Restoration Insurance: What is a waiver of subrogation?
Restoration contractors are often asked to provide a waiver of subrogation with their certificate of insurance. What is a waiver of subrogation, and how does it affect your company?
The following definition for subrogation comes from the Insurance Risk Management Institute:
In a legal sense, subrogation means one party has the right to “step into the shoes” of another party to bring a claim for damages. Not all types of claims may be subrogated. The most common type that can be subrogated is property damage claims.
For example, if you are involved in an auto accident where no one is injured, but the vehicles are damaged, and you are completely free of fault, your insurer will pay to have your vehicle damage repaired. If your insurer pays for the “property damage” to your vehicle, in most states, your insurer then becomes “subrogated” to your rights for that property damage. In other words, your insurer can “step into your shoes” and make a claim against the other driver in your auto accident that caused the damage to your vehicle, for which your insurer had to pay the repair cost. In fact, if the other driver does not voluntarily pay for the damage, your insurer may even bring a lawsuit against the other driver, and by “stepping into your shoes,” your insurer may bring that claim in your name—just as if you were bringing the suit yourself. In most states, the suit would be brought in your name or your company name.
A waiver of subrogation clause is placed in the professional services contract to minimize lawsuits and claims among the parties. The result is that the risk of loss is agreed among the parties to lie with the insurers. The cost of the insurance coverage is contractually allocated among the parties as they may agree. Once assigned to the insurers by the parties, the risk is determined to stop there, without allowing the insurer to seek redress from the party “at fault.”
In our auto accident example, if you and the other driver had an enforceable “waiver of subrogation” agreement at the time of your accident, even though the insurer for the totally innocent party—you—is obligated to pay for the loss, that insurer would not be allowed to seek damages from the party “at fault”—the other driver. The reason being that the parties had agreed to waive the right of subrogation, and the insurer’s rights can be no greater than the insured’s rights.
In the professional services setting, the clause usually allows the owner and design professional to waive all rights against each other and others for damages covered by any property insurance in place during construction. To ensure the waiver of subrogation clause's effectiveness, the owner and design professional generally require the same type of waivers from the contractors, other consultants, and agents. Most form contract documents assign the responsibility for procuring the applicable insurance, demonstrating the coverage is in place (e.g., certificates of insurance), and for the cost.
These clauses are intended to minimize the potential for lawsuits, cross-suits, and counter-suits arising from property loss that may occur during the project. An effective waiver will prevent the various insurers involved from suing the parties to the construction contracts. One reason to use the available form contracts is that the entire network of the waiver of subrogation provisions has already been thought through, drafted, is in place ready to use, and has been tested in the courts to a greater or lesser extent. The clause quoted above from AIA B141, the Standard Form of Agreement Between Owner and Architect, has a sister provision in the AIA Owner and Contractor Agreements and general conditions.
A waiver of subrogation may allow you to avoid becoming engaged in the complexities of lawsuits and insurance claims while managing the risk and associated expenses. While not totally ideal as it waives you (and your insurance company’s) right to go after the other party in the event of a claim, they are the mainstay of work contracts. Hence, your restoration company must understand the associated implications.