 11.1.1 of AIA Document A201-2017 states, “The Owner, Architect, and Architect’s consultants shall be named as additional insureds under the Contractor’s commercial general liability policy. …”
These clauses are intended to protect the additional insured party from liability arising out of the contractor’s work, but depending upon how they are written, when combined with the language of the AI endorsement to the policy, they may pass the party’s own liability to the contractor’s insurance policy. Such was the case in Mikula v. Miller Brewing Co.,27 where the Court of Appeals interpreted an AI endorsement broadly, finding AI coverage for claims of a premises owner’s own negligence under a contractor’s policy.
In all likelihood, AI requirements are not affected by section 895.447. First, the statute was not even raised in Mikula and risk transfer to an insurance company is consistent with the decisions in Gerdmann and Lester Bldgs. Secondly, and perhaps more importantly, the statute specifically removes all insurance contracts from the scope of the statute.28
Conclusion: A Perplexing Statute
Quite simply, Wis. Stat. section 895.447 is a perplexing statute. It appears to be modeled after an anti-indemnity statute enacted in several states, but the Wisconsin legislature modified it extensively during the legislative process and removed any reference to indemnification.
Instead, the statute purports to invalidate “any provision” in a construction contract which “limit[s] or eliminate[s] tort liability.” What’s more, the statute, legislative history, and subsequent case law do not articulate the important public policy which the statute seeks to advance.
Wisconsin courts have now addressed the statute in two reported decisions, and stated what it does not cover – indemnification and waiver of subrogation, but have offered little guidance in terms of what it does invalidate. Adding to the uncertainty is that the legislative history is sparse, and no similar statute has been located from another jurisdiction which might be able to offer guidance.
Until either the courts or legislature further define the parameters and applicability of section 895.447, it is suggested that a starting point for any analysis is the recognition that the statute must be interpreted narrowly, placing the least possible restriction on the common law right to freely contract secured by the contract clause of both the U.S. and Wisconsin constitutions.29
When interpreting section 895.447, it is also important to distinguish between the rights of injured third parties to recover – which the state of Wisconsin arguably has a compelling interest in protecting – and the separate and wholly distinct right of construction parties to freely allocate risk for economic damages by contract, limited only by Wisconsin’s law on exculpatory contracts.
This article was originally published on the State Bar of Wisconsin’s Construction and Public Contract Law Section Blog. Visit the State Bar sections or the Construction and Public Contract Law Section web pages to learn more about the benefits of section membership.
Endnotes
1 Rural Mutual Ins. Co. v. Lester Buildings, LLC, 2019 WI 70, 387 Wis. 2d 414, 929 N.W.2d 180 (filed June 18, 2019).
2 Beyond the scope of this article is the interplay between Wis. Stat. section 895.447 and Wisconsin’s Economic Loss Doctrine, which Wisconsin first adopted in Wisconsin 1989 in Sunnyslope Grading, Inc. v. Miller, Bradford & Risberg, Inc., 148 Wis. 2d 910, 437 N.W.2d 213 (1989).
3 The statute was originally enacted in 1977 as 895.47. It was renumbered 895.49, that same year and 895.447 in 2005.
4 Dykstra v. Arthur G. McKee & Co., 100 Wis. 2d 120, 130, n. 4, 301 N.W.2d 201 (1981).
5 Thank you to the Wisconsin Legislative Bureau for assistance with researching the legislative history.
6 Gerdmann v. United States Fire Ins. Co., 119 Wis. 2d 367, 350 N.W.2d 730 (Ct. App. 1984).
7 Id. at 373.
8 Id. at 374.
9 Two unpublished Wisconsin Court of Appeals opinions as well as an opinion of the Western District of Wisconsin have been issued which are consistent with the decision reached in Gerdmann. See Abrohams v. WI Tel. Co., 1985 Wisc. App. LEXIS 3144, 123 Wis. 2d 540, 367 N.W.2d 242; Terra Engineering & Const. Corp. v. Brookfield, 1991 Wisc. App. LEXIS 686, 162 Wis. 2d 630, 471 N.W.2d 317; Wausau Paper Mills Co. v. Chas. T. Main, Inc., 789 F. Supp. 968, 1992 U.S. Dist. LEXIS 5080.
10 Lester Bldgs, at ¶ 4.
11 Id.
12 Id. at ¶ 5.
13 Id.
14 Id. at ¶ 6.
15 Id. at ¶¶ 6-7.
16 Id. at ¶ 8.
17 Id.
18 Id. at ¶ 12.
19 Id. at ¶ 13.
20 Id. at ¶¶ 15-17.
21 Id. at ¶ 16.
22 Id. at ¶ 20.
23 Id.
24 Gerdmann, at 374.
25 Lester Bldgs, LLC., at ¶ 22.
26 Rainbow Country Rentals & Retail, Inc. v. Ameritech Publishing, Inc., 2005 WI 153, ¶¶ 25-28, 286 Wis. 2d 170, 706 N.W.2d 95.
27 Mikula v. Miller Brewing Co., 2005 WI App 92, 281 Wis. 2d 712, 701 N.W.2d 613.
28 Wis. Stat. § 895.447(2) (“This section does not apply to any insurance contract or worker’s compensation plan.”)
29 Art. I, Sec. 10, Clause 1, U.S. CONST.; Art. I, Sec. 12, WIS. CONST.
