What is a Waiver of Subrogation?
A waiver of subrogation states that if one person suffers a loss which is covered by insurance, the insurance company cannot turn around and try to collect against whoever is responsible for the loss if that person has a valid contractual waiver of subrogation with the insured. The classic coverage question is whether the contract requires the waiver as part of the contract terms themselves, or whether it should be granted separately, as an endorsement to the policy.
For example, imagine a situation where two parties are parties to a construction contract for the renovation of a warehouse . As part of that contract, they agree that if there is a fire in the renovation project, that no party will seek to bring claims against the other party for damages from the fire if those same damages are covered by insurance. In effect, they’re saying they will subrogate to the rights that their respective insurers have, but for purposes of this contract, they will not act against each other because of losses arising out of a fire. A waiver of subrogation may be written into a contract, or if the insurer agrees, it may even be part of the policy itself.
When is a Waiver of Subrogation Necessary?
The most common situations in which a waiver of subrogation is used involve building or construction projects. Application of the waiver of subrogation clause is widespread, and generally the shorter the project, the more likely that a contractor will require that the owners sign a waiver of subrogation. The most common form of this agreement is the AIA 201 and 203 forms.
Similar to construction projects, subrogation waiver forms are typically within the requirements of a lender, thus commonly incorporated into financing agreements. The lender often requires that the borrower sign a waiver of subrogation in order to protect its investment in the property. A lender waiver protects the lender’s ability to obtain credit default insurance, and also removes the risk that it will have to finance and repair damaged buildings. Allowing a subrogation waiver can encourage lenders to offer more favorable loan terms.
The Benefits and Risks Involved
Such a form is generally beneficial to the party receiving it in that if the referenced loss occurs, the waiver of the right of subrogation almost certainly means no further claims for reimbursement can be made against that party. However, if the party giving such a waiver is at fault for the loss, it may be precluded from recovering any damages it suffers related to the accident.
The waiver of subrogation concept has some potential to be tricky if the parties to the contract seek to expand the waiver of subrogation form forms to encompass circumstances not otherwise covered by the insurance policies. For example, does the waiver of subrogation form eliminate the right of recovery and the rights to enforce safety standards even though those obligations are not normally covered by insurance? Does the waiver of subrogation form serve to undermine the responsibility for or the need to maintain any safety programs and procedures? Does the form eliminate the right of recovery even if the underlying loss is unrelated to causes of loss contemplated by the insurance policies? These are areas where there is much less certainty, and it is not uncommon for the parties to renegotiate the waiver of subrogation term if there is an issue.
Securing and Completing the Form
There are several options for obtaining a waiver of subrogation form. Typically, general commercial waivers can be obtained as part of the policy document itself. Some policies contain a subrogation waiver automatically. Where it is not included within the policy, however, a regular waiver of subrogation endorsement may be used. Other waivers of subrogation are available upon request from an insurance carrier. A Specific Waiver of Subrogation may be issued as part of a specific contract or purchase agreement and attached to the policy. A Waiver of Subrogation endorsement is a singular document that may be added to other types of contracts and commercial agreements.
These forms are relatively simple to fill out. It is advisable that the appropriate names be included so that there is no confusion about the person discharging the right to sue and the person who is being released from liability. For waivers that must be included with another contract, such as a waiver of subrogation liability under a sales contract, the information should be included in the sales contract before the parties sign. In other cases, it can simply be attached to the end of the contract without having to be included in the body.
In some cases, the insurance company may issue a certificate of waiver upon request. These forms are generally addressed to whom it may concern and incorporate by reference the language of the policy to which it is adjunct. Waivers are often included as part of the workers’ compensation insurance policy. Often, these will include the language of an attached exclusionary endorsement.
Of course, errors can be made. Some common mistakes to avoid include: When dealing with a waiver of subrogation, especially for large limits, it is valuable to take care to understand the details of the policy application, claims process, and coverage.
Effect on Insurance Policies
A waiver of subrogation form can significantly impact an insurance policy. When property is insured, the insurer may have the right to pursue third parties for reimbursement or damages. This is typically spelled out in the terms of the policy. If a policy has been "waived," the insurer is agreeing that it will not exercise this right against the person or entity that has been identified in that waiver.
The decision to agree to a waiver of subrogation should not be taken lightly. Policyholders should understand how their insurer may handle the claim against the potentially responsible third party. For some policyholders , agreeing to a waiver may mean that the person who caused the damage is also responsible for the entire deductible.
Insurance policies (or even separate contracts) often specifically state that a waiver of subrogation will not be honored unless the insured agrees in writing and the insurance company gives its consent. Additionally, the policy sometimes states that the contract with the person identified in the waiver must be executed prior to the agreement to waive subrogation. The insurance company’s failure to follow these contractual obligations could be grounds for breach of contract against the insurance company and the senior project manager signing the waiver form.
Legal Issues to Consider
Although the wording on a waiver of subrogation may from insurer to insurer, all forms must comply with legal requirements to be enforceable. When properly executed, a waiver of subrogation may shield insurers and policyholders from legal liabilities and losses that may result from the negligent conduct of other parties.
A waiver of subrogation within the context of an insurance contract must meet four requirements before it is enforceable: The most common method of fulfilling the first requirement is by including express language in the policy contract or by issuing a policy endorsement. The common phrasing found in most policies states something similar to the following: "If we pay the fire loss, we waive our right to subrogation against those on the ‘who is an Insured’ provision." Court interpretations of this policy language have found that it is not ambiguous and requires no further explanation as its meaning is clear to someone of ordinary intelligence. In practice, some policies include broader prohibitions against subrogation that state that one party cannot assert a claim without the other party’s consent. In these instances, a reservation of rights letter should be issued to these parties giving them notice of the waiver and reserving the right to subrogation against the other insured. The second requirement for a waiver of subrogation is that the waiving of the right to subrogation must be for the benefit of the two parties in the agreement, as well as the civil rights and immunity of the insured. Courts have ruled that the intent of the parties to enter into a subrogated agreement must be explicitly stated in order to defeat plaintiff’s subrogation claims. Whether a defendant is protected by a waiver of subrogation depends on a few key considerations: The public policy behind allowing subrogation is that the insurer should recover what it paid out to the insured for a loss caused by a third party. If the waiver of subrogation is in the contract, violating it is a breach of contract, meaning that the insurer is liable for its contractual obligations. Because waivers of subrogation are so beneficial to all parties involved, the insurance industry generally supports the enforceability of these clauses.
Advice on Negotiating a Waiver
When negotiating such a provision in a contract, the first thing to look for is the scope of the waiver. Was it limited to losses that were "caused wholly or in part" by one party’s negligence? If so, it may be a good candidate to negotiate away. Of course, if the provision is broad and does not specify whose negligence caused the loss, you will need to carefully consider whether the contract is worth the risk that the waiver may ultimately prevent you from recovering.
Another consideration is the change of risk question. If you are unable to recover, does that significantly alter the risk you are assuming? If you are unsure how a court would read the contract, then you need to consider whether that uncertainty should be resolved before, or after, the parties have performed their obligations. If you perform first, you may be out of luck if the matter ever ends up in court.
Your ability to negotiate away a waiver of subrogation provision will often depend on who the waiving party is. If the party stands by the provision and is unwilling to amend it, you need to consider whether you really want to take on the risks of the contract without recourse against the other party . If you decide to walk away from the deal, make sure that you are doing so for the right reasons. Waivers can be a double-edged sword and can work to your benefit, so it may be a matter of consensus to allow all parties to waive their respective subrogation rights.
You should also be aware that waivers of subrogation are often required or requested by insurers and that it can be in your best interests to have them in your contract. In many cases, insurers will provide a waiver of subrogation form that can be incorporated into your contract, which is the easiest way to implement such a requirement. Although these waivers do not typically limit the scope of the waiver, they can prove helpful if they include additional considerations such as: (1) the waiver is limited to the negligent acts of the parties; (2) the waiver employs an equitable carve-out for specific losses; or (3) the waiver is subject to a waiver of rights under the applicable insurance policies.
In extremely limited circumstances, you may also consider a partial waiver of subrogation, which would mean that you will still retain some rights of subrogation, but only for specific losses.