What is an waiver of subrogation and why is it important?
A waiver of subrogation is a provision in an insurance policy where the insurer agrees not to pursue reimbursement from a third party that may have contributed to or caused a loss. In the context of trades contractors, this means that if a contractor’s insurance company pays a claim, it won’t seek to recover the costs from another party involved in the project, even if that party was partially responsible for the loss.
Why Waivers of Subrogation are Important in Trades Contracting
Reduces Potential Legal Conflicts:
A waiver of subrogation prevents one party's insurance carrier from suing another party to recoup losses. This is especially valuable in construction projects involving multiple parties, like general contractors, subcontractors, and property owners. By waiving subrogation, the contractor’s insurer agrees not to “go after” another involved party, reducing potential for disputes.
Supports Collaborative Risk Management:
Construction projects often involve close collaboration, and a waiver of subrogation helps maintain strong working relationships. By limiting the risk of litigation between parties, it fosters trust and minimizes potential disruptions from legal action if a claim arises.
Complies with Contractual Requirements:
Many construction contracts require a waiver of subrogation. Owners or general contractors commonly request it to avoid having to pay twice for the same loss: first through their own insurance and second if a contractor’s insurer tries to recover their claim payout. For the contractor, meeting these requirements is essential to secure and maintain contracts.
Protects Against Double Insurance Costs:
Without a waiver, insurance carriers might pursue other project participants to recover their claim costs. This can lead to higher insurance premiums or deductibles for the party being pursued. By waiving subrogation, all parties help keep costs more predictable and avoid surprise increases in their insurance expenses.
How a Waiver of Subrogation Works in Practice
Imagine a situation where a subcontractor’s work inadvertently causes property damage. The subcontractor’s insurance might pay to cover the damage, but without a waiver of subrogation, the insurer could pursue the general contractor (or another party) for reimbursement if they’re deemed partially at fault. If the subcontractor’s policy includes a waiver of subrogation in favor of the general contractor, the insurer waives the right to pursue that reimbursement, even if the general contractor’s actions played a role in the damage.
Important Considerations for Waivers of Subrogation
Specific vs. Blanket Waivers:
Specific waivers apply to a particular contract or project, while blanket waivers automatically apply to any contract where a waiver is required. Blanket waivers are more flexible and convenient for contractors working on multiple projects with similar requirements.
Timing of the Waiver:
Most waivers must be agreed upon before the loss occurs. Some insurers will not honor a waiver after a loss has happened, so it’s crucial for contractors to secure this endorsement upfront.
Cost Implications:
Adding a waiver of subrogation can increase the cost of insurance, as it limits the insurer’s ability to recover losses. Contractors should weigh this cost against the benefits, especially when it’s a requirement in a contract.
Why It Matters for All Parties
For trades contractors, waivers of subrogation are a proactive measure to meet contractual requirements, maintain smooth working relationships, and mitigate the risk of future conflicts. It’s a key part of ensuring that each party’s insurance operates as intended—covering losses without creating further disputes among the project participants.