Waiver of Subrogation clauses are contained in nearly every form construction contract. Contractors sign them as a matter of course, but how often do you actually consider what it means to waive subrogation? In this blog, we’ll discuss what subrogation is and why it’s usually a good idea to waive it.
What is Subrogation?
Legally speaking, subrogation is a concept that allows an insurance company that has paid a loss to step into the shoes of its insured to then sue a party that may be responsible for causing the loss. So, if a contractor’s crane drops steel onto the project and the owner’s builder’s risk insurer pays the loss, the owner’s insurer can step into the shoes of the owner and sue the contractor for the loss it caused.
What does it mean to waive Subrogation?
When a party to a contract waives subrogation, it means that a party’s insurer will not step into that party’s shoes and demand payment for any loss paid that the insurer paid. For example, in the example above, if the contractor’s crane drops steel onto the project, and the owner’s builder’s risk insurer pays the loss, the owner’s insurer will not sue the contractor for the loss it paid to the owner.
Why do parties agree to a waiver of subrogation?
The theory behind waiver of subrogation clauses is to minimize lawsuits and claims between the parties. In essence, the risk of loss is agreed to by the parties and the insurer bills premiums based on those risks. The waiver also prevents parties to an ongoing construction project from suing each other and bringing the work to a screeching halt. As they say, once the lawyers get involved, nothing gets done.
Take Away: Waivers of subrogation can be a great tool to control risk on a construction project. But, make sure that everyone is waiving the same rights against each other. The best way to accomplish this is to have an experienced construction attorney review the construction contract before it is signed.