Because they are more and more commonly used, it is worth our time to look into these clauses and understand how they affect both the policyholder and the insurance company. Let’s start with discussing what these clauses mean.
What is a mutual waiver of subrogation clause? These clauses are commonly found in construction and landlord tenant contracts. The language insists that the parties to the contract mutually agree to waive their legal and equitable right to subrogate their claims against each other. However an agreement between contracting parties does not bind the insurance company. The company still has a right to step into the shoes of the policyholder to collect from a wrongdoer if the company has paid for the loss.
Here is an example: General Contractor ABC is hired to construct an office building. ABC hires subcontractors. ABC insists that all subs sign a contract. The agreement contains a mutual waiver of subrogation such as the AIA version A201. A sub performs faulty work. The building owner sues ABC and ABC pays the owner for his damages. Can ABC sue the sub for the faulty work? NO, if the parties signed a mutual waiver of subrogation for losses arising from the sub’s “work.”
In an insurance policy, the clause grants permission to the policyholder to waive in writing his recovery rights against another. The agreement must be done prior to any loss. These waivers present great confusion. Some policies address waivers in a general clause, others by endorsement. There is an increasing body of litigation regarding these waivers in the insurance context and courts are struggling to understand how they apply.
Here is another example: General Contractor ABC is hired to construct an office building. ABC hires subcontractors. ABC insists that all subs sign a contract. The agreement contains a mutual waiver of subrogation such as the AIA version A201. The owner insists that ABC secure an insurance policy that covers not only ABC’s work, but also that of the subs. The policy includes an endorsement for a mutual waiver of subrogation. A sub later performs faulty work. The building owner sues ABC and ABC’s insurance company pays for his damages. Can ABC’s insurance company sue the sub for subrogation? NO, if the policy contains a mutual waiver of subrogation for all named and additional insureds.
Let’s go now to the why? Why would insurance companies agree to waive their legal right to collect from the ultimate wrongdoer? Mutual waivers of subrogation are a valid method of allocating risk between parties to a business venture. These clauses do minimize lawsuits and claims among the parties, which in turn reduces claims costs for insurers. It is also a common clause that has become a necessity in the insurance world due to demand from policyholders. It is not free. Such coverage increases premium payments by around 5% on any job requiring this endorsement.