Contractors – The fine print on Waivers of Subrogation

Jonathan BelekBusiness Insurance, Construction Industry, Contractors insurance, Errors & Omissions, Risk Management

Your firm gets tapped to build a brand new office building in a promising location. The budget is high and the timeline reasonable. You can’t wait to sign the contract and get started. That “Waiver of Subrogation” it includes? You’ve seen it before and haven’t thought too much about it, as it seems to be becoming standard boilerplate. But just how important is it? Super important.

Waivers of subrogation are pretty much a must-have in today’s contracting world, and they create a significant condition that bears understanding in full. The basics on what exactly is subrogation and why would one agree to waive it are as follows:

A building is destroyed because of the negligence of an electrician working on it. This is a standard “covered peril” and per the owner’s insurance policy, the owner’s insurer is obligated to make the owner whole and pay a claim to cover the loss. The legal principle of “subrogation” then allows the insurer to literally step into the legal shoes of the owner and pursue the electrician (more likely, the electrician’s insurer) to recover the funds it paid out to the owner.

But if the owner and electrician had agreed to a “waiver of subrogation” as part of their contract for service, the owner’s insurer would not be able to pursue the electrician for damages and would instead carry the full risk exposure.

Naturally, waivers of subrogation often mean higher premiums, especially if a carrier is forced to pay a claim and cannot pursue a negligent third-party for reimbursement.

Sometimes contractors working on a particular job all agree to waive subrogation to avoid the uncertainty, hassle, and cost of litigation, and to collectively place the risk on the insurance carrier whose party suffered the loss, regardless of who caused it. Some would argue that minimizing the possibility of legal action and placing risk squarely in the lap of the insurers promotes better business relationships and keeps costs lower…(assuming of course, that nothing happens and premiums don’t skyrocket after a claim).

But waiving subrogation also means waiving your own right to sue. After all, when an insurance carrier subrogates, they are acting as a legal stand-in for the insured, assuming his or her rights. But a waiver is a surrender of rights to sue someone who causes you injury.

Feeling squeamish about giving up your right (and by proxy, the right of your carrier) to sue to recover damages? That’s totally understandable. But the reality in today’s construction marketplace is waivers are becoming standard. Don’t like it and don’t want to agree to it? In many cases you won’t get the job.

If you agree to a waiver of subrogation, what happens when the job is complete? That’s not always clear in some contracts, which can create the risk of unexpected future liability.

Once a project is complete, the owner’s insurance company may still try to pursue architects and contractors to recover damages if issues arise after the fact, even from fire, flood, and other natural disasters.

Obviously at this point, it’s in the interest of those third-parties for the waiver of subrogation to survive project completion. The clearest way to make sure that’s the case is to include a “completed project insurance clause” that specifies that a waiver of subrogation survives.

Looking for further guidance on the complicated topic of subrogation? Get in touch with me today.

Jon Belek
Sinclair Risk & Financial Management

jbelek@srfm.com