While combing through many contracts over the past few years I’ve come across the word subrogation many times. When I started my career at Hausmann-Johnson Insurance I understood the idea behind subrogation, but I didn’t completely comprehend what these contracts were asking our insurance clients to provide until I really dove in.
As defined by Merriam-Webster: Subrogation
The act of subrogating; specifically: the assumption by a third party (such as a second creditor or an insurance company) of another's legal right to collect a debt or damages
Subrogation in this context describes an insurance carrier’s legal right to recover any losses that they may incur if they are obligated to pay out an insurance claim. This makes sense; if your insurance carrier deems that you (their insured) are not responsible for a loss they (the carrier) had to pay out, they will want to try and recover the loss from the negligent third party.
Now that we have developed what subrogation is, we can get into how it is being commonly applied in the insurance portions of contracts that you may enter into. What does it mean to waive your right of subrogation? How would you even do that? And why would you?
What? The third party you are entering into a contract with is asking you to waive your right of subrogation in reference to your general liability policy. What they are asking you to do is gather permission from your insurance carrier to waive the carrier’s right to subrogate in the situation of claims being paid that were caused at least in part by the third party’s negligence.
How? Many polices we write with carriers here at Hausmann-Johnson Insurance include these waivers automatically if they are required by a written contract. So, if you enter into a contract with another party and you agree to waive your right to subrogate on your general liability policy, the carrier will not try to recover any paid claims on the general liability policy from the third party. One exception to this rule, however, is that many carriers do not offer an automatic option for waivers of subrogation on worker’s compensation policies. These waivers need to be added on a per-contract basis for a small fee.
Why? Whoever you are entering into a contract with is looking to minimize their risk. Let’s say that Party A is a general contractor and Party B is a sub-contractor to Party A. Party A writes in their contract with Party B that they would like Party B to waive its right to subrogation with respect to the general liability policy and auto liability policy. What Party A is trying to do here is make sure that if there is a claim, Party B’s insurance carrier will pay the claim without trying to recover the funds from Party A.
Subrogation and understanding subrogation’s portion of insurance is very important. Taking the time to reach out to your service team can help keep you compliant with the insurance portions of any contract you may sign. Please contact us here at Hausmann-Johnson Insurance for more information and questions.