A waiver of subrogation is an effective risk management tool. Before you sign a contract containing such a clause, you need to know what a waiver of subrogation means and who needs to agree to the waiver to make it effective. Subrogation is “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.” This means that an insurer who pays a claim has the right to “step into the shoes” of another party to bring a claim for damages.
Suppose that an Owner contracts with an Architect to design an apartment building and the Owner purchases a Builder’s Risk policy to cover the Project. Due to an error of the Architect, the roof of the apartment building partially collapses after a major snowstorm during construction, causing extensive damage to the upper floors. The Owner files a claim for properly damage with the Insurer that issued the policy. The Builder’s Risk Insurer pays the claim, but asserts a subrogation claim against the Architect. In this scenario, the Insurer has become “subrogated” to the rights of the Owner for property damage – since the Insurer has “stepped into the shoes” of the Owner by paying the claim. As a result, the Insurer may bring a lawsuit against the third party that caused the damage – the Architect.
This scenario presents problems for construction professionals since litigation is unexpected, expensive, cuts into or negates profits, and may pose additional delays to project completion. Luckily, this can be avoided if a waiver of subrogation is included in the design contract. With a subrogation waiver, a project owner and construction professional waive all rights against each other and others for damages covered by any property insurance. The waiver does not cover damages in excess of property insurance.
Importantly, it is not enough to sign a contract including a waiver of subrogation. All applicable insurers (Builder’s risk, policies covering adjacent property, or Owner’s property insurance covering existing structures) must consent to the waiver of subrogation. The waiver will not be enforceable if the insurer has not consented. The best practice when obtaining a subrogation waiver is to require your client to waive any claims against you that are covered by insurance and require that they obtain an endorsement from their insurer waiving its right of subrogation under its policy.
In addition, to ensure the effectiveness of the subrogation waiver, the project owner and construction professional should require similar waivers from contractors, other consultants, and subcontractors.
Subrogation waivers are an important risk management tool and should be included in your design and construction agreements. By using a waiver of subrogation clause, you shift the risk of losses covered by insurance to the insurer who accepted a premium and issued a policy.
If you have any questions about waiver of subrogation or other risk management issues, we would be glad to help you. The attorneys of Gibbes Burton are passionate about helping professionals and businesses to minimize risk and build success.