Have you heard the story about an apartment building owner who was asked to sign a waiver of subrogation by the contractor remodeling his apartment building? Probably not, so let me weave a little tale for all of you apartment and business owners out there in the blogosphere.
The best place to start an insurance coverage discussion is usually with some definitions and clarifications. So, what exactly is subrogation in an insurance contract?
What Is Subrogation?
Simply stated, the goal of subrogation is to ultimately hold the wrongdoer responsible for the damage caused to the insured. It provides the claimant the right to pursue a claim against the responsible party.
The experts at the International Risk Management Institute, Inc. (IRMI) used this following explanation in an article I recently read. “Subrogation means, in a legal sense, one party has the right to “step into the shoes” of another party for the purposes of bringing a claim for damages. Not all types of claims may be subrogated. The most common types that can be subrogated are property damage claims.”
According to the Law.com dictionary, subrogation means, “(A)ssuming the legal rights of a person for whom expenses or a debt has been paid. Typically, subrogation occurs when an insurance company pays its insured client for injuries and/or losses and then sues the party which the injured person contends caused the damages to them.”
Hopefully when our apartment building owner signed the renovation contract with the builder who is remodeling his apartment building, he/she also confirmed that,
- The contractor was licensed and bonded
- The contractor carried the appropriate insurance coverages, including Surety and General Liability
- The contractor has Products and Completed Operations coverage
- The contractor has hold-harmless agreements with each of his subcontractors
Assuming the apartment owner and the contractor each carry the appropriate insurance, let’s look at one example of how subrogation could come into play.
During remodeling of the building, an electrical subcontractor hired by the contractor installs an improperly sized breaker panel that the city building inspector misses. Several months after completion of all construction work, an electrical fire starts in that panel and causes $50,000 of fire and smoke damage to the apartment building.
First, assuming the apartment owner has proper property insurance coverage, their insurance company should provide coverage for this claim.
If the Fire Marshall later confirms the loss was caused as a result of subcontractor’s negligence through installation of an incorrect electrical panel, the apartment owner’s property insurance policy subrogation clause allows the insurance company to seek remuneration, from the contractor, for their property claim payment. This very often results in the insurance company having to sue the contractor and/or the subcontractor and/or both, but there is a reasonable chance the insurer will collect.
However, a scenario like the one above can only happen if there are no waivers of subrogation endorsements attached to apartment owner, the contractor and subcontractor’s insurance policies.
Waivers of Subrogation
An insurance contract waiver of subrogation can be defined as waiving the right of the claimant to pursue a claim against the responsible party.
When the apartment owner hired the contractor to complete a remodeling project on the apartment building, that contractor insisted the building owner sign a waiver of subrogation. The contractor also required his subcontractors to carry insurance and to include a waiver of subrogation clause in their policies. So how does all of that come into play?
Commercial insurance contracts waiver of subrogation endorsements are fairly common and are often used when there are many contractors and sub-contractors working on a project. Several common iterations of the endorsements are versions from ISO (Insurance Services Office) and from the AIA (American Institute of Architects). Let’s take a look at these.
ISO CG 24 04
We waive any right of recovery we may have against the person or organization shown in the Schedule
above because of payments we make for injury or damage arising out of your ongoing operations or
“your work” done under a contract with that person or organization and included in the “products completed operations hazard”. This waiver applies only to the person or organization shown in the
The Owner and Contractor waive all rights against (1) each other and any of their subcontractors, sub- subcontractors, agents and employees, each of the other . . . for damages caused by fire or other causes of loss to the extent covered by property insurance obtained pursuant to Paragraph [X] or other property insurance applicable to the Work.
ISO CP 00 90
TRANSFER OF RIGHTS OF RECOVERY AGAINST OTHERS TO US
If any person or organization to or for whom we make payment under this Coverage Part has rights to recover damages from another, those rights are transferred to us to the extent of our payment. That person or organization must do everything necessary to secure our rights and must do nothing after loss to impair them. But you may waive your rights against another party in writing:
- Prior to a loss to your Covered Property or Covered Income.
- After a loss to your Covered Property or Covered Income only if, at time of loss, that party is one of the following:
- Someone insured by this insurance;
- A business firm:
(1) Owned or controlled by you; or
(2) That owns or controls you; or
- Your tenant.
This will not restrict your insurance.
So what exactly do these waivers actually accomplish? Once again I’ll reference information provided by IRMI:
A waiver of subrogation clause is placed in the professional services contract to minimize lawsuits, cross-suits, and counter-suits arising from property losses that may occur during the project. The result is that the risk of loss is agreed among the parties to lie with the insurers, and the cost of the insurance coverage is contractually allocated among the parties as they may agree. The risk, once assigned to the insurers by the parties, is determined to stop there, without allowing the insurer to seek redress from the party “at fault.” An effective waiver will prevent the various insurers involved from suing the parties to the construction contracts.
Using the apartment owner’s incorrect electrical panel insurance claim, what if all (apartment owner, contractor, subcontractor) insurance contracts had waivers of subrogation attached? In that case the apartment owner’s property insurance would still pay the fire claim exactly as before, but because a waiver was attached, that insurer could not subrogate against the contractor or subcontractor.
Finally, and this is very important, just because waivers of subrogation are fairly common in insurance contracts, and most especially for property insurance, you should not accept one without doing your due diligence. Contact your insurance company or insurance agent before signing anything that has the potential to limit your ability to collect for a claim.
Jonathan Farris is a retired insurance executive and president of InsuranceRescue Services, LLC, a property & casualty insurance consulting firm based in Madison, Wisconsin. Mr. Farris can be reached at email@example.com or through his website at http://www.InsuranceRescue.com.
Other Enhanced Insurance articles related to Claims:
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