Published February 08, 2021 • 2 minute read
The principle under which an insurer that has paid a loss under an insurance policy is entitled to all the rights and remedies belonging to the insured against a third party with respect to any loss covered by the policy. (Lee R. Rugg, Couch On Insurance § 222.2, at 222-14 (3d ed.2000))
Effectively, subrogation means an insurer may step into the position of the insured after a claim has been paid to reclaim the cost of damages from the party responsible in a court of law.
Many subcontractors—especially in construction contracts—will include a waiver of subrogation without malicious intent simply to protect their own liability. It is not the responsibility of the subcontractor to inform the insurance company of the waiver.
In an alternate universe, Fairweather Insurance Company performs due diligence prior to work beginning on Cristoff the Contractor's construction project. Fairweather then notices there's a waiver of subrogation involved and, in this case, responds by raising Cristoff the Contractor's insurance premium, thus shrinking the amount of risk for their own bottom line in the event of damages incurred by Clumsy Crew.
In most cases, there will be language in commercial or general liability policies that explicitly prohibits the insured from signing any contracts which revoke or alter the insurer's rights to subrogation.
If the waiver-prohibiting language is present in Cristoff's policy, but he still goes ahead and signs the contract with Clumsy Crew that includes a waiver of subrogation, he is now in breach of contract. In the event of damages incurred, he may be dropped from coverage by Fairweather, and also become liable for resulting losses.
Hot Tip: Instead of playing roulette with contract and policy provisions, maintain total transparency regarding contract language and hire professionals to track, review, and improve your insurance documents in real time.
BCS offers certificate of insurance tracking solutions that make it easier to review contract language, maintain current documentation, and find qualified contractors in your area. Contact us today for more information on how BCS can help protect your exposures.