What Is a Waiver of Subrogation?

A waiver of subrogation is a contractual provision whereby an insured waives the right of their insurance carrier to seek redress or seek compensation for losses from a negligent third party. Typically, insurers charge an additional fee for a waiver of subrogation endorsement. Many construction contracts and leases include a waiver of subrogation clause.

Such provisions prevent one party’s insurance carrier from pursuing a claim against the other contractual party in an attempt to recover money paid by the insurance company to the insured or to a third party to resolve a covered claim.

Understanding a Waiver of Subrogation

A right of subrogation allows an insurer to stand in proxy for its insured after satisfying a claim paid to the insured per the company’s duties under the insurance policy. The insurance company may pursue a claim against other parties to cover its costs for that same loss, even when the loss involves a resolution of claims brought against the insured.

In other words, if subrogation is waived, the insurance company cannot "step into the client's shoes" once a claim has been settled and sue the other party to recoup their losses. Thus, if subrogation is waived, the insurer is exposed to greater risk.

Types of Waiver of Subrogation

A waiver of subrogation is a provision that prohibits an insurer from pursuing a third party to recover damages for covered losses. Waivers of subrogation are found in various contracts, including construction contracts, leases, auto insurance policies, and more.

Construction Contracts

Sometimes, construction contracts contain a waiver of subrogation clause. In these clauses, the owner waives all rights to sue third parties, such as contractors and subcontractors, for damages caused by perils covered in the owner's insurance policy. Under this provision, the owner's insurer also agrees that they will pay covered losses and will not seek to recoup these losses from the negligent party.

The waiver of subrogation clauses has exceptions. If the owner's property insurance does not insure against a specific risk, the owner may seek recovery from the responsible party. Also, if the loss exceeds the insurance policy's limit, the owner may pursue the responsible party.

Landlord and Tenant Lease Agreements

Waiver of subrogation clauses in lease contracts function similarly. The insurer cannot stand in proxy for the owner to recover damages. If the injured party's insurance covers the claim, it must be paid, and no further action against the third party may occur. These clauses protect the landlord and tenant from expensive litigation costs and interruptions to the terms of the contract. Subrogation of waiver clauses can also help preserve amicable relationships between landlords and tenants.

When a landlord includes a waiver of subrogation clause in a lease, the company issuing the tenant’s renter’s insurance policy usually requires an additional premium for coverage of losses paid by the insurer as a result of acts or omissions by the landlord.

This extra cost is applied because the waiver of subrogation clause prevents the insurer from asserting a claim against the landlord for the amount paid to the insured, or on behalf of the insured, in resolution of a covered claim. For example, if the tenant’s guest sustains injuries incurred when a lighting fixture unexpectedly falls from the ceiling of the leased premises, the tenant’s insurance carrier is unable to assert a claim against the landlord for the amount paid in resolution of a claim by the guest against the tenant. Similarly, if the lighting fixture fell on the tenant’s expensive, antique table, the waiver of subrogation prevents the tenant’s insurance company from asserting a claim against the landlord for the amount paid to the insured for the damage to the table.

Some leases contain mutual waivers of subrogation, where both the landlord and the tenant waive recovery rights against each other for any claimed loss covered by insurance. In some states, existing statutory law may override a waiver of subrogation and permit claims to be brought; however, in most states, limitations of liability may absolve negligent defendants of responsibility.

Automobile Insurance Policies

When auto accidents arise, most injured parties go through the at-fault party's insurer to seek payment for losses. Sometimes, the at-fault party seeks to settle such claims without involving insurers. One of the most common ways to do this is to present a waiver of subrogation to the injured party.

If accepted and signed, the injured party and their insurer have no rights to pursue the at-fault for damages beyond the settlement agreement. Future claims are forfeited, preventing recovery from the at-fault party or their insurer. Agreeing to this provision should be done with careful consideration, often after discussing the details with the insurer or an attorney.

Reasons for a Waiver of Subrogation

Parties may want to include a waiver of subrogation in order to cut down on the possibility of drawn-out and costly legal disputes that can arise from contractual obligations. Clients may want this provision to avoid being sued for or held responsible for a loss and to speed up the claims process in the event of such a loss. For some, settling is quicker than claim processing. Accidents can adversely affect premiums or terminate coverage for at-fault parties; therefore, settling could prevent negative activity from being recorded on their insurance profile. Waiver of subrogation clauses in construction contracts also prevent delays in construction caused by disputes and litigation resulting from losses. When these provisions are absent, investigations ensue to determine fault. As with many cases, this process can take time—more time than what the owner has allowed to complete construction. As a result, costs surmount, compromising the integrity of the project.

The Bottom Line

A waiver of subrogation is a legal endorsement that prevents an insurer from recovering the money they've paid out on a claim from a negligent third party. This avoids lengthy and costly legal disputes that could arise in the course of contracted activities like letting a property or subcontracting construction work.