Subrogation is a right afforded to an insurance company that has made a claim payment to you or on your behalf. The insurer has the right to subrogate against the party that caused the loss. That is, the insurer may recover the payment it made to you (or to someone else on your behalf) by suing the party that caused the loss.

When the insurer makes a claim payment to you or on your behalf, it obtains whatever rights you have against the party responsible for the loss.

If you have waived (relinquished) your rights against that party, you will have no rights to transfer to the insurer.

Many contracts used in business contain a requirement that one party waive its right to sue the other. When a waiver of subrogation is required by a contract, an endorsement is often added to the policy. Waiver of subrogation endorsements may be added to liability, property, auto or workers compensation policies. This article will explain how waivers apply to liability, auto and workers compensation policies. Waivers of subrogation under commercial property policies are explained in a separate article.

Liability Coverage

Waivers of subrogation are used in liability insurance to reinforce a transfer of risk from one party to another in a contract. If Party X has assumed liability on behalf of Party Y in a contract, Party Y may use a waiver to protect itself from subrogation lawsuits by Party X's liability insurer. Here is an example.

Abacus Inc. is a computer consulting company that provides systems administration services.

One of Abacus' major clients is First Financial, a financial services company. Abacus has signed a contract in which it has assumed liability for any claims against First Financial for bodily injury or property damage that arises from Abacus' work for First Financial.

One day two employees of Abacus Inc. are doing routine maintenance on First Financial's main server. An Abacus employee has strung some cables around the server area. Steve, a First Financial customer, is walking by the area when he trips on a cable. Steve falls to the floor and injures his back. Steve files a lawsuit against Abacus Inc. He claims that the company's workers handled the cable negligently and that their negligence caused his injury.

Elite Insurance, Abacus' general liability insurer, pays Steve's claim. It then files a lawsuit against First Financial. Elite Insurance alleges that First Financial was negligent in allowing customers near where Abacus was working. First Financial's negligence contributed to Steve's injury. Abacus does not want its insurer to sue a key client but Abacus cannot prevent the lawsuit. The insurer paid the claim on Abacus' behalf. Thus, Elite Insurance assumes Abacus' right to file a negligence claim against First Financial.

Waiver of Subrogationunder General Liability

First Financial could have prevented the subrogation suit by Abacus' liability insurer. When it drafted its contract with Abacus it could have required Abacus to waive its right to sue First Financial.

The standard ISO liability policy prohibits you from waiving your rights of subrogation after a loss has occurred. The policy is silent on waivers you make before a loss occurs. Technically, you will not violate the policy terms if you waive your subrogation rights prior to any losses and do not notify your insurer. Nevertheless, the party requesting the waiver may demand that you add a waiver of subrogation endorsement to your liability policy. This endorsement states that the insurer will not sue the party listed in the endorsement.

Commercial Auto

Commercial auto policies contain a "transfer of rights of recovery" clause similar to the one in the liability policy. This clause prohibits post-loss waivers only. This means that you may waive your rights to sue someone in a contract without notifying your auto insurer. Still, the party that has requested the waiver may demand that you add a waiver endorsement your auto policy. This  endorsement states that the insurer will not sue the party described in the endorsement.

Workers Compensation

The standard NCCI workers compensation policy contains a subrogation clause. This clause is entitled Recovery From Others. It states that the insurer has your rights, as well as the rights of your workers who are entitled to workers compensation benefits, to recover its payments from anyone liable for the injury. That is, if your insurer pays benefits to an injured worker and another party is liable for the injury, your insurer assumes your rights and those of your injured employee, to sue that party to recover the value of the benefits it paid.

For example, suppose that Susan, an Abacus employee, is injured when a loose ceiling tile falls on her while she is working on First Financial's server. She receives benefits under Abacus' workers compensation policy. Abacus' workers compensation insurer then sues First Financial. It claims that the firm's poor maintenance practices contributed to Susan's injury. The insurer has assumed Susan's right to sue First Financial so it can recover the amount of benefits it paid to her.

Now suppose that in its contract with Abacus, First Financial has required Abacus to waive its rights to sue First Financial. If Abacus has waived its subrogation rights, its insurer cannot sue First Financial. The insurer cannot obtain reimbursement for the workers compensation benefits it paid to Susan.

A subrogation waiver will not prevent an injured worker from suing a third party. Suppose that Susan, Abacus' injured employee, has obtained workers compensation benefits from Abacus' insurer. She  then sues First Financial for bodily injury. She claims that First Financial failed to maintain its workplace properly and its negligence contributed to her injury. In many cases, an employee who has received damages from a third party for an injury may be required to reimburse the insurer for the benefits he or she has received for the same injury. This prevents the worker from "double dipping" (obtaining double recovery for a single injury). However, the waiver Abacus signed may prevent the insurer from collecting reimbursement from the employee. This enables the worker to "double dip."