What is a waiver of subrogation and how can it impact your small business?

Subrogation meaning

When your insurance company pays for a claim, they can assume your right to seek compensation for their loss from a liable third party. The right to legally pursue payment for this loss is known as subrogation. To cover the cost of paying your claim, insurance companies can pursue a subrogation claim against any parties that are either responsible or partially responsible for the loss.

Below are some examples of claims that would lead to a loss for your insurance company:

• If you own a business car and an employee gets into an accident while driving it, your commercial auto policy will generally cover the damages. However, your employee may be sued by your insurance company for reimbursement of their losses.
• If you are a wedding venue that works with third party vendors, if a client sues for an illness, injury or accident that occurred at the wedding, your insurance may cover the claim. To seek payment for their losses, they’d have the right to sue a liable third party vendor for compensation.

What does it mean to waive your rights of subrogation?

If subrogation is the right for an insurance company to recoup a loss, a waiver of subrogation relinquishes this right. As the insured, you have the ability to enter into an agreement that legally waives the insurer's ability to sue other parties for damages the insurer sustains.

In the event that damages are caused by a third party and they aren’t covered by your insurance, however, you retain the right to recoup your losses. Additionally, if the insurance company covers the peril or source of insurance loss, but the loss is more than the policy’s limit, you can still seek payment from the negligent third party.

Why would you want a waiver of subrogation?

Having a waiver of subrogation as a clause in a business contract provides third parties with protections for losses that may occur during a business agreement. Small businesses are threatened with lawsuits every year, and a waiver of subrogation safeguards these third parties you do business with from getting sued for damages.

For example, if you have a home-based business doing construction, and you and a contractor accidentally cause property damage, you may be sued by your client for the damage. If the damages are covered, your insurance company will pay for the claim and take on a loss.

Through their right to subrogation, your insurance company could sue your contractor to compensate for their losses, but a waiver of subrogation would protect your contractor from being sued in this situation. This helps you keep good working relationships with third parties that you do business with.

Examples of when a waiver of subrogation is used

Waiver of subrogation clauses can be found in business agreements and contracts in different industries. Below are two examples of common scenarios when a waiver of subrogation is used.

Tenant or landlord contracts

Leases or contracts made between landlords and tenants typically include a waiver of subrogation. In the event that covered damages are paid for by the tenant’s renters insurance, the insurer can’t take legal action against the landlord after covering the claim.

For example, if an electrical problem causes a house fire that damages a tenant’s belongings or causes an injury, the tenant’s insurance would cover their personal property and/or medical expenses. However, if a waiver of subrogation clause was included in the tenant’s lease, their insurance company could not seek compensation from the landlord for their loss.

Construction contracts

Oftentimes, a waiver of subrogation clause will be used in construction contracts. This makes it so that the owner of the construction company can’t sue any contractors or subcontractors for any damages resulting from perils that the owner’s insurance will cover. The insurance company also agrees to pay for the covered perils and agrees to not seek compensation from the party at fault.

How do you get a waiver of subrogation?

You can typically add a waiver of subrogation as a provision to your insurance policy. Expect a premium increase or extra fees if you do want to include a waiver of subrogation, since it exposes your insurance company to greater risk. One way you can balance out the added insurance expense is by factoring it into the rates you charge clients.

Pros and cons of a waiver of subrogation

As a small business, including a waiver of subrogation in your business contracts or in your own insurance policy can have its advantages and disadvantages. We’ve gone over the main ones below.

Pros of a waiver of subrogation

If your business has clients or works with third-party contractors, having a waiver of subrogation can help offer them protection and in turn benefit your business. You can find a few major benefits below.

• Provides client protection by ensuring that clients won’t be sued by insurance companies
• Preserves good working relationships by preventing legal conflicts from spoiling business agreements
• Keeps your business running by not allowing litigation to interrupt or delay regular business operations
• Prevents financial losses by avoiding costly lawsuits with third parties or insurance companies

Cons of a waiver of subrogation

Introducing a waiver of subrogation to your insurance policy or business contracts has a couple disadvantages as well.

• Results in increased premiums because insurance companies need to offset the risk of loss
• May be a breach of contract with your insurer if you sign a waiver in a business agreement without consulting your insurance company first

What does it mean for your small business?

A waiver of subrogation is useful for small businesses across different industries. If you work with clients or third parties like consultants and contractors often, it may be a desirable provision to add to your business agreements to protect them. Before you do this, check with your small business insurance to make sure you won’t be in breach of your policy or work with them to add a waiver of subrogation to your policy to begin with.

When it comes to business agreements and insurance documents, it’s helpful to understand the different provisions that are available. Now that you know what a waiver of subrogation is, the benefits it can provide and how it impacts your business, you can decide if it’s worthwhile for you. If you do find it useful, check your small business insurance to make sure you can accommodate it with your current policy.