Subrogation allows an insurer who has paid out a claim to their insured to then pursue the responsible party for those transferred losses. It serves as a control mechanism that holds bad actors accountable while protecting carrier viability, which discourages people from engaging in tortious behavior and allows insurers to continue to offer competitive premiums.
Subrogation is a legal mechanism that boils down to the principle of equity. In equitable subrogation, a party who has suffered damage at the hands of another has the right to be reimbursed. In insurance, once the insured is reimbursed, the insurer becomes the party who needs reimbursing, so they “step into the shoes” of their insured, legally speaking.
Depending on the context of the insurance dispute and the jurisdiction in which it is brought, the right to subrogate carries different levels of veracity. Regardless, subrogation is an invaluable tool to any company; taking advantage of every viable claim protects the bottom line. So why would anyone want to waive their right to subrogation? And what does that mean?
Let’s discuss waivers of subrogation: what they are, what they mean and why they matter.
What is a Waiver of Subrogation?
Just as the process of subrogation operates with the insurer as a shadow of the insured, so, too, does the process of signing a waiver of subrogation. A waiver of subrogation is a legal agreement in which one party agrees to waive their right to seek reimbursement from the other party for losses or damages covered by insurance.
There are two parties involved in signing the agreement: the insured party and the party requiring the waiver of subrogation. This party is often a contractor or vendor. By signing it, the insured by proxy precludes their insurer from pursuing a responsible third party after reimbursing them for a loss, so long as the insurer agrees the waiver.
A waiver of subrogation affects all parties in the agreement:
- The Carrier: is not allowed to pursue equitable subrogation of paid out claims.
- The Insured: limits transfer of risk to the insurance company and the third party.
- Third Party: is protected from subrogation liability on insurance claims.
After signing a waiver of subrogation, the insured will instruct their carrier to issue an endorsement (formal clause) to their policy, allowing the waiver.
How it Works: The Details on Subrogation Waivers
As is ubiquitous in the legal field of subrogation, waivers of subrogation come with specific nuances, limitations and loopholes worth discussing briefly. For instance, there are two types of waivers of subrogation:
Scheduled vs Blanket Endorsements
Scheduled waivers of subrogation are extremely specific. They will name specific entities, contracts and types of incidents that the waiver applies to. They typically require updating with each new contract. While the logistical cost of this is high, the financial cost is lower because the waiver of subrogation is so limited.
An insurer may allow a blanket waiver of subrogation, which applies automatically to all contracts that require a waiver. These cost much less time and effort than scheduled waivers, as they don’t need updated, but they cost more because they encompass so much more risk.
In addition, the waiving of subrogation rights isn’t always so clear:
Limitations & Loopholes
First, any contract requiring a waiver of subrogation should be submitted to the insurer before signed. The reason for this is twofold: (1) two parties cannot sign an agreement that limits the rights of another without that other party’s knowledge, and (2) the insured may breach their policy by doing so, which can result in outright rejection of insurance claims.
Second, a waiver of subrogation must be tailored to the specific situation. Is it a waiver of subrogation on property? Personal liability? Does it cover negligent or tortious behavior or just accidents? A waiver of subrogation on property can relieve commercial real estate or equipment holders of serious risk, while a general liability waiver of subrogation also covers cases of injury.
Third, the terms of a waiver of subrogation clause in a contract isn’t always enforceable depending on the terminology and the context of the claim. Waivers of subrogation that aren’t meticulously written in clear, decisive language tend to be picked apart and rendered null by courts.
Waiver of Subrogation vs Additional Insured
Before we discuss how a waiver of subrogation plays out in the insurance industry, let’s define the difference between a waiver of subrogation vs additional insured. While both a waiver of subrogation and additional insured are used to protect parties from liability in contractual relationships, there are key differences between subrogation waivers vs additional insured:
- A waiver of subrogation prevents the insured’s carrier from pursuing the contractor for reimbursement, but an additional insured provides the contractor with direct protection under the insured’s policy.
- A waiver of subrogation protects the contractor from being pursued for losses even if they contributed to causing them, but an additional insured makes them eligible for the same coverage as the insured under their policy.
- A waiver of subrogation is often used to limit potential lawsuits in a contractual relationship, where additional insured is used when the contractor wants direct coverage under the policy.
Both subrogation waivers and additional insureds benefit the contractual party by mitigating or eliminating their liability risks. Both endorsements are also sure to result in higher premiums, as the insured is asking their carrier to shoulder all the risk.
Common Use Cases for a Waiver of Subrogation
We most often see waivers of subrogation applied in contractual relationships, especially in the context of:
Construction/Contracting
General contractors will often require their subcontractors sign a waiver of subrogation. This protects the general contractor from lawsuits by subcontractors’ insurers after accidents or damages. Construction sites often involve several parties working simultaneously, and accidents can happen. By waiving subrogation rights, each party avoids being dragged into costly insurance disputes over who is responsible for damages already covered.
Real Estate Leases
A waiver of subrogation on property protects commercial landlords from lawsuits by tenants’ insurers for property damages covered by the tenant’s insurance. Commercial properties often have multiple and/or long-term tenants. Landlords want to avoid legal battles with tenants’ insurers over damages covered by tenant policies. A waiver of subrogation on property protects the landlord and simplifies the claims process.
Vendor Agreements
Vendor and service contracts are often part of repeated, long-term exchanges between parties. A waiver of subrogation ensures service providers are not held liable by the business’s insurance carrier for accidents or damages, facilitating smoother business operations and reducing litigation risk for any insurance disputes.
In each of these use cases, waivers of subrogation are used to minimize legal disputes, protect business relationships and ensure simple resolution of insurance claims without litigation.
Pros & Cons of Signing a Waiver of Subrogation
Waivers of subrogation play out in many types of commercial contracts because of the extra peace of mind it provides the entities involved in the contract. What it does, simply put, is take the weight of risk off everyone involved in the business relationship. This benefits especially the party who requires the waiver of subrogation – they are shielded from legal actions by the insured’s carrier. However, a waiver of subrogation also minimizes costs of litigating subrogated claims for all parties and fosters cooperative business relationships.
However, that weight of risk goes somewhere – the insurer – which is why a waiver of subrogation is not a magic solution to liability. This results in higher premiums for the insured, understandably so. It also leads to more potential claim rejections because of all that risk the carrier bears, and it offers limited protection for the insured, i.e. they can still be pursued directly by another party.
When we weigh the risks and rewards associated with signing away the right to subrogate against a third party, we can see there are definitely conditions where a waiver of subrogation makes the most sense for a person/company. However, like all things in the legal realm of insurance and recovery, retaining subrogation counsel adept at handling the nuances of subrogation waivers is vital to ensuring this decision always ends in maximized reward and minimized risk.