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Liability Insurance for Contractors: Understanding Waivers of Subrogation

Waivers of subrogation are clauses found both in construction contracts and in contractor insurance policies, so this term may sound familiar. But if you aren’t exactly sure what a waiver of subrogation is or what it does, don’t worry. We are going to take you beyond the basics of your contractor insurance to give you a clear picture of what all this subrogation waiving is about.

Why Does My Liability Insurance Have a Waiver of Subrogation Clause?

First off, let’s talk about subrogation. Subrogation is assuming the legal right to collect a debt or damages on someone else’s behalf. Which really means to step into someone else’s shoes and collect payment in their name.

Here’s an example of how subrogation works within the confines of an insurance policy:

You are a subcontractor using a forklift to move a large piece of equipment on a jobsite. The load was improperly secured by an employee of the general contractor, and the equipment falls onto a neighboring home. Your insurer pays out for the property damage claim, but wants to recover their losses from the general contractor, whose employee was at fault for improperly securing the load. If legal action is needed to recover damages, your insurance company may bring that claim in your name, just as if you were bringing that lawsuit against the general contractor yourself.

Another example of subrogation can be found in an auto accident. Let’s say your insurance company is paying to have your truck repaired after you were involved in an accident (which wasn’t your fault). After your insurance company pays for your repairs, it “steps into your shoes” and makes a claim against the driver who was at fault for the accident. Your insurer uses the right of subrogation to bring a lawsuit against the other driver in your name.

In both instances, your insurance company is taking action in your name to collect damages that is has paid out for your claim. That’s subrogation.

So why would a waiver of subrogation be included in a construction contract or insurance policy?

A waiver of subrogation clause is often included in a contract to reduce the amount of claims and lawsuits among parties.

In other words: “The risk stops here.”

Let’s say you are a general contractor entering into a construction contract along with the project owner and design firm. Your contract contains a waiver of subrogation clause, which will prevent the insurers from various lawsuits, counter-suits, and cross-suits in the event something goes wrong during the construction process.

Not all insurance policies allow waivers of subrogation, because they limit an insurer’s ability to receive reimbursement after they pay out a claim. The policies where you are generally able to add a waiver of subrogation include:

Waiving subrogation rights often makes things easier when multiple parties are working together on a single project, but they limit your insurance provider’s ability to be reimbursed on a claim, and may not be available to add a waiver to every policy.

If your policy allows a waiver of subrogation endorsement, it can only be added before a loss occurs. You won’t be able to do so after a loss. Before you enter into a construction contract that requires a waiver of subrogation, you may want to review your insurance policy carefully, or consult with your insurance provider. When it comes time to sign a contract, best practices is to fully understand what you are signing away -- including your insurer’s right to subrogate.

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