Waiver of Subrogation Clauses

What Is a Waiver of Subrogation?

A waiver of subrogation is a two-way agreement in which each party agrees to give up subrogation rights against the other in the event of a loss, such as damage to a building or personal possessions from a fire. A waiver of subrogation clause is good for both a tenant and a landlord.

Generally, the idea behind the waiver is to prevent one person's insurance company from pursuing subrogation—in other words, from taking the other person to court in a lawsuit. Including a waiver of subrogation clause in a lease or other business agreement is a good idea for both parties because it can prevent potentially expensive and time-consuming litigation after the loss.

How A Waiver of Subrogation Works

Subrogation is the right for an insurance policy provider to go after the party responsible for a loss on an insured claim to recover the funds. A waiver of subrogation is a clause stating the insurance company agrees not to seek financial restitution after paying for losses on an insured claim.

This agreement is used when it is beneficial for two parties to maintain a relationship, such as between a landlord and a tenant. For instance, a tenant might have renter's insurance, which covers damages or losses that might be the landlord's fault. If the renter files a covered claim and the incident was the landlord's fault, the insurance company could make the payout to the renter and sue the landlord to recoup its loss. A waiver of subrogation signed by the renter and landlord included in the lease would prevent the insurance company from suing the landlord.

Types of Waivers of Subrogation

There are two different types of subrogation waivers. One is a blanket waiver of subrogation, which gives you the right to waive subrogation for any contract so that you don't have to ask for it on each one.

A scheduled waiver of subrogation is a waiver where the individual or organization named is who the insurance company is waiving its right to subrogate.

Waivers of Subrogation Uses

Waivers of subrogation are used in many industries where relationships between parties are important. It might be important to maintain these relationships because future business can depend on it, or claims recouped by insurance companies might bankrupt a business or individual. Some instances where these waivers are used are in:

• Workers compensation coverage
• Construction contracts
• Leases
• Auto insurance policies

Limitations of Waivers of Subrogation

These waivers, while mutually beneficial, do come with some drawbacks. First, the policyholder must find out if their insurance provider will not consider them in breach of contract if they sign a waiver of subrogation. If the provider allows the policyholder to sign the contract and not breach the contract with the provider, it is likely that the covered's premiums will increase to compensate the provider for the possibility of loss.

Example of a Waiver of Subrogation

Let's assume that a tenant accidentally causes a fire that damages the landlord's building six months into a one-year lease. The landlord files an insurance claim and receives payment for their losses from their insurance company. Without a waiver of subrogation, the landlord's insurance company can sue the tenant to try to get back what it paid to the landlord. If the tenant is sued and loses, this might harm them financially, which would not be helpful to a landlord who depends on the tenant to pay rent.

On the other hand, if a landlord causes a fire or is otherwise negligent, a waiver of subrogation stops the tenant's rental insurance firm from turning around and suing the landlord after having paid the claim to the tenant. If a landlord loses, they might raise the rent to cover their additional risk or not have enough capital left to continue operating, forcing them into bankruptcy.

The Bottom Line

A waiver of subrogation protects people, organizations, and businesses from being sued by insurance companies to recoup their losses after paying for a claim. These clauses are usually mutual, a two-way street beneficial to all parties—except the insurance company.