When you and another party agree to do business together, you may sign a contract that contains a waiver of subrogation provision. Such a provision typically requires one or both parties to waive (give up) the right to sue the other. This article will explain how waivers of subrogation may affect your commercial property insurance. The effect of waivers on your general liability, commercial auto or workers compensation insurance is addressed in a separate article.
Many commercial property policies contain a subrogation provision similar to the one found in the ISO Property Conditions form. This clause applies if your insurer has paid a claim for property damage or loss of income that is covered by your policy. The clause states that if you have the right to recover damages from someone else, those rights are transferred to your insurer.
For example, suppose that you operate a business called Accurate Accounting. Your company rents office space in a building owned by Prime Properties. You have insured your office contents under a commercial property policy.
A company called Classic Consulting rents an office next to yours. One evening a fire breaks out in Classic Consulting's office. The fire spreads to your office, damaging several desks and computers. According to the Fire Marshall, the fire was caused by a smoldering cigarette butt left in a trash can in Classic's office.
Your property insurer pays for the damage to your property. It then tries to recover the amount it paid by suing Classic Consulting for property damage.
If you had no property insurance, or if your insurer had not paid your claim, you would have had the right to sue Classic Consulting for property damage. Since your insurer compensated you for the loss, your right to sue Classic Consulting is transferred to your insurer.
Protection of Subrogation Rights
Commercial property policies require you to protect your insurer's rights to subrogate against another party. You cannot voluntarily absolve the other party of liability or otherwise interfere with the insurer's right to pursue a claim against that party.
The standard subrogation clause allows you to waive your rights of subrogation before a loss occurs. Thus, you may sign a contract in which you agree to waive your right to sue another party for losses that may occur in the future.
The standard subrogation clause also allows you to waive your right to sue another party after a loss occurs if the other party is one of the following:
- an insured under your policy
- a company you own or control
- a company that owns or controls you
- a tenant of yours
For example, suppose that your company, Accurate Accounting, owns 100% of Classic Consulting. In this case, your company may waive its right to sue Classic Consulting for the fire damage to your property after the fire has occurred.
Many contracts contain a mutual waiver of subrogation. In a mutual waiver, the parties agree to waive their rights to sue each other. Typically, the waiver applies only to losses that are covered by commercial property insurance.
For example, suppose that your business, Accurate Accounting, has signed a lease with your landlord, Prime Properties. You agree that property insurance will serve as the primary source of recovery for damage to the landlord's building or to your personal property. The property insurance may consist of a single policy (covering the building and your personal property) or two separate policies.
Suppose that you and Prime Properties have each purchased a separate property policy. The lease contains a mutual waiver of subrogation. One night a defective coffee maker in your office space causes a fire. The fire causes $10,000 in damage to your personal property and $50,000 in damage to the building. Your insurer pays your claim and Prime's insurer pays Prime's claim. Your landlord has waived its rights to sue you for property damage covered by property insurance. Thus, a landlord's insurer is barred from suing you to recover the payment it made to its insured.
Some contracts contain a unilateral (one-sided) waiver of subrogation. When contained in a lease, a unilateral waiver usually benefits the landlord. The landlord requires that the tenant waive its right to sue the landlord for any damage the landlord may cause to the tenant's property. However, the landlord retains its right to sue the tenant for damage the tenant causes to the landlord's property.
Suppose that the tenant accidentally damages the landlord's property. The landlord's insurer reimburses the landlord for the loss and then seeks recovery for the loss payment by suing the tenant. If you are a tenant, try to avoid signing a lease that contains a unilateral waiver of subrogation.
Waivers of subrogation are also common in contracts involving construction projects. Suppose that Busy Builders, a general contractor, signs a contract with Prime Properties to build a new office complex. The contract contains a mutual waiver of subrogation. Busy Builders hires all of the subcontractors (electrical, concrete, painting etc.) needed for the project. The contract between Busy and the subcontractors also contains a mutual waiver.
In both contracts, the parties agree to waive their rights to sue one another to the extent losses are covered by commercial property insurance. Busy Builders purchases a builders risk policy (a type of property policy) covering the construction project. The policy includes Prime Properties, Busy Builders and all subcontractors as insureds. If a fire (or other covered peril) causes damage to the building during its construction, the loss should be covered by the builders risk policy. If the insurer pays a claim, it cannot attempt to recover its loss payment by suing Prime Properties, Busy Builders or any of the subcontractors.