Waivers of subrogation and contractual risk transfer

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“Subrogation” is a legal term commonly used in contracts or used by insurers when they seek reimbursement for damages. The idea is that if you experience a loss covered by insurance and your insurer pays you, then your insurer, provided they have the right of subrogation, can sue the person or entity that caused the loss in order for your insurer to collect for the payments made to you under your policy.

It is common in commercial contracts and leases to insert language that limits the ability of the insurer from suing the party that caused the loss (a Waiver). In the case of contractors, the logic is that the party doing the work is being compensated and accepts certain responsibilities in the contract. The Waiver of Subrogation (WOS) intends to prevent an insurer from pursuing subrogation against a third party. WOS may take various forms in commercial property and casualty insurance policies as well as workers’ compensation policies.

The idea of agreeing in advance to a WOS is to minimize lawsuits and claims among the parties. Essentially, with a WOS the risk of loss is agreed to lie with the insurers prior to any claim of loss actually occurring.

WOS are typically evidenced on the Certificate of Insurance asked for by the landlord or contracting party. Moreover, there are specific insurance policy Endorsement forms that may be requested as further proof that the WOS has, in fact, been granted by the insurer.

In the case of workers’ compensation, WOS is automatically invoked (although there are a few state exceptions). This is done to prevent the employee from suing their employer or its insurer because they are already being compensation for injury under the workers’ compensation policy of the employer. Download a state-by-state guide to workers’ compensation law and subrogation rights.

Generally speaking, courts have upheld the validity and enforceability of Waivers of Subrogation. A few points to bear in mind:

  • Keep your insurer informed of any agreements to which you have agreed to grant a WOS. The insurer must agree to the WOS as they are the party that must grant it.

  • Contracts should be written in language that does not give the appearance of conflict between the indemnity provisions afforded the owner and the WOS granted by the contractor. Some courts have found the two provisions create an ambiguity which must be resolved through determination of the parties’ intent.

  • Review state law to determine if your state applies WOS broadly or narrowly and align the contract language accordingly.

  • Indicate clearly in the contract if the WOS provision is to remain in effect after the completion of the contracted work.

Waivers of Subrogation provide a useful mechanism for minimizing project disruptions and stemming unwanted litigation providing benefit to both parties. Risk Managers are advised to have the WOS elements of their contracts reviewed by both legal and insurance professionals to ensure clarity of the intentions of each party and to remove any potential conflicts with other contract provisions.

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