A waiver of subrogation is a contractual provision whereby an insured party waives the right of their insurance carrier to seek compensation for losses from a negligent third party after a claim has been paid.
When an insurance company pays a claim to their insured, they typically gain the right to “step into the shoes” of the policyholder and pursue recovery from any third party responsible for causing the loss. This process, known as subrogation, allows insurers to recoup their financial losses from the at-fault party.
However, a waiver of subrogation explicitly prevents the insurance company from pursuing these recovery actions. The waiver effectively contains financial losses to a specific party’s insurance policy, regardless of who might be legally responsible for the damage.
This contractual provision is commonly found in commercial insurance policies, construction contracts, lease agreements, and service contracts.
Waivers of subrogation are often required by clients, landlords, or business partners before entering into agreements. These waivers help maintain positive business relationships by preventing situations where your insurer might sue your business partner or client after paying a claim.
Many vendors and clients specifically request these waivers to ensure they won’t face legal action if they inadvertently make a mistake that causes a loss.
There are two primary types of waivers of subrogation: scheduled endorsements and blanket endorsements.
A scheduled endorsement explicitly names the specific individual, organization, or company that the insurer agrees not to pursue. A blanket endorsement gives the insured the general right to waive subrogation when required by contract, removing the need to request specific waivers for each new business relationship.
State Regulations and Subrogation Waivers
Several states in the U.S. have specific regulations or legal precedents that affect the enforceability of waivers of subrogation.
Alabama
The Alabama Uniform Condominium Act (Section 35-8A-313) requires insurers to waive subrogation rights under policies issued for condominium associations. This provision ensures that unit owners and their households are protected from liability claims arising under the association’s insurance policy. See State-by-State Compendium on Waivers of Subrogation on Condominium Contracts
Missouri
Missouri courts have consistently upheld the enforceability of waivers of subrogation in commercial leases. For example, in Disabled Veterans Trust v. Porterfield Const., Inc., the court confirmed that such clauses are valid, provided they are clearly stated in the contract. See Understanding Waivers of Subrogation in Commercial Leases
New Jersey
While New Jersey generally enforces waivers of subrogation, courts have scrutinized such provisions in residential leases and service contracts. In cases where the waiver is part of an adhesion contract (e.g., standardized forms with no room for negotiation), courts may deem them unenforceable if they violate public policy. See Cozen O’Connor Subrogation & Recovery: Federal Courts Refuse to Enforce Waiver of Subrogation Clauses in Certain Residential Situations
Pennsylvania
Pennsylvania courts have similarly refused to enforce waivers of subrogation in residential contexts where they are found to shift risk unfairly or absolve negligent parties from liability. This was highlighted in State Farm Fire & Casualty Co. v. Petroleum Heat & Power Co., where a waiver in a service contract was invalidated on public policy grounds. See Cozen O’Connor Subrogation & Recovery: Federal Courts Refuse to Enforce Waiver of Subrogation Clauses in Certain Residential Situations
Oregon
The Oregon Supreme Court has set a high bar for enforcing waivers of subrogation, emphasizing that such clauses must be clear and unequivocal. In Certain Underwriters v. TNA NA Manufacturing, the court ruled against enforcing a waiver that would have absolved a negligent party from liability, citing public policy concerns. See Protecting the Right to Subrogation- One State at a Time – Subrogation & Recovery Law Blog
Florida
Florida allows waivers of subrogation in workers’ compensation insurance but imposes strict requirements for their validity. The waiver must be explicitly agreed upon in writing before any incidents occur, ensuring all parties understand its implications. See Workers’ Compensation Subrogation Waiver Endorsements
New York
New York enforces waivers of subrogation, particularly in workers’ compensation and commercial contracts. However, enforcement depends on whether the waiver is clearly stated and agreed upon by all parties involved. Courts have also upheld these waivers when included in cooperative or condominium bylaws. See Workers’ Compensation Subrogation Waiver Endorsements
Connecticut
Under Connecticut law, waivers of subrogation are enforceable as long as they are clear and unambiguous. Courts will examine the contract language to determine whether the parties intended to waive subrogation rights. See State-by-State Compendium on Waivers of Subrogation on Condominium Contracts
Maryland
The Maryland Condominium Act requires insurers to waive subrogation rights under policies issued for condominium associations. However, unit owners may still obtain additional insurance coverage that does not include such waivers. See State-by-State Compendium on Waivers of Subrogation on Condominium Contracts
Massachusetts
Massachusetts recognizes waivers of subrogation in condominium insurance policies, requiring insurers to waive their rights against unit owners and household members when claims arise under association policies. See State-by-State Compendium on Waivers of Subrogation on Condominium Contracts
These examples illustrate how state-specific laws and judicial interpretations can significantly impact the enforceability of waivers of subrogation. Business owners should consult legal counsel to understand how these rules apply to their contracts and insurance policies.
Subrogation Waiver Examples
Construction Project Scenario
Consider a general contractor hired to renovate an office building. The building owner requires the contractor to have a waiver of subrogation clause in their insurance policy. During construction, an electrical fire occurs due to a wiring issue, causing $50,000 in damage to the building.
The contractor’s insurance company pays the claim to repair the damage. Later investigation reveals that the building’s outdated electrical system may have contributed to the fire. Without a waiver of subrogation, the contractor’s insurer could sue the building owner to recover some of the claim amount.
However, because of the waiver, the insurance company must bear the full cost without seeking compensation from the building owner, preserving the business relationship between the contractor and the owner.
Small Business Service Provider Example
Imagine a marketing consultant who works with a large retail client. The client requires a waiver of subrogation in the contract. During a joint marketing campaign, the consultant and client are sued for copyright infringement. The consultant’s professional liability insurance pays $75,000 to settle the claim.
Investigation shows that the client actually provided the copyrighted material without proper licensing.
Normally, the consultant’s insurer would sue the client to recover the settlement amount. However, due to the waiver of subrogation, the insurer cannot pursue the client for reimbursement. This protects the consultant’s valuable client relationship, which might otherwise be damaged by litigation between their insurer and client.
Pros and Cons of Waivers of Subrogation
The primary benefit of waivers of subrogation is the protection of business relationships.
When parties agree not to pursue each other for damages, it creates a more collaborative business environment and prevents the strain that litigation can place on partnerships.
These waivers also significantly reduce the time and expenses associated with legal proceedings, allowing businesses to focus on operations rather than lawsuits.
For many companies, especially those in construction or professional services, having these waivers in place can be a competitive advantage, as many clients specifically require them before signing contracts.
However, insurance companies typically charge additional premiums for policies with waivers of subrogation since they’re assuming greater risk by giving up their recovery rights.
Some insurance policies explicitly prohibit signing agreements that waive subrogation rights without prior approval. Signing such an agreement without insurer consent could potentially void coverage.
Business owners should therefore carefully review any waiver of subrogation before agreeing to it, as each represents an assumption of risk that could affect future premium costs if claims occur.
Did You Know?
Waivers of subrogation are sometimes referred to by their alternate name, “waiver of transfer of rights of recovery,” in insurance policies and contracts.
This technical terminology reveals the true nature of what’s happening: the insured is waiving the insurer’s right to transfer recovery efforts to a third party.
Interestingly, while these waivers are common in business contexts, they may also be used in personal insurance scenarios. In landlord-tenant agreements, landlords often require tenants to waive subrogation rights to prevent being sued by the tenant’s insurer if damage occurs to the tenant’s property due to building issues.
Sources and further reading
Waiver of subrogation explained – Thimble Insurance
What Is a Waiver of Subrogation? Types and Reasons For Needing
Waiver of Subrogation: What Is It, Do I Need It – Huckleberry Insurance
What is a Waiver of Subrogation? – Hiscox
What Is a Waiver of Subrogation? – Business Credentialing Services
The Facts About Waiver of Subrogation Clauses – Conroy Simberg
Understanding Waivers of Subrogation: What They Are and Why …
The Crucial Role of Waivers of Subrogation
What’s A Waiver Of Subrogation In Insurance? | Ask biBERK
Waiver of Transfer of Rights of Recovery against Others to Us