What is a Waiver of Subrogation?
In legal and insurance contexts, a waiver of subrogation refers to the relinquishment by one party of the right to bring a claim against another party. A waiver of subrogation takes place after a loss has occurred, meaning that the entity waiving its rights does so despite having suffered a loss and despite having a potential claim against another party. When it comes to insurance policies, a waiver of subrogation clause prevents the insurer from pursuing a claim against any third parties for their alleged negligence or wrongdoing if that negligence or wrongdoing contributed to the insured losing its property or suffering an insured loss. In most cases, such a waiver cannot be bought after an accident, or the loss of property. It must be agreed to before any such event occurs . Since an insurer pays out the money related to the property lost or damaged, they have the right to recover that money from the party responsible for any negligence. However, when a waiver of subrogation is in place, the insurer may not have the right to take legal action against a third party for their negligence. Such clauses are subject to specific state law requirements. Whether an entity waives its right to bring a subrogation claim is within its discretion, except where it is mandated by statute, and constitutes a departure from the usual rule that subrogation is available to insurance companies that pay claims for losses. Waivers of subrogation have a significant impact on the carriers involved with short term rentals, and on the ability of policyholders to recover when insurers refuse to meet their promises, or deny claims without reason.
Decoding a Waiver of Subrogation Endorsement Form
Waiver of subrogation endorsement forms modify the standard policies. The purpose for the form is to allow the insurer to waive its right to sue the responsible party under the policy. Subrogation is a right that a company has to pursue indemnification from a party following payment of a policyholder’s claim.
Most generally, a waiver of subrogation may be placed into an endorsement form. An endorsement is an addition to an existing insurance policy. An endorsement takes the original insurance policy and modifies or extends the policy to an extent, in this case by adding a waiver of subrogation. Endorsement Forms are "attached" to the insurance policy.
There are three components that make up a waiver of subrogation endorsement form: the contract, the insurance, and the waiver. Generally speaking, the contract will be a writing between the insured and another party. In terms of construction, the contract should be reviewed carefully to determine when the waiver termination will take effect. Will it terminate on the completion of the contract? Will it terminate at a certain date? If the waiver terminates prior to completion of the contract, the insured should determine if the contract can be re-written to extend the waiver period. If the contract cannot be altered, the insurance policy should be examined closely.
The insurance to be provided is usually the CGL (Commercial General Liability) insurance that covers the contractor. However, it may be possible to have the waiver apply to other types of insurance. For example, it is conceivable that the waiver could be extended to an Employer’s Liability Insurance or a Workers Compensation Insurance. However, as with other issues involving insurance, there will be some complex issues involved with how an employer’s liability insurance applies to the waiver that do not arise with a standard CGL or general liability insurance policies. Therefore, the specific role of the insurance in the waiver of subrogation endorsement form can be complicated and should be analyzed closely.
Finally, the waiver portion of the form describes the rights waived by the insurance carrier. The rights waived can include the right to sue the other party, and the right to recover any payments from other responsible parties. Many times, the carrier will also waive the right to be sued if the other party is sued by the insured. It is important to specifically determine which rights will be waived by the carrier.
It is my opinion that subrogation issues are arising more and more frequently. As this trend continues, all parties to a waiver broadly written should examine their position closely. The carrier can be put to the task of waiver interpretation and the courts are given the task of adjudicating the parties’ rights. In the end, litigation may well occur due to a challenging waiver and the dispute that arises from that waiver.
The Benefits of a Waiver of Subrogation
The waiver of subrogation endorsement form will protect your business in a few ways. First, you will not need to be concerned about those who you are doing contract work for being susceptible to financial devastation from a subrogation claim against them arising from their negligence. The waiving of subrogation is usually tied to a contract and therefore the potential for liability claims against you as a contractor performing work will be eliminated.
If a contractor has a waiver of subrogation signed, it will make the entire business day go smoother. There will be no need to be audited or have to audit someone else’s policy because a waiver of subrogation will likely be a part of the contract that you are using. So, there won’t be any huge arguments about whether or not the contract was fulfilled completely. The waiver of subrogation is required to be in place by many large government contracts, and that is one reason why businesses need a waiver of subrogation. The costs of insuring the subrogation claims are significant if not handled quickly or properly.
You want to avoid getting sued over something that was out of your control. A waiver of subrogation requires the insured to not sue the person who is responsible for the claim. The waiver of subrogation suggests that everyone did something wrong, so let everyone take responsibility for the portion that they caused.
How to Get a Waiver of Subrogation
The process of obtaining a waiver of subrogation endorsement requires that the client make a request to their insurer or insurance broker for such an endorsement to be added to their policy. Most insurers will require documentation and evidence of the type of contract at issue in order to grant the endorsement. Since there are costs associated with a waiver of subrogation endorsement, obtaining a waiver of subrogation endorsement is ideal in the beginning of the project, versus waiting for an event to occur when subrogation triggers to request the endorsement. A client’s insurance provider may charge an additional premium for providing the product, provided the insurer agrees to issue it, of course.
Usage Scenarios for a Waiver of Subrogation
There are several scenarios where the use of a waiver of subrogation endorsement form may be necessary or beneficial. For example, a waiver of subrogation form is commonly used in construction projects. In the context of a construction project, the owner of property generally will require the general contractor and any subcontractors to waive their right to file suit against one another and/or owners as a result of damage sustained in the course of the construction. If the contract between the owner and general contractor contains a waiver of subrogation clause , any insurer that has an insurable interest in the property affected by the construction will be required to honor the waiver and its insureds will not be permitted to file action against one another for damages caused by the work.
Waivers of subrogation can also be important to lease agreements. It is common for an owner of commercial property, such as shopping malls, office complexes, commercial centers and apartment buildings, to require its tenants to waive any right the tenant might have to sue the owner and/or its insurers for damages sustained by the tenant during its occupancy of the property. If the contract contains a waiver of subrogation clause, an insurer that has an insurable interest in the property but is nevertheless aware of the clause will have to honor the waiver of subrogation and will be prevented from filing action against its insured and other parties to recover damages.
Potential Risks and Issues
Insurers are not required to include a waiver of subrogation endorsement in their property insurance policies. This is because the law generally requires parties in complex business transactions to decide by whom and how covered losses are to be handled. Insurers argue that policyholders should retain the risk that an insured peril might happen to them, rather than pass it on to others by the act of filing a claim. To force insurers to waive subrogation on all property insurance policies at no additional premium would force them to charge everybody higher premiums. None-the-less, the parties’ decision to waive subrogation is contractual in nature; and neither party may unilaterally impose the decision on the other.
Under some circumstances, the policyholder’s obligation to defend an action against the person who caused the loss will be superseded by the right of also seeking a recovery from the responsible party. If the policyholder settles a claim against the responsible party without obtaining the insurer’s consent, the waiver of subrogation may be vitiated. Further, if the policyholder settles without the insurer’s consent and a subrogation right is not preserved, the carrier may deny coverage for any loss the policyholder suffers as a result of the settlement. This is because policies often contain anti-subrogation rights that apply to all parties to the insurance contract. In other words, the policyholder cannot obtain coverage for malfeasance for which it is responsible.
Even with a waiver of subrogation endorsement in place, the policyholder must be careful not to waive subrogation against another insured who is responsible for causing the insured property loss to which the claim pertains. In many policies an insured may execute a waiver of subrogation that waives its right to seek reimbursement from the same insured to whom it has granted the waiver. A typical warranty reads "the insured named in this policy, and each of its employees, agents and assigns, shall not sue the terms of this policy or claim any money thereunder against any other agent, servant or partner of the insured named in this Policy, nor against the Board of Directors or Officer thereof, nor against any stockholder in the organization of the insured, and in the event of any such suit against any such party this warranty shall be a complete defense." This type of warranty applies to the policyholder’s agents and assigns anytime it submits a claim against the insurer. The warranty also applies to policyholders’ agents and assigns anytime they are indemnified out of the policy’s proceeds for the benefit of the policyholder.
Subrogation Waiver Legal Effects
If a party agrees to waive subrogation it may be more difficult to bring a legal action against the insured’s carrier in subrogation. Courts have stated that when a waiver of subrogation is broad in scope, a party cannot bring suit directly against the insured’s insurer. Illinois courts are divided as to whether a broad "any and all" waiver of subrogation eliminates the subrogee’s right of action directly against an insurer. Other courts have stated that such a waiver will prevent separate recovery against the insured’s carrier in subrogation.
For example in West American Ins. Co. v. Schaefer Inc., 155 Ill. App. 3d 1159, 508 N.E.2d 1198 (4th Dist. 1987) the Illinois Appellate Court found that the subrogee’s suit against the insurer was not precluded by a waiver of subrogation in the Waiver of Subrogation Endorsement form when the endorsement stated that the insured waived its right to collect under the insurance policy against a third party. The policy also provided that this Waiver of Rights included all parties named in the policy. The court found that such a broad language provision merely meant that if the insured could have sued in its own name (but not actually did sue), the waiver of subrogation meant that a third party could not sue directly in the insured’s name. The court held that the intent of the clause was only to prevent a party from bringing a suit when the subrogor had had no claim against the third party. The court further stated that the waiver of the insured’s rights to bring a claim against the third party cannot be interpreted to mean that the subrogee could not bring a direct cause of action against the insurer. The insured never waived its right of subrogation because it was never made whole by the insurer and thus the subrogated insurance company was entitled to collect from the negligent party’s insurer. The court noted that such a contract would not be void as a violation of public policy if the insurer had not been an intentional tortfeasor with respect to the loss suffered by the insured.
In Firemen’s Ins. Co. v. Teufel, 205 Ill App 3d 591, 563 N.E.2d 113 (1st Dist. 1990) the Illinois Appellate Court, in contrast, held that since the Waiver of Subrogation Endorsement was directed specifically to the insured’s right to sue, the phrase "any and all rights of the insured" extended to any and all rights of the subrogee and therefore the subrogee had no right of action in subrogation. In this case the Waiver of Subrogation Endorsement contained language that stated "any and all rights of the insured under this policy at the time of loss against any person who is an architect . . . or landlord . . ." were waived. The court found that the phrase "any and all rights of the insured" clearly meant that the waiver of subrogation applied despite the breach of a party’s duty to the insured. Because it was established that the parties intended to include parties other than the architect, general contractor, sub-contractors, lessors and lessees, the court ruled that the "expanded" waiver of the subrogor’s rights concerning any party who was negligent in creating the insured’s loss could not be separated from the prohibition against suing the negligent parties’ carrier. The court based its decision on the fact that the phrase in the endorsement was not restricted by the word "against."
Is A Waiver Of Subrogation Right for You?
Here we are at the final chapter of this unfortunate saga. So far, we’ve talked about how the waiver of subrogation endorsement form is used and a few examples of ways it might come back to bite you later on. Before we end our story, I would like to provide some simple questions you can ask yourself to determine whether a waiver of subrogation is right for you and how you can be better protected from its potentially dangerous bite .
Does your insurance company know this waiver of subrogation endorsement form is in your contract?
How much did you save on your premium for the Waiver of Subrogation Endorsement?
Can you modify the contract so the waiver of subrogation is removed when both parties are negligent?
Is the issue of negligence properly addressed in your original contract?
What insurance policies do I have that are signed and sealed with a Waiver of Subrogation Endorsement, and is it in my best interest to modify the waivers or remove them?
The Waiver of Subrogation Endorsement Form can save money and be used as part of an integrated risk avoidance strategy by providing for an equitable allocation of risk. But, as we have seen, it can also have a hidden cost years later.