Waiver Of Subrogation

In most industries, a waiver of subrogation clause provides additional protection for clients, which can help to avoid prolonged litigation and wrecked business relationships.

What is a waiver of subrogation?

A waiver of subrogation is a contractual term in which an insured waives their insurance company’s right to seek remedy or compensation from a negligent third party. A waiver of subrogation endorsement is usually charged at an additional cost by insurers. A waiver of the subrogation clause is seen in many construction contracts and leases.

Such provisions prevent one contractual party’s insurance carrier from pursuing a claim against the other contractual party in order to recover money paid by the insurance company to the insured or a third party to resolve a covered claim.

Waiver of Subrogation: What does it mean to you?

While the term “subrogation” appears in almost every insurance contract, it is only understood by insurers and attorneys. It’s a term that’s often glossed over by insureds who are overwhelmed by a stack of insurance documents on their desk, some of which are over an inch thick. But what exactly does it imply? What if you’re asked to waive subrogation in a contractual setting? Waiver of subrogation is not something that should be taken lightly, as a misstep without a thorough knowledge of the implications could result in coverage refusal.

First and foremost. What is the definition of subrogation? Subrogation is defined in the insurance context as the notion that an insurer who has paid a loss under an insurance policy is entitled to all of the insured’s rights and remedies against a third party with respect to any loss covered by the policy. Subrogation is the process through which an insurer compensates an insured for a loss caused by a third party. The insurance company is then “subrogated” – that is, it assumes the role of the insured – and sues the third party for the insured’s loss. In other words, the insurance company compensates its insured in order to make him or her whole. The insurer then has the ability to sue the other party to recoup its losses.

Because an insurer pays on a policy for the insured’s losses in order to make the policyholder whole, the insurer loses a lot of money. Its sole option for recouping those funds is to file a lawsuit against the entity that caused the loss. As a result, insurance policies contain provisions requiring the insured not to take any activities that could jeopardize the insurer’s right to subrogation. “Insured will not act in any way that might limit or otherwise weaken the insurer’s right of subrogation,” the policy normally specifies.

Despite this generally universal insurance policy language, “waiver of subrogation” terms are frequently included in commercial contracts between parties (not the insurer). Construction and lease contracts are the most common places to find these. A waiver of subrogation provision forbids the insurance company from suing the other party to the contract – who most likely caused the loss – after it pays a loss. Furthermore, waiving of subrogation clauses in contracts is frequently affirmed by courts.

What happens if you sign a contract that includes a waiver of subrogation? Because insurance policies almost always include terms prohibiting the insured from taking any actions that limit or diminish the insurer’s right of subrogation, what happens if you sign a contract that includes a waiver of subrogation? The simple answer is that you, the insured, have violated the terms of the insurance contract. Simply put, the insurance company will deny you coverage and will not compensate you for any losses suffered as a result of the policy.

An interesting case of waiver of subrogation

What if, on the other hand, you signed a contract with someone who then subcontracted a portion of the job, and the subcontract included a waiver of subrogation? Such an issue arises more frequently than one might think, as evidenced by Travelers Indem. Co. v. Crown Corr., Inc., 2011 WL 6780885. (D. Ariz. 2011). In that scenario, the Arizona Cardinals and Hunt Construction signed a contract with Tourism and Sports Authority, the owner of the University of Phoenix Stadium, for the design and construction of the Arizona Cardinals’ stadium. Hunt signed a subcontract with Crown Corr, Inc. to design the stadium’s outer enclosure system as part of the stadium’s completion. The Hunt-Crown subcontract contained information that the Tourism and Sports Authority was unaware of.

During a wind and rain storm shortly after the stadium opened, several Crown Corr panels came from the stadium’s outside, inflicting $1.5 million in damage. The stadium’s owner, the Tourism and Sports Authority, filed a claim with Travelers, who paid it — and then sued Crown Corr (as a subrogee of the stadium owner) for $1.5 million, claiming poor construction. Crown Corr replied by filing a petition to dismiss, claiming that a waiver of subrogation clause was included in the contract is signed as a subcontractor.

Although the stadium owner did not join into the subcontractor arrangement with Crown Corr, Inc., the Court held that it had the authority to evaluate the contract, which contained the waiver, which included a waiver of subrogation clause. Travelers, as subrogee, assume the role of the insured and are bound by the terms of the contract.

“Insurers are in the best position to protect themselves against waivers of subrogation entered into by their insureds before the acquisition of the insurance policy by

1.  inserting an exclusion into their policies that permits the insurers to deny coverage if an insured waive[d] the insurer’s subrogation rights,
2.  raising premiums to offset outlays incurred from the loss of their subrogation rights,
3.  investigating whether a potential insured waive[d] the insurer’s subrogation rights, and
4.  investigating whether As a result, the Court determined that Travelers was bound by the renunciation of subrogation rights and was prevented from pursuing claims against Crown Corr as a result of this.

While Crown Corr narrowly avoided culpability as a result of the Court’s decision, many other insureds are not so lucky. In the vast majority of circumstances, if an insured signs a waiver of subrogation without informing the insurer, the insurer is entirely within its rights to deny coverage and leave the insured to cover the loss out of pocket.

What to do when presented with a contract containing a waiver of subrogation?

Based on the foregoing, the question now becomes: what if I am presented with a contract that contains a waiver of subrogation? Do I have to reject the contract? Should I demand that the provision be deleted? Should I sign it and hope the insurance company never finds out? NO! The simple answer is to present this issue to your insurer. It is likely that the insurer will enter into an endorsement allowing for the waiver of subrogation.

As you may expect, this endorsement will come with an increased premium, as the insurer has to recoup its risk through higher prices. Also, it goes without saying, if you have entered into an agreement with a waiver of subrogation clause and then seek insurance, be sure not to hide this from the insurer, as the gambit could result in denial of coverage in the event of a claim. Another easy solution is to consult an attorney specializing in this area who understands the risks involved in these types of waivers and who is able to negotiate with the insurer to ensure you are not left without coverage.

Understanding a waiver of subrogation

After satisfying a claim paid to the insured in accordance with the company’s duties under the insurance policy, a right of subrogation permits the insurer to act as a proxy for the insured. Even though the loss includes the resolution of claims brought against the insured, the insurance company may pursue a claim against other parties to cover its costs for the same loss.

If subrogation is waived, the insurance company cannot “step into the shoes” of the customer after a claim is settled and sue the other party to recuperate their losses. As a result, if subrogation is waived, the insurer faces a higher risk.

To include a waiver of subrogation clause, insurance firms usually impose an extra fee on top of the premium. Parties to the agreement avoid litigation, and the insurance company bears the loss.

When are waivers of subrogation used?

A waiver of subrogation is a clause in an insurance policy that prevents an insurer from pursuing a third party for damages related to covered losses. Subrogation waivers can be included in a variety of contracts, including building contracts, leases, and motor insurance policies.

• Construction contracts

Waiver of subrogation clauses is sometimes included in building contracts. In these clauses, the owner waives all rights to sue third parties for damages caused by risks covered by the owner’s insurance policy, such as contractors and subcontractors. The owner’s insurer also agrees to pay covered losses and not pursue restitution from the negligent party under this condition.

There are some exceptions to the waiver of subrogation clauses. If the owner’s property insurance does not cover a certain risk, the owner may sue the responsible party for compensation. In addition, if the loss exceeds the policy’s limit, the owner has the option of pursuing the culpable party.

Construction contracts with waivers of subrogation clauses avoid construction delays caused by disagreements and litigation over losses. When certain provisions are missing, an investigation is launched to establish the source of the problem. This process, like many others, can take a long time—far longer than the owner has budgeted for completion. As a result, costs rise, jeopardizing the project’s integrity.

• Landlord and tenant contracts

Subrogation waiver clauses in lease contracts work in a similar way. The insurer will not be able to recover damages on behalf of the owner. If the claim is covered by the injured party’s insurance, it must be paid, and no further action against the third party may be taken.

These clauses protect both the landlord and the tenant from high litigation fees and contract interruptions. Subrogation of waiver provisions can also assist landlords and tenants maintain friendly relationships.

When a landlord inserts a waiver of subrogation clause in a lease, the company that issues the tenant’s renter’s insurance policy normally charges an extra premium to cover losses paid by the insurer as a result of the landlord’s conduct or omissions.

Because the waiver of subrogation clause prevents the insurer from making a claim against the landlord for the amount paid to the insured, or on behalf of the insured, in resolution of a covered claim, this additional cost is imposed.

For example, if a tenant’s guest is injured when a lighting fixture falls unexpectedly from the leased premises’ ceiling, the renter’s insurance carrier will be unable to sue the landlord for the amount paid in settlement of the guest’s claim against the tenant.

Similarly, if the lighting fixture falls on the tenant’s valuable antique table, the waiver of subrogation prevents the tenant’s insurance company from pursuing the landlord for the sum paid to the insured for the table’s damage.

Mutual waivers of subrogation are clauses in leases in which both the landlord and the tenant waive recovery rights against each other for any insurance-covered loss. Existing statute law in some states may override a waiver of subrogation and allow claims to be made; nevertheless, limitations of liability in most states may acquit negligent defendants of obligation.

• Automobile policies

When an auto accident occurs, most injured parties seek compensation from the at-fault party’s insurer. The at-fault party may attempt to resolve such claims without the involvement of insurers. One of the most typical methods is to present the aggrieved party with a waiver of subrogation.

If the settlement agreement is agreed upon and signed, the injured party and their insurance have no further rights to sue the at-fault party for damages. Future claims are void, and the at-fault party or their insurance cannot be sued. Agreeing to this provision should be done with care, often after speaking with the insurer or an attorney about the specifics.

Some insurance firms refuse to allow their insureds to participate in waiver of subrogation agreements since it jeopardizes their financial security.

Some insurance firms refuse to allow their insureds to participate in waivers of subrogation agreements since it limits the amount of money they can recover.

For some people, settling is faster than filing a claim. At-fault parties’ premiums may be affected or their coverage may be terminated as a result of accidents; hence, settling could prevent bad actors from being noted on their insurance profile.

Waiver of subrogation FAQs

• What are the benefits of a waiver of subrogation?

One of the most typical advantages of a subrogation waiver is the avoidance of protracted litigation and negotiations, as well as the associated expenditures. These clauses can help prevent disputes between contracting parties, such as between a landlord and a renter. They also protect certain parties from being held liable for losses that were not their fault.

• Should I agree to a waiver of subrogation?

Subrogation waivers differ by contract or agreement, as do their benefits and hazards. As a result, it’s important to seek legal advice or speak with your insurance for a waiver of subrogation. Some insurers forbid their insureds from signing subrogation waivers because they place them at greater risk. Understanding the hazards involved will assist you in making an informed decision.

• How does the waiver of subrogation process work?

An insurer pays a claim to the insured for covered losses after a loss. If a third party caused the loss, the insurer may be able to subrogate the claim and seek damages from the responsible party. A waiver of subrogation prevents the insurer from pursuing or suing the responsible third-party for compensation. These clauses can be found in contracts or added to existing contracts as addendums. To be legitimate, any contract must have consent between the parties.

Examining workers’ compensation waivers of subrogation

Workers’ compensation waivers of subrogation are, without a doubt, highly popular in today’s contracts, especially construction contracts. The reason for this is less obvious. Perhaps the contractual party expects immunity from a third-party claim emerging from their subcontractor’s workers’ compensation claim if they sign the waiver. This is a false hope if this is the hope.

A waiver of subrogation does not prevent an injured subcontractor’s employee from pursuing the contractor in court. It only prevents the subcontractor’s workers’ compensation insurance from pursuing subrogation or enforcing its lien on a third-party claim. The wounded employee, who may obtain a twofold recovery if the worker’s compensation line does not have to be repaid to the business, maybe the lone winner from the waiver. Because the waiver did not have the expected impact of preventing a third-party claim, the contracting party loses or at the very least does not prevail. Because its right of recovery was waived, the workers’ compensation insurance loses. The biggest loser is the subcontractor who:

1. Pays an additional premium to add the waiver of subrogation to its workers’ compensation policy.
2. Faces a premium increase because the lack of recovery on its workers’ compensation lien inflates its loss experience.
3. Takes a double hit when its own general liability coverage is used to resolve its employee’s third-party claim due to a likely indemnification provision in its contract.

A waiver might theoretically eliminate a third-party risk. If an injured employee chooses not to file a third-party claim, several states grant insurers the authority to seek subrogation on their own. With a waiver, the insurer relinquishes its autonomy. In practice, it is uncommon for an insurer to initiate a third-party claim on its own. It may have to pay for a counsel to pursue subrogation without knowing whether or not it would be successful. When the key witness, the injured employee, is not included in the investigation, it becomes much riskier. A waiver of subrogation obligation is barely justified by the elimination of this type of hypothetical third-party claim.

Typical scenario

The wounded employee, rather than the workers’ compensation insurer, is significantly more likely to file a third-party claim. Typically, the employee hires a lawyer on a contingency basis to seek reimbursement in addition to the workers’ compensation payments he has obtained from the at-fault party.

In a third-party claim, the employee may be compensated for pain and suffering in addition to the lost wages and medical benefits provided under the workers’ compensation system. In the absence of a waiver of subrogation, a lien on any third-party settlement or verdict can be placed by the workers’ compensation insurance to recover the benefits paid to the injured employee. The insurer recovers up to two-thirds of his workers’ compensation payments lien in this case, while yielding one-third to satisfy the attorney’s contingency fee (assuming a one-third contingency fee arrangement).

In the case of a third-party claim initiated by an employee and a waiver of subrogation endorsement attached to the workers’ compensation policy, the contractor who required the waiver receives no benefit from the waiver. The claim is not barred because the waiver does not apply to the injured employee who filed the claim. Even if the workers’ compensation insurance surrendered its right to recover payments from the judgment, the third-party award is not lowered.

When there is a waiver in many jurisdictions, the injured employee keeps the entire award, thereby giving the employee a double recovery for the indemnity and medical benefits already earned through the workers’ compensation claim. Giving an injured employee a double recovery while offering no advantage to the contractor who included a subrogation waiver in its contract was clearly not the intention of requiring the waiver, but it is the reality in many circumstances.

Why do it?

Why are subrogation waivers so commonly needed in contracts, given their dubious value? There are numerous perpetrators. Companies that acquire waivers from their subcontractors are favored by general liability insurance. It’s a common question on general liability applications, and the correct answer might influence the insurer’s risk appetite and the premium charged. For brokers, insurance advisers, and risk managers, requesting waivers has become a “recommended practice.” Few people want their skills called into doubt because they didn’t meet an industry-standard—even if the standard is mainly meaningless.

When at all possible, subcontractors should fight worker’s compensation waivers of subrogation obligations. The difficulty is that they don’t have the clout to get the general contractor to eliminate the requirement. Subcontractors will likely need aid from state legislatures or judicial challenges to get rid of the waiver of subrogation obligations they are currently facing unless their negotiating position improves.

States’ response to the waiver of subrogation

New Hampshire has taken the lead in this area, changing its workers’ compensation statute to prohibit releases of subrogation. Any condition in an agreement that forces an employer or an employer’s insurer to forgo any rights of subrogation is now prohibited under Section 281–A:13 (VI). Similarly, Kansas (in some cases), Kentucky, New Jersey, and Missouri (only for construction risks) have declared releases of subrogation to be against public policy and hence null and void.

In this case, the Maine courts have likewise ruled in favor of subcontractors. A waiver of subrogation did not prohibit the employer from executing its lien against the employee who made the third-party recovery, according to Fowler v. Boise Cascade Corp., 948 F.2d 49 (1st Cir. 1991). The employer could not pursue its lien against the contractor who demanded the waiver, but it could enforce it directly against the employee who received the third-party settlement, which was a clever workaround. While Wisconsin, like Maine, does not totally declare releases of subrogation to be against public policy, it does allow employers to recover on their liens even if there is a waiver of subrogation endorsement.

Conclusion

While some states do not compel subcontractors to renounce a third-party recovery even when a waiver of subrogation is in place, these states are in the minority. Subcontractors are obliged to take subrogation waivers in order to gain work from general contractors, yet the waiver may not help the general contractor and may do significant harm to the subcontractor’s loss experience. Subcontractors can only push back on waivers where they can until universal change comes to the industry, and, of course, work as safely as possible to prevent the various claim hits that can come from injuries to their staff.