Before we can understand what a waiver of subrogation is, we should first discuss the rights of subrogation. What does subrogate even mean?
Subrogation refers to one party stepping into the shoes of another party and assuming the second party’s rights and responsibilities. It essentially allows one party to take the place of another and is extremely common in the insurance industry.
Example of subrogation
The easiest and most common example people use to explain subrogation is car insurance. Say you’re in an accident, and it’s not your fault. Typically, you’ll make a claim against your insurance carrier, and the whole thing will (hopefully) go away…for you.
However, the insurer’s job isn’t done yet. As a part of the relationship between you and the insurance company, your insurance company will have the right to go after the other party in the accident to recover the cost of the claim they paid out to you. So, when your insurance company goes after the other party that caused the accident, they are assuming your rights and responsibilities in order to do it.
What is a waiver of subrogation?
A waiver of subrogation is the waiver of the right to subrogate. Easy, right? Including a waiver of subrogation clause is just another way of allocating and minimizing risks.
Waiver of subrogation example
Using the car insurance example above. If there was a valid waiver of subrogation is in place, then the insurance company could NOT step into the shoes of their policyholder to try and recover the claim they pay out (by going after the other party).
In other words, if a waiver of subrogation was in place, then your insurer would be forced to simply pay your claim. They would not be able to go after anyone else. As in the other party that caused the accident — as if they were the ones harmed in the accident.
Why do I need a waiver of subrogation?
If you’re on a construction project where things go sideways, then a waiver of subrogation could be your savior. The best way to explain this is through a simplified example:
Let’s say there’s a subcontractor working on a project. A couple of the sub’s guys accidentally cause some property damage during the course of the project. The GC’s general liability insurance will cover the damage caused by the sub. So the owner makes a claim against the GC’s policy. The GC’s insurance company pays the claim, and all is well.
If subrogation is allowed, the GC’s insurance company could go after the subcontractor (and/or their insurance company) to attempt to recover the money they had to pay out in the owner’s claim. However, if a waiver of subrogation is present, the GC’s insurance company will pay the claim and won’t be able to act as if they were the GC (and go after the subcontractor).
Think about that for a second. If an insurance company comes after a sub for damaging the property, that could be huge! A simple accident could put the subcontractor’s entire business in danger! However, if a simple waiver of subrogation clause is present in the construction contract, that nightmare could be avoided.
How common are waivers of subrogation clauses?
They’re pretty common! Unlike a lot of other risk-shifting provisions (such as contingent payment clauses, the parties who sign the contract aren’t really directly affected by a waiver of subrogation clause. The rights being waived are not the individual company’s rights — they’re the rights of the insurance companies. Because of this, there typically isn’t too much haggling over waiver of subrogation provisions during the contract negotiations.
Of course, some insurers won’t allow for a waiver of subrogation to be present for their construction industry clients. If the clause is present but disallowed by the policy, it won’t be effective to waive subrogation rights.
The bottom line
Generally, insurance policies do not bar coverage if the insured has signed a waiver of subrogation. Waiver of subrogation increases the insurer’s risk by prohibiting the recovery of money paid to or on behalf of the insured. Therefore, the insurance companies frequently charge an additional fee on top of the premium. But at the end of the day, the extra fee is worth not dealing with the aggravation later down the road.
If you have any questions about your business insurance, we would love to answer any questions you have. Our construction insurance advisors are experts in California Contractors Insurance and we are active as insurance advisors in multiple California Construction and Remodeling Associations in California. We are here to help! 800.992.1712 Ext#12.