A waiver of subrogation is an endorsement policyholders get to prohibit their insurers from recovering funds paid in a claim from the people who are ultimately deemed responsible for the loss. Contractors often opt for these waivers when they work onsite for a client because they minimize the likelihood of prolonged lawsuits if something goes wrong.
Sometimes it’s clear who is responsible for damages in an insurance claim, but most of the time it’s not. Combine that with competing interests, and one incident can take months—even years—to litigate. Moreover, you risk being held liable any time you go to court, even when you are sure you’re in the right. That’s why businesses that work with contractors often request the contractor to get a waiver of subrogation. It protects the business owner from being held liable for accidents at their site.
How Subrogation Works
Most insurance policies have a clause that transfers the policyholder’s rights to the insurer once the insurer pays a claim. The legal term for this act is subrogation, and it allows insurers to pay claims quickly and then seek reimbursement for that payment if they believe someone other than their policyholder is to blame. Transferring the policyholder’s rights allows the insurer to sue to recoup its losses.
What a Waiver of Subrogation Is
A waiver of subrogation is a provision added to an insurance policy in which the insurance carrier waives its right to seek reimbursement from responsible third parties or their carriers in a claim. Clients may ask you to get a waiver of subrogation because they don’t want to be held partially responsible for damages that occur because of your working relationship.
For example, let’s say you’re a plumber working at a client’s office when a delivery person trips over your pipe inspection camera and breaks her arm. Because this is an injury to a third party, it’s covered by general liability insurance. The question, however, is whose insurer pays? Your client blames you because you left your tools out, but you think your client’s carrier should pay because he shouldn’t have allowed anyone near your worksite.
A subrogation waiver in your general liability policy stops this conflict before it starts. In this case, it may mean you end up paying for the delivery person’s medical bills, but it could also save your relationship with your client.
Why Subrogation Waivers Are Used
Small businesses, particularly independent contractors, often use waivers of subrogation to reassure the company hiring them that liability for a claim will not be assigned to the company. Additionally, many companies hiring independent contractors do not want to be liable for having a contractor on their premises and will not work with ones who don’t have a waiver of subrogation.
The reason for this is that major projects with multiple parties can make the claims process time-consuming and more expensive. When a waiver of subrogation is in effect, one claim is made and processed for all claims associated with the service provider. The waiver removes the question of who to seek settlement funds from.
What It Means to Waive Subrogation
Waiving subrogation means you, through your insurer, assume the risk of paying all damages even if there’s a chance other parties should share the liability. For contractors and businesses that go into clients’ homes or businesses, this waiver means you will not hold them liable for damages even if they are partially responsible for the loss.
For example, if an air conditioning contractor goes into someone’s home with a waiver of subrogation in place and their work leads to the floor collapsing, they are responsible for the damages. It doesn’t matter if the homeowner failed to meet building codes when he renovated his home—the cost of repairs is still on you.
How to Get a Waiver of Subrogation
Small business owners can request a waiver of subrogation directly from their carriers when applying for small business insurance. If you need a waiver, you should discuss your options and pricing with your agent. Make sure you understand how it impacts your rights to get your deductibles back after a claim you aren’t responsible for.
Subrogation Waivers Impact on Costs
Adding a waiver of subrogation impacts the cost of your policy because the insurance company has to commit to paying claims without the prospect of getting some or all of its money back. These endorsements can add approximately $25 to $100 to existing small business insurance policy premiums.
The increased cost depends on your carrier, state, and industry as well as the policy type. For example, it might cost $100 to add a waiver of subrogation to a workers’ compensation insurance policy for the construction industry because the risk of employee injury is so high.
Common Industries for Subrogation Waivers
Waivers of subrogation are a common business practice in some industries. Service providers and licensed subcontractors on construction sites commonly use waivers of subrogation to meet the requirements of the hiring entity or to make themselves more marketable for new contracts.
Industries that commonly use waivers of subrogation include:
- Construction and artisan contractors
- IT consultants and technicians
- Real estate
- Delivery and cargo
While waivers of subrogation are frequently used in these industries, they are not exclusive to them. Most small business owners never think about it unless someone requests one before signing a contract. However, anyone considering waiving subrogation should read the fine print in contracts they enter to make sure they are not contractually bound by subrogation waivers.
Pros & Cons for Subrogation Waivers
If you are getting a new small business insurance policy and thinking about adding a waiver of subrogation, you need to consider what you get and what you give up. As with every business decision, you should weigh the pros and cons before you elect a waiver of subrogation on any of your insurance policies.
Pros of a Waiver of Subrogation
- Employability: Waivers can improve your ability to obtain contracts with valuable clients.
- Fast claims: Insurance carriers process claims without arguing with other parties’ insurance carriers, getting claims paid quickly and your business back to normal operations.
- Streamlines major projects: Projects such as real estate development with many subcontractors can have complicated claims, and waivers eliminate extensive and expensive reviews of negligence.
Cons of a Waiver of Subrogation
- Increased premium: Expect to pay an additional cost in your insurance premiums when adding a waiver of subrogation.
- Potentially increased liability: Insurers may accept and pay a claim to your policy limits even when there is another partially responsible party. This could lead to excess lawsuit costs if claims are above policy limits.
Talk to your insurance agent specifically about the costs and liability considerations of adding a waiver of subrogation to your business insurance policy.
Waiver of Subrogation Examples for Your Business
Seeing how subrogation works in real claims scenarios helps small business owners understand when subrogation comes into play and the risks maintained by the business owner. Subrogation is commonly used in many different areas of insurance but is most often used in auto claims.
Look at how a waiver of subrogation plays out in various small business insurance policies:
Commercial Auto Insurance Subrogation Example
Imagine a delivery van is in an auto accident where it appears that the driver is not responsible for the accident. In this situation, the van owner can either file a claim with the other driver’s insurance or through his own commercial auto insurance policy, and he may choose the option that gets him back on the road the quickest.
For example, the van owner may decide to file a claim with his insurance company so he can pay his deductible and get the van fixed as quickly as possible, especially if the other driver claims no responsibility. If the van owner’s policy has a waiver of subrogation, his insurance company cannot pursue reimbursement from the other insurance carrier—including the van owner’s deductible.
General Liability Subrogation Example
A well-documented 1995 court case, Butler v Mitchell-Hugeback, Inc., et al., upheld a waiver of subrogation agreed to by the property owner regarding several contractors hired to retrofit a roof. The building owner hired an architect, engineer, and general contractor to do the work where part of the roof collapsed during the construction.
Because of the waiver of subrogation, the general liability insurance lawsuit filed by the property owner was denied and the architect was not held liable for professional errors that caused hundreds of thousands of dollars in damages. This case ruling was upheld by the Supreme Court of Missouri showing how strong a waiver of subrogation is in protecting parties from lawsuits.
Workers’ Compensation Subrogation Example
Some states allow subrogation clauses in workers’ compensation insurance with major differences often based on industry. An example where a workers’ comp subrogation might arise is if an employee is hit by another party while driving a company car. If the employee is injured, this is a workers’ comp case; however, the employer is not negligent in this situation—the other driver is.
Subrogating the claim allows the small business owner’s insurance company to start paying the injured employee’s medical bills while still seeking reimbursement from the other driver or the other driver’s insurance company. If subrogation is not allowed, the claim is covered entirely by the small business owner’s workers’ compensation insurance policy.
Waiver of Subrogation Frequently Asked Questions (FAQs)
Subrogation and waivers of subrogation can be confusing. Below are some of the most frequently asked questions regarding the issue.
What is the purpose of subrogation?
Subrogation serves to help policyholders quickly get claims processed through their own insurance company while the insurance company retains all rights to collect the cost of the claim from the responsible third party. Subrogation is commonly used in auto insurance where the not-at-fault party wants to get vehicles fixed quickly without fighting the at-fault party.
Should I waive subrogation?
Because waivers of subrogation are often upheld in courts, consider all ramifications before obtaining one. If you get sued and feel that you are not the responsible party, you could still be held liable for all damages. On the flip side, you might limit your ability to get contracted work if you do not have a waiver of subrogation.
A waiver of subrogation is important for many business owners and contractors who work as subcontractors or in client locations. While it is often necessary to secure contract work, it is important that a small business owner understands what they are giving up should they elect a subrogation waiver.