Waivers of subrogation limit which party can sue for civil damages caused by negligence under an insurance policy. At times, there are good and legal reasons for doing so in construction, lease, event, and auto insurance agreements. Assuming financial liability is challenging, but subrogation allows you to recover losses caused by negligent parties.
Keep reading this blog article to learn more about waivers and subrogation, how they work, and how you can get one for your insurance contracts.
What is a Waiver of Subrogation?
A waiver of subrogation, also known as a subrogation clause, is a contractual provision where the insured party waives their insurance provider’s right to seek compensation for civil damages from a negligent third party. Construction, service, and lease agreements commonly contain them in insurance contracts, and insurance companies often charge fees for waiving subrogation endorsements.
These legal clauses preclude one insurer from bringing civil damages to claim against the other to recover funds paid by the insurance company to the insured or a third party to resolve a covered claim. Waivers of subrogation are complex and rife with legalese , which means you should draft them carefully to avoid legal mistakes.
Here is a web page that defines waivers of subrogation.
What is Subrogation?
Subrogation occurs when one party has the right to act as the other party to bring a claim against a negligent third party for damages. Insurers commonly file subrogation claims against responsible third parties to recover policy payments. While the insurer’s legal right of subrogation typically arises automatically upon paying them, most insurance policies include a standard subrogation clause .
This web page also describes how subrogation works.
Why Would You Want a Waiver of Subrogation?
You communicate to your client that one party will waive their right to recover damages. However, the trade-off is the certainty that the aggrieved party receives coverage regardless of fault and negligence. You want a waiver of subrogation when you want reassurance in specific situations.
Below, we’ve outlined four additional reasons as to why subrogation clauses are helpful:
Reason 1. Safeguard Against General Liability
You can use waivers of subrogation to reinforce risk transfer from one party to another in a contract. The majority of general liability policies contain a clause prohibiting you from waiving your rights following a loss. Subrogation clauses allow for recuperation of damages against third parties.
Reason 2. Using Commercial Vehicles
Commercial motor vehicle policies contain a “transfer of rights of recovery” clause. This clause explicitly prohibits post-loss waivers only. As such, you may waive your right to sue someone before a loss occurs without notifying your insurer.
Reason 3. For Workers’ Compensation
The insurer has the right to recover its payments from liable parties on behalf of your employees entitled to workers’ compensation benefits. If your insurance company pays benefits to injured employees and another party is responsible for the damage, your insurer receives the legal right to sue the other party for the benefits paid to date.
Reason 4. Eliminate Business Conflicts
Waivers of subrogation eliminate potential business conflicts between you and your client in the event of a claim, as neither you nor your insurance company can seek a share of any damages paid under this agreement. As such, many clients will request that you amend your general liability insurance policy to include a waiver of subrogation.
Examples of a Waiver of Subrogation
The legal issues surrounding subrogation waivers are technical and complex, and it is confusing to understand how they work. Many seasoned business professionals in this world still struggle with subrogation clauses after years of experience. However, real-world examples can bring an abstract concept into concrete focus.
Here are three examples of waivers of subrogation to help you understand how they work better:
Example 1. Construction Contracts
Construction agreements usually contain clauses waiving subrogation, and the owner waives all rights to litigate against third parties for civil damages covered by the insurance policy. Additionally, the owner’s insurer agrees to pay covered losses without reimbursement from the negligent party.
Subrogation clause waivers in construction contracts help avoid construction delays caused by disputes and litigation over losses. When these provisions are not in place, investigations determine liability, and this process can be lengthy and jeopardize construction projects.
Example 2. Wedding Insurance
Wedding insurance subrogation clauses are endorsements to your event policy that prevents the insurance company from obtain compensation on paid claims from the event site’s insurance policy. If your event site asks for one, you’ll need to purchase this type of endorsement.
For example, let’s say that the caterer serves spoiled food and causes a case of food poisoning. If the event site operator contracted with the caterer, they would pursue compensation against the cater, not the customer or their insurer.
It ensures that your policy is the only policy to pay a covered claim, even if the venue is somewhat liable. Subrogation waivers limit the insurance company from recuperating costs for civil damage claims paid on another’s behalf.
Example 3. Lease Agreements
Subrogation waiver clauses in building leases and warehouse lease agreements prohibit the insurer from acting in place of the owner to recover civil damages. If the injured party’s insurance policy covers the claim, they must pay with no further opportunity for action.
These clauses safeguard the landlord and tenant against high litigation costs and disruptions to the contract’s terms. Subrogation of waiver clauses can also help landlords and tenants maintain amicable relationships.
Let’s look at an example:
if a tenant’s guest experiences injuries due to a faulty staircase, the tenant’s insurance carrier cannot assert a civil claim against the property manager or owner for the amount paid in settlement of the guest’s lawsuit against the tenant.
How a Waiver of Subrogation Works
A right of subrogation entitles an insurer to act in the insured’s place following satisfaction of a claim paid to the insured party per the company’s obligations under the insurance policy. This arrangement allows the insured to settle while giving an insurance company the right to recover their losses caused by another’s careless or reckless actions.
1. Insurers Pay Claims to Insureds
The insurance company may seek reimbursement from third parties for costs incurred with the same loss, even if the loss involves resolving claims brought against the insured. In other words, the insurance company cannot assume the client’s position and sue the other party to recuperate their losses after settling a claim. As a result, the insurer faces greater risk exposure.
2. Insurers Pursue Reimbursement
If a third party is responsible, the insurer may subrogate the claim or seek damages from the responsible party. If the insurer has waived subrogation, the insurance company cannot hold the responsible third-party liable for their financial recovery. These provisions are usually found in contracts or added to existing contracts as addendums. As with any agreement, the parties must agree for the contract to be valid.
How to Get a Waiver of Subrogation
Contract mistakes can result in unwanted legal consequences, which means you should always have a legal professional draft your subrogation clauses. Find insurance lawyers in your state who can help you work toward a fully-executed contract today!