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What is a waiver of subrogation?

A waiver of subrogation relinquishes your insurer’s rights, the rights of a third party’s insurance company, or both to pursue legal action to recover paid-out damages as a result of a claim.

To really understand how a waiver of subrogation works, let’s take a look at an example of a situation that could occur in your business:

Let’s say you suffer a fire in your business’s brick and mortar. This fire occurred due to improper installation of a piece of machinery by a contractor you hired. You need to recover costs for damages, so you file an insurance claim, and your insurer pays you.
Once your insurance company pays you, they assume responsibility for recovering the financial loss caused by the negligent third-party contractor. Your insurance company will then want to exercise its right of subrogation, which requires the negligent third party at fault (the contractor) to pay the insurance company for the damages they caused.
However, before the incident, you signed a waiver of subrogation in your contract with the contractor. This means that you agreed to waive your insurer’s rights of recovery. Now, they cannot sue the contractor for reimbursement. The result is that your insurance carrier must bear the full financial burden for the damages, even though you (their client) were not at fault for the fire.

What does a waiver of subrogation mean for my business?

Each time you sign a waiver of subrogation, you assume risk. You hope that you will never suffer a loss that causes your insurance to pay you for a third party’s negligence. Your premiums may increase initially due to the presence of a waiver of subrogation, but until a claim is made in which the insurer cannot pursue damages from the third party, you should not see a continued rise in your premiums.

However, each time a waiver of subrogation provision stops your insurance carrier from recouping financial losses due to a third party’s negligence, your premiums may increase. Too many instances like these can even cause you to be dropped by your insurance carrier, as you have become too much of a liability for them to continue to carry your insurance policy.

Why would I want a waiver of subrogation?

When a waiver of subrogation is signed, the agreement made is that the risk is to be placed entirely on each party’s insurers, not on each other. Should a contractor, subcontractor, or employee cause your business to lose money in damages, you agree that your insurance will assume all responsibility for the damages. This is often done to support healthy business relations and eliminate business conflicts by avoiding lengthy and expensive litigation.

Another reason to pursue a waiver of subrogation is to ensure that projects are completed promptly. Business owners often agree to waivers of subrogation clauses if they see that to do otherwise would result in lengthy litigation that would cause even greater financial losses due to the need to halt projects until any lawsuit is settled.

When are waivers of subrogation used?

Waivers of subrogation may be found in many types of contracts. Let’s take a look at a couple of the most common places where you might run into a waiver of subrogation clause.

Construction contracts

An owner may be asked to waive their insurance carrier’s right to subrogation should a general contractor or subcontractor cause damages covered by the insured party’s policy. The owner’s insurer agrees to pay any covered losses and not pursue legal action against any negligent party.

Landlord and tenant contracts

The landlord may ask for waivers of subrogation to protect the landlord from the tenant’s insurers should the tenant suffer an injury due to landlord negligence. The tenant may be asked to pay an additional insurance premium on their renter’s insurance to cover the costs the insurer cannot recoup should the tenant file a claim for which a third party is at fault.

The landlord isn’t the only one who stands to benefit from this waiving these rights. The agreement can also be mutual, prohibiting the landlord’s insurer from pursuing recompensation from tenants should their actions result in property damage or injury.

What are the limitations on a waiver of subrogation?

There are exceptions to waiver of subrogation clauses.

For example, if the owner’s insurance doesn’t cover a certain risk, the owner can pursue recovery costs from the negligent party. In addition, the policy owner may seek to recoup any costs from the third party that exceed the insurance policy’s payout limit.

Should I agree to a waiver of subrogation?

Risk management is important in determining whether or not to sign a waiver of subrogation. To know if waiving subrogation is the right choice for you, it’s best to consult legal counsel. An attorney can help you understand the balance of risks and benefits associated with your particular case so that you can make an informed decision.

You may find that a client withholds payment or service until you agree to waive your right to subrogation. This is done so that the client knows they will not be held accountable should they be responsible for any damages on the job. While this may eliminate any potential conflict between you and your client, it also puts your insurer at a greater financial risk, which could cost you more in premiums or even cause you to lose your insurer altogether.

What is an example of when you might want a waiver of subrogation?

If your business contracts with clients, you may want a waiver of subrogation in place. This will protect you if you are fully or partially responsible for damages accrued during or after a job with a client. If you insist that your client sign a waiver of subrogation, their insurance company cannot sue you to recoup the costs they had to pay out to their client.

In reverse, you may agree to sign a waiver of subrogation if you can see that withholding a signature could cost more in litigation fees down the line than any potential damages could be worth. Remember that when your insurance company goes after a third party to recoup costs paid to you, you are responsible for helping your insurance company with the process. Economically speaking, this could be more trouble than it’s worth for you, even if it means your premiums go up.

What are the benefits of a waiver of subrogation?

Let’s outline the main benefits of a waiver of subrogation, should you choose to put one in place.

  • If it is mutual, neither party’s insurance company can pursue either party for recovery of damages paid
  • It adds a layer of protection for clients in the vast majority of industries, which will make them more confident to work with you
  • Lawsuit opportunities will be minimized, releasing all parties from additional time and cost

Does a waiver of subrogation affect my business insurance rates?

Two major points of concern exist for you as a policyholder when you agree to sign a waiver of subrogation.

  • Insurance premiums may rise
  • Your insurer may choose to release you from your insurance contract as a result of too many claims filed with a waiver of subrogation clause in place

You will need to speak with your insurer to understand their stance on waivers of subrogation. Depending on the type of waiver, they may have a different approach, such as if you agreed to a blanket waiver of subrogation versus a scheduled waiver.

They will likely respond with a waiver of subrogation endorsement that comes with increased insurance premiums on all your policies, including general liability insurance, workers' compensation insurance, business property insurance policies, employment practices liability policies, and more. You must decide if this increase is financially viable in relation to the losses you may accrue if you don’t have a waiver in place.

Do I need to inform my new insurer if I have a waiver of subrogation in place?

Yes. It is important to disclose this information to a new insurance provider. To withhold this information may result in denial of coverage if you file a claim.

Ultimately, are waivers of subrogation a good idea?

Waivers of subrogation can be helpful in the right cases.

Be sure to speak with legal counsel and your insurance provider to fully understand the risks and benefits in your specific situation.

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