Should Your Clients Sign a Waiver of Subrogation?

A Waiver of Subrogation is an agreement between two parties where one party agrees to waive subrogation rights against the other in the event of a loss. In other words, the person who adds this waiver onto their policy is waiving their right to sue the party they added, even if that party was negligent. 

A Waiver of Subrogation is commonly requested in professional and commercial insurance, such as General Liability, Commercial Auto, Property, and Workers’ Compensation policies. A Waiver of Subrogation increases the insurance company’s risks, which means your client’s premium may go up with this clause. However, the waiver can:

  • Minimize the number of lawsuits that arise from a claim.
  • Protect professional relationships.
  • Offer business owners peace of mind that their clients won’t be responsible for losses already covered by the owner’s insurance policy. 

These waivers are commonly used when a subcontractor signs a contract with a general contractor to work on a specific project. Many general contractors require that the subcontractor provides them with a Waiver of Subrogation before starting the job. This means the general contractor is asking the subcontractor to waive their rights to sue them over the project – even if the general contractor is found negligent. 

The Waivers of Subrogation benefit the person who wants them to be added – usually a project owner or general contractor – not the insured that’s adding the waiver to their policy, such as a subcontractor.

Here’s an example:

  • A project owner hires a general contractor to construct a retail building.
  • The contract between the project owner and the general contractor contains a Waiver of Subrogation clause saying that since the owner’s insurance covers any damage to the project, the owner waives all rights against the general contractor regarding any damage.
  • The general contractor hires a subcontractor with an agreement containing a similar Waiver of Subrogation provision.
  • During the construction project, the subcontractor is negligent and starts a fire that destroys the building, resulting in a loss of $4 million.
  • The project owner’s insurance pays the $4-million loss and the project owner isn’t able to sue the general contractor or the negligent subcontractor to recover the loss.
  • Because of the Waiver of Subrogation, the risk of loss is not passed on to anyone else and is the sole responsibility of the project owner’s insurance company.

If your client is a contractor who works with subcontractors, it’s wise for them to get a waiver of subrogation. By doing so:

  • Their insurance policy is protected. Requiring subcontractors to provide a Waiver of Subrogation means that if they are sued due to work done on one of your client’s jobs, their insurance company can’t try to recover funds from your client’s insurance company.
  • Their claims history is protected. Any money that your client’s insurance company pays goes onto your client’s loss history. Even if the claim isn’t their fault, if their insurance company reimburses another carrier on their behalf, the claim goes on your client’s record. Thus, your client could face higher insurance premiums as well as possible non-renewal based on the frequency or severity of claims.

Waivers of Subrogation are an important part of commercial contracts and it’s essential to explain what this waiver means for your client and the benefits (or disadvantages) of participating. Quaker Special Risk has significant experience around Waivers of Subrogation and can advise on whether this is necessary in a particular situation. Contact us for more information.