By: Jake Knight J.D. CRIS, IMA Financial & Pete Wiggins, MBA, FIRST, VERIFY
Today, it’s not uncommon for companies to require that any contractor working at their facilities or job sites provide them with proof of a defined level of insurance coverage that includes a waiver of subrogation.
But what is a waiver of subrogation? Before explaining this, one must first understand what subrogation is. From a legal standpoint, subrogation means the right of one person (the subrogor) to step into the shoes of another person (the subrogee) to pursue claims and remedies available to the subrogree. In the insurance context, subrogation occurs when an insurance company pays its insured and then sues the entity or person responsible for the loss to recover the amounts paid to or on behalf of the insured. The insurance company steps into the shoes of the insured and exercises any rights the insured might have against the responsible party.
Suppose you were involved in an accident where your car was hit by a car that ran a red light. In this case, the other party was totally at fault. In most states, if your insurance company paid to have the damages to your car repaired, they could then step into your shoes and make a claim (usually in your name) against the other driver and their insurance company. This prevents the party actually responsible for the damages to your car, the other driver, from escaping liability for its actions. It also allows you to have your car repaired without waiting for the other driver or its insurance company to pay for the damages.
A waiver of subrogation is a contractual agreement between two parties where one or both parties agree to waive or give up their (and in turn their insurer’s) respective rights to recover from the other party in the event of a loss that the other party may be responsible for. Insurance carriers will typically include provisions in or endorsements to their policies where they agree to waive rights of subrogation against parties when their insured has agreed, prior to a loss, to waive its rights of recovery against those parties. The insurance company is not really waiving any rights, though, because they only have the rights that their insured has. Rather, the insurance company is agreeing to honor the insureds contractual agreement to waive its rights of subrogation and not void the coverage it provides to the insured.
So why agree to a waiver of subrogation? The intent is to minimize the number of lawsuits among the parties and to shift certain risks onto the parties’ respective insurance companies. They can also a very cost-effective method of risk allocation, particularly in the context of construction projects and property or builder’s risk insurance. If there was damage to property under construction and the parties involved (and/or their insurance carriers) were left sorting out responsibility for the damage, the project could be ground to a halt and the costs of construction could skyrocket. By instead agreeing to waive rights of subrogation, the parties can look solely to the property or builder’s risk insurer and avoid or at least reduce delays and cost overruns.
It is important when required to provide a waiver of subrogation that you understand what you are waiving and that your insurance policies contain provisions or endorsements which support your agreement to waive rights of subrogation. When providing a certificate of insurance, you will want to make sure that the waiver of subrogation wording on your certificate matches the requirements of the client or contractor requesting the waiver without violating the terms of your insurance policies.
In sum, a waiver of subrogation does not restrict or enhance a party’s coverage terms; it simply removes the insurance company’s ability to recover what they paid on a claim from a negligent third party.