What is a Waiver of Subrogation Rights & How Does it Work?
A Waiver of Subrogation Rights is a contractual agreement where an insured waives the right of their insurer to “step into their shoes.” This means the insurer cannot go after an at-fault party for recovery after settlement to the insured or a third party.
If there is a right of subrogation, the insurer can sue an at-fault party to recover what they paid to their insured for that loss.
A waiver of subrogation rights means an insurer cannot get any money back from the at-fault party. Because of this, insurers often charge the insured an extra fee when they want to add this as an endorsement to their insurance policy.
What Does Subrogation Mean?
To understand a waiver of subrogation rights, you must understand what ‘subrogation’ is. This is a practice commonly used in construction and auto insurance policies.
For example, when you get into a car accident and are not the driver at fault, your insurance gives you money to repair or replace your damaged vehicle. The insurance company then looks to the at-fault driver’s insurance to recover what they paid to you. Your insurer is “stepping into your shoes” to subrogate the claim, and you do not have to wait to settle the claim before you can repair your car.
Quick payments to insureds are one of the driving forces behind subrogation. When there is an accident, an insured tells their insurer and they receive payment for that accident. The insurer then steps in as the insured and goes to the at-fault party or their insurer for the cost of damages.
How Does Waiver of Subrogation Rights Work?
When a waiver of subrogation is part of a policy or contract, the insured’s insurance provider cannot look to the at-fault party for repayment. According to IRMI, The International Risk Management Institute, “the intent of the waiver is to prevent one party’s insurer from pursuing subrogation against the other party.”
Waivers of subrogation are common in an owner’s policy during construction. This means if the owner’s insurance policy covers an accident they cannot sue contractors, subcontractors, or any other third parties for the damages. The owner’s insurer will instead pay for the damage.
There are exceptions to waiver of subrogation rights in construction, though. If a risk does not have coverage under the owner’s insurance policy, they may sue the responsible party for damages. Owners can also seek payment for any damages exceeding the amount their policy covers.
When is a Waiver of Subrogation Useful?
A waiver of subrogation is useful when there is a project on a tight schedule. Having this eliminates the possibility of litigation arising from losses that often delay construction projects.
Waivers of subrogation are also important in high-risk situations. An example of this is a business relationship that needs to stay intact. By eliminating the possibility of a lawsuit, parties can work together without worrying about lawsuits for damages.
Investopedia states 3 reasons to have a waiver of subrogation:
- Avoidance of time-consuming litigation and its costs.
- Its ability to prevent conflict between parties in disagreement.
- Protects innocent parties from being held liable for damages.
How to Know if There is a Subrogation Waiver
The easiest way to know when there is a waiver of subrogation is by requesting a certificate of insurance (COI). A waiver of subrogation is an endorsement to an insurance policy, so they are present in a COI.
It is important to make sure you collect up-to-date insurance certificates from anybody you work with or enter a contract with.
Learn more about the easiest way to collect COIs and increase compliance!