Insurance is the area of ISNetworld® compliance that causes the most confusion for our clients, and the waiver of subrogation requirement is one of the most confusing requirements. In addition to requiring specific types of insurance coverage and liability limits, most owner clients require their contractors to grant a waiver of subrogation in their favor as a condition of the contract. Most contractors just send the certificate in without really thinking about the language, but we believe it is important to understand what you are agreeing to when you grant a waiver of subrogation.
What Does Waiver of Subrogation Do?
Subrogation is the process where an insurer seeks reimbursement from another insurer for claims they paid that were caused by the actions of their policyholder. Waiver of subrogation prevents the insurer from pursuing reimbursement the other insurer for such claims. The best way to explain what a waiver of subrogation does is to give an example.
Big Oil Co grants a contract to Electrical Contractor, and requires a waiver of subrogation from Electrical Contractor on their General Liability, Commerical Auto, and Workers' Comp insurance policies as a condition of the contract. Electrical Contractor grants the request and a certificate of insurance is issued and uploaded into ISNetworld®.
One day at work, a Big Oli Co employee drops a tool while on the second level, and it lands on an employee of Electrical Contractor. The employee is rushed to the hospital with a serious head and eye injury. Electrical Contractor's workers' compensation policy responds by paying for the medical bills and lost wages of the injured employee. The total claim is expected to run about $195,000.
If there is no waiver of subrogation, Electrical Contractor's workers compensation insurer would then subrogate against Big Oil Co's general liability policy for reimbursement of the $195,000. However, since the Electrical Contractor granted Big Oil Co a waiver of subrogation, Electrical Contractor's workers compensation insurer cannot get reimbursed. This allows Big Oil Co's insurance program to avoid paying for the actions of their employee that resulted in the injury.
Big Oil Co's loss history stays clean while Electrical Contractor's workers compensation experience modification gets hit with a big loss. Electrical Contractor will have to pay increased premiums for 3 years due to the increased experience modification and ARAP (Assigned Risk Adjustment Program) penalty. Depending on the value of the contract with Big Oil Co, the increased premium costs due to the waiver could be greater than Electrical Contractor's profits from the contract.
Limiting the Waiver of Subrogation Language to Protect Your Company
A waiver of subrogation doesn’t sound all that threatening at first glance, but as shown above, the results can be expensive depending on the value of the contract. So how can a contractor protect themselves from the potential costs of a waiver of subrogation?
One way to limit your exposure is to limit the scope of the waiver of subrogation. You can limit the waiver of subrogation language so that it only applies when you, your company, or your employees are at fault and does not apply where the Owner-Client or its employees are at fault. You should consult your insurance broker or an attorney for specific wording to use on the certificate of insurance. By limiting the scope of the waiver of subrogation, you can avoid potential costs of increased premiums due to claims that are not your fault. Of course, the limited waiver language will need to approved by ISNetworld® and comply with the Owner Client requirements.
Best Practices & Tips
- Don't blindly agree to waiver of subrogation language
- Discuss your options and the potential effect of the waiver of subrogation on future premiums with your insurance broker
- Determine whether the waiver of subrogation is in your company's best interests based on the value of the contract and potential costs
- Don't be afraid to submit a certificate with a limited waiver of subrogation. If it is rejected, you will need to revise it, but you should definitely try to limit your potential costs as much as possible.
- Consult your attorney and insurance broker for advice before you agree to a blanket waiver or subrogation, or for help drafting a limited waiver of subrogation that complies with the owner client's requirements.