Subrogation Waivers: a quick primer

Below is an article about insurance subrogation for construction contracts prepared by one of VB's construction attorney partners, John Lockard:

WHAT IS A “WAIVER OF SUBROGATION”?

            The parties involved in a construction contract can purchase insurance as a way to allocate the risks involved in the project.  Typically, the specific responsibilities to provide insurance are spelled out in the insurance clause of the parties’ contracts.  If an insurance company does pay a claim associated with a construction project, then it “steps into the shoes” of its insured and has the right to pursue a claim against the individuals or company that actually caused the loss.  This is known as “subrogation.”  Often, however, the insurance clause in a construction contract contains a provision stating that the parties agree to waive any claims against each other to the extent those claims are covered by insurance.  This is a “waiver of subrogation.” 

            A waiver of subrogation makes sense in most cases.  For example, if the contractor and the owner agree that the contractor will provide builder’s risk insurance, then neither party wants its insurance carrier to attempt to collect from the other party for any loss paid for a claim made under the policy.  That would defeat the purpose of allocating the risk between the parties.  The parties must be careful, however, to review such insurance clauses with their insurance carrier.  In some cases, a waiver of subrogation can be contrary to the terms of the insurance policy and, possibly, invalidate the insurance.  This could leave one of the parties contractually responsible to pay a significant claim that would otherwise be covered by insurance.

            All contractors should be careful to review their insurance policies and contracts to make sure that they have covered the basic risks that can arise on a construction project.  As appropriate, they should also request that the other parties provide certificates of insurance to demonstrate that they actually have the required insurance in place.  The prudent contractor will periodically review its contracts with its insurance agent and an experienced construction attorney to make sure that they have these risks covered to the greatest extent possible by insurance.