Author: David Griffiths, Insurance By Ken Brown, Inc., firstname.lastname@example.org
Most of you have seen this term before. Maybe it has been in the fine print of the insurance requirements of a contract you are considering or on a Certificate of Insurance. You will often pay an additional premium to have your insurance policies and coverages amended to comply with this requirement. But what is the purpose of a Waiver of Subrogation? What does it really accomplish and how does it affect your policies and premiums?
First, let’s define subrogation. Subrogation is “the substitution of one person in the place of another with reference to a lawful claim, demand, or right, so that he or she who is substituted succeeds to the rights of the other in relation to the debt or claim, and its rights, remedies, or Securities.”
In other words, the purpose of subrogation is to require the ultimate payment of a debt by the party which legally is responsible. Subrogation is an “equitable device used to avoid injustice”.
A section of insurance policy provides an insurer the express right to take legal action against a negligent third party responsible for a loss to an insured for which a claim has been paid.
A sample subrogation clause found in most insurance policies reads as follows:
I. Transfer of Rights of Recovery Against Others To Us
If any person or organization to or from whom we make payment under this Coverage Part has rights to recover damages from another, those rights are transferred to us to the extent of our payment. That person or organization must do everything necessary to secure our rights and must do nothing after loss to impair them. But you may waive your rights against another party in writing.
For example, let’s say your company leases space in a building for your offices and you decide to expand and increase that space. In order to expand you need to perform some renovations to the building and hire a contractor to do the work. During the course of construction the contractor hits a pipe releasing water throughout your unit causing $50,000 in damage to your property (office contents). The insurance company covering your office contents pays for their repair and replacement. Then, in turn, they will subrogate against the contractor which caused the loss to recover the damages. Since the cause of the damage was the contractors fault, ultimately it will be their responsibility to pay for the damages and reimburse your insurance company. Often this would become a property damage claim against the contractor’s general liability insurance.
So, what then is a waiver of subrogation? As stated in the caption above, you may waive your rights against another party in writing. Just as the insurer has a legal right to pursue subrogation, so too does a party to a contract have a right to structure the transaction so that the party's rights of recovery against another party are restricted (or waived).
So, when a contract requires you to provide a waiver of subrogation in favor of another party it restricts (or waives) your insurance company’s right to subrogate against that particular party even if they are negligent.
This requirement is commonly found applying to Workers’ Compensation and, to a lesser degree, General Liability policies.
Before being approved, a waiver of subrogation is usually analyzed by the underwriter for approval. Since the insurance company is waiving their “right of recovery” they customarily charge a small additional premium to do so.
Please read your contracts carefully and share the insurance requirements with your insurance agent before agreeing to their requirements. Sharing that information with your agent before bidding on a job is an even better idea!