What is a waiver of subrogation? Types and Benefits

A waiver of subrogation is an insurance provision prohibiting a provider from using a third party to recover damages for losses they paid out. They appear in various contracts such as retail leases or construction contracts that use waiver of subrogation endorsements to avoid legal disputes related to the contract. Waivers of subrogation are vital provisions in insurance contracts, preventing insurers from seeking reimbursement from third parties for losses they have paid out. This blog explores the nuances of waivers of subrogation, their types, benefits, and considerations for clients in various contractual arrangements.

What is a Waiver of Subrogation?

A waiver of subrogation relinquishes an insurance company's right to pursue recovery from another party in the event of a loss due to negligence. Rather than engaging in potentially costly legal disputes, the waiver streamlines the claims process and alleviates the need to determine fault.

When a loss occurs due to negligence, the party at fault is liable to cover the losses. In this case, as an insurance carrier, you can choose to sue to recover the amount of a claim you pay on your client’s behalf, which is called subrogation. However, a waiver of subrogation mitigates lawsuit risk by preventing your company from trying to recover costs from a third party. 

It also ensures the claim is paid without the need to determine fault. When a client signs such a contract, they might not realize they are breaching their own insurance policy agreement. As a result, a waiver of subrogation endorsement is often added to clarify exactly what this means in the contract and how it applies to claims on their policy. It’s important to use appropriate policy language to avoid contractual risks while also ensuring your clients understand how a waiver of subrogation impacts their policies.

Differentiation Between Blanket and Specific Waivers

• Blanket Waivers: The blanket waiver is used to waive subrogation rights against all third-party recoveries in a policy.
• Specific Waivers: Specific waivers are used to waive subrogation rights against a specific third party, naming the contract or project to ensure it is understood the waiver is limited.

Reasons for Implementing a Waiver of Subrogation

Waivers of subrogation foster amicable relationships between contracting parties, minimizing the risk of litigation. While they limit an insurer's ability to recover losses, they serve practical purposes such as facilitating contract agreements and enhancing risk management efforts.

Offering Waivers to Clients

Key considerations include assessing coverage adequacy, clarifying liability implications, adjusting premiums accordingly, ensuring contractual compliance, and employing clear and concise language to mitigate disputes.

Specific considerations when offering waivers to clients include:

Amount of coverage

Waiver of subrogation clauses should be reviewed carefully to ensure coverage is appropriate based on the type of coverage so it is consistent with industry standards and the specific policy holder’s needs.

Liability

Clarifying how the waiver of subrogation clause affects liability losses is important as you need to ensure the language does not put the policyholder at risk of being liable for damages.

Premiums

A waiver of the subrogation clause calls for higher premiums and should reflect the risk your company is taking when offering this type of waiver. This should be made clear to the policyholder.

Contractual requirements

In some cases, the clause is a requirement for a contract between your client and a third party, such as a landlord and tenant. In this case, the policy must reflect that agreement to ensure your client is compliant.

Risk management

Although always a consideration for insurance policies, when a waiver of subrogation clause is included, it calls for a far more stringent risk management strategy.

Language

Effective waiver of subrogation clauses are clear and concise so they aren’t open to interpretation that can lead to disputes.

Be specific in mentioning parties

Including all parties involved in the agreement in the waiver of subrogation clause ensures everyone is aware of the waiver and understands its implications.

Mutual waivers

A mutual waiver of subrogation means both parties agree to waive their right to seek reimbursement, protecting both from legal action that may arise.

Adhere to state laws

State laws that apply to waivers of subrogation must be considered when drafting the clause to ensure your company and client are compliant and that the contract is enforceable.

Review the waiver regularly

The waiver must remain effective and enforceable, which calls for annual reviews to ensure new laws and regulations are reflected accurately.

Mitigating Risks and Liabilities

Insurers can safeguard against policy limitations by incorporating exclusions, adjusting premiums, verifying subrogation waivers, and maintaining reinsurance coverage. Effective communication with clients regarding the implications and costs associated with waivers of subrogation is essential for mutual understanding and compliance.

There are steps you can take to protect your company against policies that remove your subrogation rights, including:

• Adding exclusions in your policies allowing the insurance company to deny coverage if an insured has waived the insurer’s subrogation rights
• Raising premiums to offset losses
• Determining whether a potential policyholder has waived subrogation rights at the time the policy is written
• Having clients agree they won’t nor haven’t waived your subrogation rights
• Having reinsurance to cover subrogation waivers

However, commercial contracts between parties usually include waiver of subrogation provisions, especially in construction and lease contracts, to keep you from suing them. Meanwhile, your insurance policy is likely designed to avoid limiting or diminishing your right of subrogation, which means once your client signs such a commercial contract, they will breach their own insurance policy. In these cases, you deny coverage, but the question is, did you take the time to explain this to your client?

Discussing the implications of signing waivers of subrogation with your clients and explaining how having the waiver protects them from denial is essential to help protect both your company and your clients. They should also understand that that protection comes at a higher cost reflected in their premiums.  Also, effective use of subrogation waivers could consider ways to ensure the cost of one insurance policy is allocated among all the parties to reduce the costs of exposure to common risks.

Although it presents a potential challenge to you as an insurance retailer, you can leverage waivers of subrogation effectively to benefit your clients and help reduce the overall costs associated with claims.

This article is not intended to be exhaustive, nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice.