Posted on 09/14/2011, by Jeremy Edsall
Understanding the Waiver of Subrogation in Your Contracts
A waiver of subrogation, otherwise known as transfer of rights recovery, is often required in many construction contracts. You’ve probably seen the term before, but do you know what it means for your business?
Subrogation is your right, and therefore your insurance provider’s right, to recover the costs of a claim if it was caused by a third party. Let’s say that a third party causes damage to your business that’s covered by your insurance. When your insurance provider pays your business for the claim, your insurance provider can step into your shoes and has the rights to recover the costs of the claim from the third party who was at fault.
If you had a contract with the third party that included a waiver of subrogation, your insurance provider wouldn’t be able to recover the costs from the paid claim. The waiver gives up the right of your insurance provider to recover the cost of the loss from the third party if the damage is covered by insurance. In other words, the risk of loss gets shifted to the insurer regardless of which party is at fault and your insurer wouldn’t be able to sue the third party.
In the event of a workers’ compensation claim, a waiver of subrogation can be complex. Imagine that your business is subcontracting for another company. An employee from your company gets injured, due to the fault of an employee of the other company (a third party). Your company is obligated to pay workers’ compensation benefits, but without a waiver of subrogation, you, or your insurance company, can bring a lawsuit against the at-fault third party, along with or in place of the injured employee, for the costs that your insurance provider has paid or will pay for the claim. Recuperating these costs can help protect your experience mod and your future insurance premiums. However, with a waiver of subrogation, your company and insurance provider cannot recoup the costs, negatively affecting your mod and premiums for the future.
The inclusion of such a clause in a contract is meant to minimize lawsuits and claims among the parties of a contract. Waivers of subrogation are commonly added to an insurance policy for an annual fee; although they can also be endorsed separately in the instance it is required by a contract.
Call Friedman Associates for more information about waivers of subrogation and other contract exposures.