A Boring but Deadly Contract Clause

Faegre Baker Daniels partner Mark Voigtmann authored the following article for the Control System Integrators Association in June 2015.

There are several parts of a contract that quickly draw the eyes of integrators (or should) — price, limitation of liability and warranties — to name a few. However, when it comes to a “waiver of subrogation” clause, let’s just admit it: it’s pretty darn boring. Maybe it’s because the concept is difficult to understand. Or perhaps it’s because it takes looking at legalities in more than one piece of paper (contract and insurance policy) to understand what’s going on. Or, most likely, maybe it’s because “waiver of subrogation” is something that most integrators blindly shoot over to their insurance agent for handling.  

Good luck with that. Let me suggest that a somewhat more hands-on approach might be in order.

• What is a “waiver of subrogation”? It’s your agreement to give up (i.e. “waive”) the right of your own insurance carrier to seek legal compensation from a person or company that caused a loss. 
• When are such “waivers” used? Mostly with property insurance, but sometimes with other coverages as well (like worker’s compensation). For instance, in the property insurance context, one party typically provides builder’s risk insurance (the type of property insurance that covers stuff under construction). If a loss is suffered as a result of an accident, the builder’s risk insurance pays, but the waiver would prevent the builder’s risk carrier from suing the person or company that caused the loss. The idea is to reduce litigation.
• What can go wrong? Here’s a few: did you need to get consent from your insurance company before giving the waiver? If you did — and did not get it — you might have lost your coverage entirely. Or the waiver might be defined in a way that is unclear or unhelpful: for instance, does it apply only to the work or does it also include damage to existing or adjacent property? Are subs included? What about post-completion losses? And worst of all: does the waiver apply even when the insurance company has denied coverage?

There is also (of course) a much more down-to-earth impact to these clauses: rates. Constraining the right of your insurer to pursue an ultimate wrongdoer means the insurer is biting off additional risk. Did you think that this risk transfer is a freebie? Not so much . . . .