What is a Waiver of Subrogation?
Posted by Dan Phelan on Fri, Apr 29, 2011 @ 09:41 AM
What is a waiver of subrogation? You've seen this in construction contracts, on certificates, and many of your insurance policies have it, what what exactly is a Waiver of Subrogation and what does it do? A waiver of subrogation, also known as a "transfer of rights of recovery" is a mechanism that insurers use to transfer risk and to limit the rights of recovery from another party on behalf of the insured. Confused? An example of how a "Waiver of Subrogation" would work in a workers' comp claim scenario is this:
A laborer at ABC HVAC is on XYZ General Contracting's site. ABC's laborer is injured because a piece of wood wasn't cleaned up by one of XYZ's workers. ABC's injured worker collects workers compensation for his injury, but because a waiver of subrogation was in place, ABC's insurance carrier can not go after XYZ's insurance limits to get the money they spent on the claim due to XYZ's negligence in maintaining the job site. Because ABC’s worker was injured, and ABC’s insurance carrier is on the hook for 100% of the medical and indemnity costs of the claim, ABC HVAC’s experience modification factor will increase, as well their workers compensation costs for the next three years. Depending on what ABC’s experience mod was prior to the claim, this spike could also hurt their ability to bid jobs requiring an experience mod lower than 1.00.
If a waiver of subrogation were not in place, ABC's insurance carrier could have subrogated back to XYZ's insurance carrier and make them pay the percentage of the claim that they were responsible for. This would have minimized the expense costs for ABC’s workers comp carrier, as well as minimized the effect that the claim had on ABC’s experience mod.
A popular misconception by many upstream contractors is that they are insulating themselves from liability downstream by requiring their subcontractors to provide a waiver of subrogation in their favor. While they are insulating themselves from the workers compensation insurance carriers of their subs, they are not insulated from having a suit brought by the injured worker and his/her family. Also, depending on the level of negligence by the upstream party, their general liability policy could be called upon to pay both defense costs as well as a settlement.
One last thing to consider about risk management and waivers of subrogation. There are two ways to obtain this coverage endorsement. It can be added to your policy for an annual fee, or can be obtained on a one off basis whenever required by contract. We advise our clients to have it built into their policy so that there isn't a possibility that they are in breach of contract by forgetting to have it endorsed separately for every job requiring it.
Want to get technical? Great article on IRMI.com about WOS here
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