The Construction Context and Beyond
As a general matter, after payment of a loss is issued to an insured, the in- surer is entitled to pursue any right of action the insured may have against a third party whose negligence or wrongful act caused the loss. The in- surer is able to do this through subrogation.
Insurers can be subrogated only to those rights possessed by the insured. In other
words, the insurer “steps into the shoes” of its insured in seeking recovery of its payment
for a loss. Therefore, any defenses available against the insured would also apply to the
insurer in the subrogation action.
A common defense to a subrogation action is an express “waiver of subrogation” provision contained in a contract between the insured and the allegedly negligent third
party. In a waiver of subrogation provision, the parties to a contract agree to waive any
rights of recovery against each other to the extent the loss at issue is covered by insurance. The purpose behind waivers of this type is to avoid the hassle of litigation and
allocate the risk of loss related to the contract to the insurance carrier. This provision is
most commonly used in construction contracts.
However, waiver of subrogation provisions can also be found in real property lease
agreements and other similar agreements. Let’s discuss some common interpretation
and enforcement issues as well as ways for insurance carriers and claims professionals to
avoid the harmful effects of this provision.
other Contract Provisions
Waiver of subrogation provisions are not interpreted as stand-alone provisions.
Courts often look to related contract provisions when analyzing the scope of the
waiver. Insurers also try to avoid the effect of a subrogation waiver by arguing
that it conflicts with other provisions in
Construction contracts often contain
a provision that requires the contractor
to indemnify the owner of the property
for damage to the property to the extent
such damage is caused by the negligence
of the contractor. This type of indemnity
provision would seem to contradict a
waiver of subrogation provision releasing
the contractor from liability to extent of
insurance coverage. Many subrogation
waivers, however, expressly provide that
the waiver is effective even when the party seeking protection of the waiver would
otherwise have a duty to indemnify the
owner of the property.
Insurance carriers seeking to exercise