Insurance policies give the insurance companies the right to recover damages they pay from at-fault parties. This process is called “subrogation.” Policies will allow the policyholders to waive their carrier’s rights of subrogation, subject to certain rules. Most property and general liability policies will allow blanket waivers without special endorsement and without charge, workers compensation policies will allow blanket waivers by endorsement and for an additional premium and professional liability policies vary with most allowing a waiver of subrogation against the client only without special endorsement and without charge.
The term subrogation refers to the right of an insurance company to step into the shoes of a policyholder after paying a claim on their behalf and pursue recovery of amounts paid from any parties who are responsible for causing the loss. Once an insurance company pays a claim, they are said to be “subrogated to the rights” of the policyholder. The insurance company’s right of subrogation is established in the policy form. In all cases, a waiver of subrogation is only allowed if it is included in a written contract executed prior to the loss.
The most common example of a subrogation claim is when an automobile carrier pays for collision damages to a vehicle and then turns around and tries to collect back the damages from the at-fault driver. It is important to note that the insurance carrier does not have any enhanced rights, meaning they can only collect back damages to the extent that they were caused by a third-party to the insurance contract. The insurance carrier can also collect back the deductible paid by the policyholder, which is refunded in whole or in part to the policyholder.
In a construction setting, it is common for the parties to agree that the owner, contactor and designer all agree to waive subrogation claims against each other for damages to the extent that they are covered by property insurance. The rationale is that the parties are allocating the risk of property damage to the insurance companies so that the project does not get bogged down in claims between the project participants. Article 11.3.1 of the AIA A201 (2017), General Conditions for the Contract for Construction says, in part:
The Owner and Contractor waive all rights against (1) each other and any of their subcontractors, sub-subcontractors, agents, and employees, each of the other; (2) the Architect and Architect’s consultants, and (3) Separate Contractors, if any, and any of their subcontractors, sub-subcontractors, agents and employees, for damages caused by fire, or other causes of loss, to the extent those losses are covered by property insurance required by the Agreement or other property insurance applicable to the Project, except such rights as they have to proceeds of such insurance. The Owner or Contractor, as appropriate, shall require similar written waivers in favor of the individuals and entities identified above from the Architect, Architect’s consultants, Separate Contractors, subcontractors and sub-subcontractors. The policies of insurance purchased and maintained by each person or entity agreeing to waive claims pursuant to this section 11.3.1 shall not prohibit this waiver of subrogation.
When owners draft contracts, they frequently require Their design professionals to waive the subrogation rights of their insurance carriers. Different policies have different rules regarding waivers subrogation. Most general liability policies and property policies will allow you to waive all subrogation rights as required by a written contract without an additional charge. This makes sense because we would not expect your liability carrier to make a payment on your behalf and then try to turn around and collect that money back from somebody else.
Workers compensation policies will allow a waiver of subrogation only if the policy is endorsed. There is a charge for a waiver of subrogation endorsement because a workers compensation carrier is giving up a valuable right to recover damages that they pay. Job site injury cases in particular are often caused by third-parties, so there is a valid right of subrogation against them.
Professional liability policies vary significantly with regard to their stance on waivers of subrogation. Most professional liability policies will allow a waiver of subrogation against the client only . Some policies will allow a waiver of subrogation as to the client and the owner of the project, and a few policies will allow a blanket waiver of subrogation. There is typically not a charge for the waiver of subrogation in a professional liability policy.
It is advisable to review the terms of your policy before agreeing to contractual waivers of subrogation. You can do this be performing a word search for “subrogation” in the policy form. When in doubt, consult with your broker about the acceptability of proposed contractual waivers of subrogation.
