05 Jul Waiver of Subrogation: When Do They Make Sense?
Commercial general liability insurance, car insurance, workers’ compensation insurance, and some property insurance policies can include a Waiver of Subrogation, but few people understand what they are and what they mean for their company.
What is Subrogation?
Subrogation occurs when an insurer pays the insured for a loss caused by a third-party. It transfers the rights and responsibilities from the insured to the insurance company.
For instance, if you’re in a car accident and it was the other party’s fault, your insurer pays for repairs to your vehicle and then pursues the other person’s insurance company for the loss. You waive your right to subrogation so your insurance company can recover the money they paid out on your claim. In this case, a waiver of subrogation seems to make sense.
However, sometimes both parties are held responsible. If you’ve relinquished your rights, you can’t pursue the other party for their portion of the damages since your insurer now controls the process.
Why Clients Ask for a Waiver of Subrogation
Clients ask a business to waive their rights of subrogation because they do not want to be held partially responsible for a loss. When included in a contract, it prevents your business and your insurer from seeking a share of the damages paid to prevent potential conflicts.
Since your company gives up its right to recover any losses, it increases your insurer’s risk to recover losses since they have fewer rights. Consequently, your insurance premium will probably increase.
Sometimes, you cannot waive your rights even if the client asks you to. For instance, the Pennsylvania Workers’ Compensation Act provides the workers’ compensation insurer with the right of subrogation to recover benefits paid to an injured employee.
However, one court case debated whether employers could recover future claims costs. The court stated the waiver of future subrogation rights must be “clear and explicit” to avoid any problems.
In this particular instance, an ambiguous waiver of subrogation meant the employer had an absolute right of reimbursement. Clearly, it is very important to understand what you agree to when you sign a waiver of subrogation.
Signing Contracts with Waivers
Often times, businesses enter into contracts with contractors who then sub-contract a portion of the work. This is very common in the construction industry, but may also occur in IT and computer maintenance. These subcontractors may include a waiver of subrogation in their contract with the general contractor.
Even though you did not sign a contract directly with them, they can still be a bone of contention for your insurance company since the courts contend you have the right to review the contract, even if you don’t. You may also enter into a contract without initially realizing it includes a waiver of subrogation, but insurance policies almost always include terms which ensure the insurance company can pursue compensation after paying a claim.
Problems can arise when you sign a contract with another party that includes a waiver of subrogation without notifying your insurance company. It’s a breach of your insurance contract, and your insurer will deny coverage and claims for losses leaving you to pay out-of-pocket if something untoward occurs.
This does not mean you have to reject or modify the contract. Instead, contact your insurer to discuss the implications. They’ll ask questions to understand the additional risk, increase your premium, and require you to waive your subrogation rights too so they can pursue third-parties if a loss occurs.
If a client asks your company for a waiver of subrogation, talk to us first. Gilbert’s Risk Solutions is an expert in risk management. We offer reliable advice and explain insurance in plain English. We can tell you when a waiver of subrogation makes sense for you, and when it doesn’t. We’ve helped hundreds of Pennsylvania businesses, and we’re here to help you, too.