What is a Waiver of Subrogation?

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Definition:

A waiver of subrogation is a clause in a contract where an insurance policyholder waives their insurance company’s right to sue a third party to recover its losses.

🤔 Understanding waivers of subrogations

Subrogation is a contract clause that insurance companies have to recover their losses. After they pay a policyholder for an insurance claim, they can use subrogation to sue a third party who may have been responsible for the incident. When someone signs a waiver of subrogation, they’re promising that their insurance company won’t sue to recover its losses. Waivers of subrogation often appear in construction contracts and leases. Many insurance contracts include a clause that prohibits the policyholder from waiving the insurer’s right of subrogation — Doing so could result in a denial of coverage.

Example

Suppose that Rhonda moves into a new apartment and signs up for rental insurance, which will cover her losses if anything in her apartment is damaged. Rhonda’s landlord stops by to fix a few things and accidentally bursts a water pipe, which ruins some of Rhonda’s belongings. Rhonda files a renter’s insurance claim, and they send her a check to replace the items. The renters’ insurance company decides to sue the landlord to recover their losses. But it turns out that Rhonda’s lease contract included a waiver of subrogation, meaning her rental insurance company can’t sue the landlord.

Takeaway

A waiver of subrogation is like making a donation with someone else’s money…

It’s easy to agree to donate money to a good cause when you’ve got someone else’s money to spend. That’s kind of what a policyholder does when they sign a waiver of subrogation. They’re giving up their insurance company’s right to recover their financial losses if they file a claim.

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What is a waiver of subrogation?

A waiver of subrogation is a contract clause in which you agree that another person or company won’t step in and sue the party with whom you’re entering into a contract. Waivers of subrogation are often used to prevent insurance companies from suing third parties to recover their losses for a claim.

Waivers of subrogation are common in agreements with contractors and subcontractors. Companies want to shield themselves from liability as much as possible, so they might ask those they work with to sign waivers of subrogation to enter into business together.

What does it mean to waive subrogation?

Subrogation gives insurance company’s the ability to recover their losses if they have to pay out a claim that wasn’t their customer’s fault.

Suppose you’re in a car accident with another driver. Typically, the insurance company of the at-fault driver would pay for the damages. But what if the other driver doesn’t have insurance? In that case, your insurance company would pay for your costs.

Because the accident was a result of the other driver’s negligence, they should really be the ones to pay for the damages. Your insurance company sues the other driver for the amount they paid you. If the other driver pays, then you and your insurance company both come out without any financial losses.

In some cases — often in the case of business contracts — someone might ask you to waive subrogation. When you waive subrogation, you’re promising that even if the other party causes damages that your insurance company has to pay for, your insurance company won’t sue them.

Waivers of subrogation are unique in the world of contracts because the person signing them isn’t waiving their own rights. Instead, the signer is waiving someone else’s rights — the insurance company’s. And the insurance company may not get a say.

What is the difference between a waiver of subrogation and indemnification?

Indemnification is a provision in a contract where one party promises to protect the other against certain financial losses. An indemnification agreement often appears in insurance contracts, where your insurance company agrees to compensate you for specific kinds of damages. In other words, they’re taking responsibility for your liabilities.

Indemnification can apply to both business and personal insurance contracts. For example, your auto insurance and homeowners insurance policies are examples of indemnity insurance. If you face any financial losses that fall under the purview of your insurance policy, then your insurance company will indemnify you (meaning they’ll pay you for your damages).

Certain types of professionals are also likely to carry indemnity insurance policies. For example, healthcare professionals have to have malpractice insurance. If someone sues the doctor for malpractice (meaning negligence or harm in their capacity as a healthcare professional), then the malpractice insurance company will cover the costs.

So how does indemnification relate to waivers of subrogation?

Essentially, a waiver of subrogation can create a situation where your insurance company keeps up their end of the deal by indemnifying you for your losses, but you’ve signed away their right to make themselves whole.

Sometimes insurance companies have to pay a customer for losses that weren’t the customer’s fault. Suppose you’re visiting a friend who just bought a new house. You’re sitting on the friend’s back deck, when suddenly the wood gives out and your leg falls in. Your leg is badly injured, and you have to go to the doctor. Your health insurance covers the injury. But when they find out the accident was someone else’s fault, they might want that person to pay for it.

When someone signs a waiver of subrogation, they’ve signed away their insurance company’s right to do that. In the case of visiting a friend, there probably isn’t going to be a waiver of subrogation preventing your insurance company from suing.

On the other hand, let’s say you hire the contractor to fix your roof, and he asks you to sign a waiver of subrogation.

A few months later, a chunk of your roof caves into the house. You file a claim with your homeowners insurance company, and they pay for the damaged roof. Because the cave-in was the fault of your contractor, they might want to sue him for damages. But because you’ve signed a waiver of subrogation, they can’t do that.

Why would you want to waive subrogation?

There are some professionals you might contract with who want to protect themselves from liability. To do that, they’ll ask you to sign a waiver of subrogation. These waivers are common in leases and construction contracts, as those are the situations where a business is most likely to open themselves up to potential liability.

One type of insurance company that might be affected by a waiver of subrogation is a worker’s compensation company. Suppose you own a business and pay for worker’s compensation insurance in case one of your employees gets hurt at work.

You contract with another company to come in and provide employee training to your workers. Let’s say that one of your workers gets hurt during the training, but the trainer was the person responsible for the injury. Your worker’s compensation company will pay the medical bills, but they also might try to sue the training company, since the accident was their fault. There’s a good chance this training company is going to have a waiver of subrogation that says your worker’s compensation insurer can’t sue them.

As a word of caution, it would be wise to check with your insurance company before entering into any contract that includes a waiver of subrogation. Remember that when you waive subrogation, it’s not your rights that you’re waiving — It’s those of your insurance company.

Many insurance companies include provisions within their insurance contracts that prohibit you from doing anything to limit or waive their right to subrogation. If you sign a waiver of subrogation, you may have breached your agreement. As a result, they probably won’t cover any future losses you incur.

You want to know ahead of time if your insurance contract has a provision like this. The last thing you want is to sign a waiver and then down the road have a considerable claim that your insurance company denies.

How do you get a waiver of subrogation?

Suppose you’re not the person signing a waiver for subrogation, but the one asking for one. First of all, let’s talk about why you might want a waiver of subrogation clause to protect your business.

Anytime you’re entering into a contractual agreement with someone else to provide a good or service, you’re opening yourself up to some level of liability. A waiver of subrogation can help to limit that liability.

Unless you’re an attorney, it’s probably in your best interest to hire one to draft any contract you need for your business. When you work with a lawyer on your contract, you can ask them to include a waiver of subrogation.

Do you have to pay for a waiver of subrogation cost?

Insurance companies will often have a provision in their insurance contracts that prohibits you from waiving their subrogation rights. If you violate that provision, they’ll probably deny your claim.

Depending on the situation, your insurance company might be willing to agree to the waiver. If that’s the case, your insurance company will probably increase your premium. To figure out exactly how much that will cost, you’ll have to speak with your insurance company, as it will vary depending on the provider.

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What is Subrogation?
Updated June 17, 2020

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