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Waiver of subrogation
A waiver of subrogation prevents an insurance company from suing a third party to recover its losses after paying out a claim to an insured. It also protects third parties from expensive litigation if they are liable for a loss.
What is a waiver of subrogation?
A waiver of subrogation limits an insurer's right to sue a third party responsible for a claim after it has reimbursed the policyholder. It’s primarily used as a risk management strategy for businesses that enter into a contract with another person or company.
Another way to think about a waiver of subrogation is that it puts more of the risk on each party’s insurance carrier if something goes wrong. Because the business owner’s insurer waives their rights of recovery, the insurer must assume the financial burden of the claim, regardless of who was responsible.
If a contract doesn’t contain a waiver of subrogation provision, the insurance company is allowed to take legal action against the third party to seek reimbursement for their own losses. As a result, the third party could face a costly lawsuit that might affect their reputation or bottom line.
How does a waiver of subrogation work?
Imagine you own a retail store and you hire an electrician to update the wiring. Shortly after the work is completed, an electrical fire starts and causes $50,000 worth of property damage to the store. Your insurance company reimburses you for the claim. However, the adjuster determines the wiring was installed incorrectly and that the electrician was responsible for starting the fire.
If your contract with the electrician included a waiver of subrogation, your insurance company has no subrogation rights. That means the insurer doesn't have the legal right to sue the electrician to recoup the money they paid out to you.
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In what cases would a waiver of subrogation be added?
A waiver of subrogation can be added to many different types of contracts, including vendor contracts, client contracts, and insurance contracts. However, subrogation waivers are more common in certain industries.
Below are a few scenarios where a waiver of subrogation might be added to a contract between two parties:
Hiring contractors
Construction businesses that hire general contractors and subcontractors often require a construction waiver of subrogation in construction contracts. It prevents disputes and costly litigation that could interrupt a project and lead to more financial losses.
Signing a lease
Landlords often request a waiver of subrogation when signing a lease agreement with a tenant. The waiver of subrogation clause prevents the landlord and the tenant from suing each other if something happens. If there’s an insurance claim, both parties' insurance companies would cover it.
Purchasing insurance
Waivers of subrogation endorsements can be found with these types of insurance policies:
- Commercial auto insurance covers legal bills, medical expenses, and property damage if a business vehicle is involved in an accident. If a waiver of subrogation is added and an employee gets into an accident while operating a business-owned vehicle, it would prevent the insurer from suing the other driver to recover their losses after covering expenses from the incident.
- Workers’ compensation insurance covers an employee’s medical expenses and partial lost wages if they get sick or injured at work. If your workers’ compensation policy has a waiver of subrogation, it prevents the insurance carrier from suing a negligent third party that is involved in the employee’s claim.
- Commercial property insurance covers damage to a physical business location and your business property. When the policy includes a waiver of subrogation, it prevents your insurer from litigating a third party who is responsible for a covered claim.
- Business renter’s insurance policies can have a waiver of subrogation to limit third-party lawsuits when another party is at fault for a claim. For instance, landlords often require a waiver of subrogation to reduce their risk of litigation if they are responsible for a loss that your insurer has to pay for.
What value does a waiver of subrogation provide a small business?
The main purpose of a waiver of subrogation for small businesses is to reduce the chance of expensive third-party litigation. When the insurance company waives its right to sue, it helps avoid disputes and expedites the claim process.
However, insurance companies usually charge an extra fee on top of the premium if you request a waiver of subrogation. Before you decide to add a waiver of subrogation endorsement, it’s important to understand how it will affect your policy costs.
The price of adding a waiver of subrogation can also depend on the type of waiver you choose:
- Blanket waiver of subrogation: A blanket waiver prevents your insurance carrier from suing any third party involved in a contract.
- Scheduled waiver of subrogation: A scheduled waiver prevents your insurer from litigating specific parties involved in a project.
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How to protect your business from lawsuits
By addressing your business risks with the right mitigation strategies and preparing for any disputes, you can reduce your chance of a lawsuit and the impact it can have on your reputation and your bottom line.
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Updated: February 20, 2025
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