What is a Waiver of Subrogation?
The review of every contract you sign with all of its requirements and clauses is a highly important risk management consideration. This includes a contract’s waiver of subrogation clause.
To understand what a waiver of subrogation does, it’s important to understand what subrogation means. Subrogation is a basic insurance concept utilized in insurance contracts. If a loss occurs, it typically happens through someone’s negligence. In general, the negligent (or “at fault”) party is liable for the cost of the loss. Your insurance carrier can “step into your shoes” and choose to sue the at fault party to recover the amount of a claim they paid for you. This is subrogation. You may not find the term subrogation in your contract, but it may be included — check for the terminology ”Transfer of Rights of Recovery Against Others to Us,” which some insurance policies use.
When a waiver of subrogation is required in a contract, it means that you are “signing away” or waiving your insurance company’s right to subrogate against another party—most commonly the party you are contracting with. This is not an uncommon practice. In fact, most policy contracts, with the exception of workers’ compensation, allow you to waive your rights of subrogation as long as it is done IN WRITING AND PRIOR TO THE LOSS. Often an endorsement is added specifically referring to the exact contract as a means of clarification.
There are areas of caution:
- Workers’ Compensation: In some jurisdictions, Waivers of Subrogation are not available. Therefore, a careful review of the state statute is required. You should also obtain your workers’ compensation carrier’s position and agreement on waivers of subrogation.
- Waiver of subrogation requirements should be built into a contract. The contract wording should be thoroughly reviewed to ensure the waiver of subrogation is being utilized appropriately for the situation. For example, mutual waivers may be beneficial in landlord/tenant contracts (where all parties waive their rights). However, in construction contracts, mutual waivers may not be acceptable nor prudent.
Why Waiver of Subrogation Clauses are Valuable
A waiver of subrogation clause is placed in a contract to minimize lawsuits and claims among the parties. The risk, once assigned to the insurers by the parties, is determined to stop there, without allowing the insurer to seek costs from a third party. This guarantees that if a loss occurs, the owner’s insurer pays the claim and the insurance proceeds can be used to fund the cost of repairs without determining who was “at fault.” Without a waiver of subrogation, litigation or arbitration is frequently needed to determine whose fault caused the accident. And these can cause long and costly delays.
Reviewing Contracts: An Important Risk Management Consideration
It’s important when agreeing to any and all contractual language that it mirrors your policy. As your insurance partner, we are committed to helping you understand how your policy language impacts your contractual risks.
Call GDI Insurance Agency, Inc today at 1-888-991-2929 to learn more about how we can assist you in mitigating your contract exposure.