If you own a commercial insurance policy and if you haven’t already, you’ll likely come across the term Waiver of Subrogation soon or later.
Ask 10 contractors what waiver of subrogation is and nine will offer a blank stare and one will simply start laughing.
We’re certainly not trying to poke fun here, only shining a light on the many insurance terms that never come up and if they do, they’re quickly forgotten.
In an effort to educate the many contractors that depend on Fairbanks Insurance Brokers to handle their insurance needs, we want to make you aware of various insurance terms, what they mean, and how they might affect your business.
What is Waiver of Subrogation
To understand the waiver of subrogation, we must first offer a definition of the term Subrogation.
Subrogation is an insurance term that describes the legal right maintained by insurance carriers to legally pursue a third party that caused an insurance loss (claim) to that company’s insured.
Subrogation allows your insurance company to go after the third party that caused the loss that the insurance company was obligated to pay for. In other words, the insurer takes on the legal rights of the policyholder to seek compensation they’ve paid for a loss.
Here’s an example using a car accident:
Suppose you are driving your company van to a job site when another vehicle runs a stop sign and t-bones your vehicle and causes a lot of damage.
The other vehicle’s owner (third party) is considered at-fault and therefore responsible for the repairs to your company van.
Rather than waiting for the other party to make good on repairing your van, you can file a claim with your insurance company and then they will pay to have your van repaired and then go after the at-fault driver that hit your car and demand compensation for the loss they paid on your behalf. This is known as subrogation and is a typical method for handling a claim.
Why ask for a Waiver of Subrogation?
Typically, waivers of subrogation are only needed for businesses like contractors, subcontractors, or specialty contractors.
Here’s an example for waiver of subrogation:
Apex Contracting is a general contractor and has won a bid to build an apartment complex. During the project, Apex hires several subcontractors to handle various aspects of the project.
During the course of the project, two of the subcontractors cause some property damage and so the project owner files a claim with the general contractor’s insurance company to cover the costs to repair the damages that were caused by the subcontractors.
Typically the GC’s insurance carrier would pay the claim and that would be the end of it. With normal subrogation in place, the GC’s insurance company would then file against the subcontractors to recover their respective portion of the loss.
However, if a waiver of subrogation is in place, the GC’s insurance will still pay the claim but will not be allowed to assume the rights of the GC and go after the subcontractors.
Since most subcontractors live job-to-job and are not flush with cash, if the GC’s insurance company goes after them to reimburse for the loss, they will likely go out of business unless they also have general liability insurance in place.
You see, if a simple waiver of subrogation clause is placed in the insurance contract, the GC could rest assured that its subs won’t end up out of business because of an accident.
Are Waivers of Subrogation common in the Construction Industry?
Yes, they are. In fact, they are so common that one is automatically entered into the common AIA forms (American Institute of Architects) such as the A201 General Conditions Form.
Here’s the common language:
The Owner and Contractor waive all rights against (1) each other and any of their subcontractors, sub-subcontractors, agents, and employees, each other, (2) the Architect and the Architect’s consultants; and (3) Separate Contractors, if any, and any of their subcontractors, sub-subcontractors, agents, and employees, for damages caused by fire, or other causes of loss, to the extent covered by property insurance required by the Agreement or other property insurance applicable to the Project, except such rights as they have to proceeds of such insurance
What is a Blanket Waiver of Subrogation?
The difference between a Waiver of Subrogation and Blanket Waiver of Subrogation is fairly simple and has to do with the verbiage in the contract.
The endorsement will either name a specific entity where the insurance company waives its right to subrogation or it inserts the term “blanket waiver of subrogation” when it must get written permission from the insured to subrogate against the third party that caused the loss.
What is Workers’ Compensation Waiver of Subrogation?
When it comes to workers’ compensation insurance, the waiver of subrogation is automatic.
As an employee of a company that carries workers’ compensation insurance, you are listed as a named insured. This means that if you file a work-related injury or illness that is covered by your employer’s workers’ compensation company, you give up your right to sue your employer or the insurance company since you were already compensated for your job-related injury or illness.
The Bottom Line
Although waiver of subrogation might seem confusing and therefore left to your agent to take care of, it’s important that business owners understand the terms of the insurance contract and so they can confidently speak with their agent about every aspect of it.
Since Fairbanks Insurance Brokers are specialists in the construction and contracting industry, you can count on us to know which product and special endorsements will best accommodate the needs of your business and its operations.
Here is What We Recommend
General Liability: Contractors General Liability will be the foundation of protection for your business. The coverage will respond if you or your employees are found liable for bodily injury, property damage, or have a products/completed operations complaint. The coverage also covers defense costs for your business to respond to any lawsuits brought by a third party.
Workers’ Comp: Many states will require contractors to provide workers’ compensation coverage for their workers before they can begin a project. Accidents will happen at the job site that can result in an employee becoming injured and missing work. Your workers’ compensation coverage will provide financial assistance for medical expenses and lost wages.
Surety Bonds: It’s very likely that your state will require you to be licensed before you can begin operations. Most states and customers will require contractors to offer a license or surety bond before you are allowed to bid on a job or begin working.
Commercial Auto: Typically, most contractors will have light and heavy vehicles that require commercial auto insurance to make certain their vehicles can be repaired or replaced in the event of an accident, vandalism, or theft.
Tool Coverage: Also known as Inland Marine Insurance, this policy will provide for reimbursement for expenses to repair or replace tools and equipment. Your tools represent an important part of your livelihood, so we always encourage carpentry contractors to consider this valuable coverage.
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