What Are Waivers of Subrogation?
Many contracts used in business include a waiver of subrogation clause. What is this clause and why is it included in contracts? What effect does it have on your insurance coverage? This article will answer those questions.
What's a waiver of subrogation?
A waiver of subrogation clause is a provision in a contract that requires one party to waive (give up) its right to subrogate against another party. The clause demands that Party A relinquish its right to seek recovery for a loss from Party B. By signing the contract, Party A promises that it won't demand compensation from Party B if Party A suffers a loss for which Party B is responsible.
If you suffer injury or damage due to an accident caused by someone else, you have the right to seek compensation for your loss by suing the responsible party. If your insurer has compensated you for the loss, your right to sue that party is transferred to your insurer. The insurer can sue the responsible party to recover its loss payment. However, if you have waived your right to subrogate against that party, no rights are transferred to your insurer. Your insurer cannot sue that party to recover its loss payment.
Waivers Under Liability, Auto and Workers Compensation
This article will explain how waivers of subrogation are used in general liability, commercial auto and workers compensation insurance. Waivers of subrogation under commercial property policies are explained in a separate article.
Waivers of subrogation are used in liability insurance to reinforce a transfer of risk from one party to another in a contract. If Party X has assumed liability on behalf of Party Y in a contract, Party Y may use a waiver to protect itself from subrogation lawsuits by Party X's liability insurer. Here is an example.
Abacus Inc. is a computer consulting company. One of Abacus' major clients is First Financial. Abacus has signed a contract in which it has assumed liability for any claims against First Financial for bodily injury or property damage that arise from Abacus' work for First Financial.
One day an Abacus employee is doing routine maintenance on First Financial's main server. The worker has strung some cables around the server area. Steve, a First Financial customer, is walking by the area when he trips and falls on a cable. Steve injures his back and files a lawsuit against Abacus Inc. He claims that Abacus' employee handled the cable negligently and that the worker's negligence caused his injury.
Elite Insurance, Abacus' general liability insurer, pays Steve's claim. It then files a lawsuit against First Financial. Elite Insurance alleges that First Financial was negligent in allowing customers near where Abacus was working. First Financial's negligence contributed to Steve's injury. While Abacus does not want its insurer to sue a key client, it cannot prevent the lawsuit. The insurer paid the claim on Abacus' behalf. Thus, it assumes Abacus' right to file a negligence claim against First Financial.
Waiver of Subrogation under General Liability
First Financial could have prevented the subrogation suit by Abacus' liability insurer. When it drafted its contract with Abacus it could have required Abacus to waive its right to sue First Financial.
Most general liability policies contain a condition that prohibits you from waiving your rights of subrogation after a loss has occurred. They are typically silent on waivers executed before a loss occurs. Technically, you will not violate the policy terms if you engage in a pre-loss waiver and don't notify your insurer. Nevertheless, insurers like be informed of such waivers. Moreover, the party requesting the waiver may demand that you add a waiver of subrogation endorsement to your liability policy.
There are two basic types of waiver endorsements used on liability policies, scheduled and blanket. A scheduled endorsement states that the insurer will not sue the party listed in the endorsement if you have waived your rights of subrogation against him or her. A blanket endorsement affords broader coverage. It typically states that if you have agreed in a contract to waive your rights to sue someone, the insurer will not sue that party.
Commercial auto policies contain a "transfer of rights of recovery" clause similar to the one in the liability policy. This clause prohibits post-loss waivers only. This means that you may waive your rights to sue someone in a contract without notifying your auto insurer. Still, the party that has requested the waiver may demand that you add a waiver endorsement your auto policy. Again, your insurer may add either a specific or a blanket waiver endorsement to your policy.
The standard NCCI workers compensation policy contains a subrogation clause entitled Recovery From Others. It states that the insurer has your rights, as well as the rights of your workers who are entitled to workers compensation benefits, to recover its payments from anyone liable for the injury. That is if your insurer pays benefits to an injured worker and another party is liable for the injury, your insurer assumes your rights and those of your injured employee, to sue that party to recover the value of the benefits it paid.
For example, suppose that Susan, an Abacus employee, is injured when a loose ceiling tile falls on her while she is working on First Financial's server. She receives benefits under Abacus' workers' compensation policy. Abacus' worker's compensation insurer then sues First Financial. It claims that the firm's poor maintenance practices contributed to Susan's injury. The insurer has assumed Susan's right to sue First Financial so it can recover the amount of benefits it paid to her.
Now suppose that a contract between Abacus and First Financial requires Abacus to waive its rights to sue First Financial. If Abacus has waived its subrogation rights, its insurer cannot sue First Financial. The insurer cannot obtain reimbursement for the workers' compensation benefits it paid to Susan.
A subrogation waiver will not prevent an injured worker from suing a third party. Suppose that Susan (in the previous example) has obtained workers compensation benefits from Abacus' insurer. She then sues First Financial for bodily injury. She claims that First Financial failed to maintain its workplace properly and its negligence contributed to her injury.then sues First Financial for bodily injury. She claims that First Financial failed to maintain its workplace properly and its negligence contributed to her injury.
If Susan receives damages from First Financial, she may be required to reimburse Abacus' insurer for the benefits she received. This will prevent Susan from "double dipping" (obtaining a double recovery for a single injury). If Abacus has waived its right to sue First Financial, however, the insurer may be barred from seeking reimbursement from the company. The waiver will enable Susan to "double dip."