subrogation. is a phrase that appears in virtually every insurance contract, but is rarely understood except by insurers and attorneys. it’s a term often overlooked by policyholders, who are intimidated by a veritable mountain of insurance documents on their desk, often over an inch thick. But what does it mean? What if, in a contractual setting, you are asked to waive surrogacy? Surrogacy waiver is not something to be taken lightly, because a misstep without fully understanding the ramifications could lead to a denial of coverage.
first things first. what is surrogacy? in the context of insurance, subrogation is defined as “…[t]he principle according to which an insurer who has paid a claim under an insurance policy is entitled to all the rights and remedies corresponding to the insured against a third party with respect to any loss covered by the policy” read r. rugg, sofa on insurance § 222.2, at 222-14 (3d ed. 2000). In simple terms, subrogation occurs when an insurer pays an insured for a loss caused by a third party. the insurance company then “subrogates”, or puts itself in the place of the insured, to sue that third party for the loss suffered by the insured. In short, the insurance company pays its insured to make the insured complete. The insurer, to recover, has the right to sue the third party that caused the damage.
Because an insurer pays in its policy for losses incurred by the insured to make the policyholder whole, the insurer loses significant amounts of money. the only way to recover that money is to sue the party responsible for the loss. therefore, insurance policies include terms that require their insured not to take any action that compromises the insurer’s right of subrogation. the general language of the policy generally states that “the insured shall not act in any way that limits or diminishes the insurer’s right of subrogation.”
Despite this generally universal insurance policy term, often commercial contracts between the parties (not the insurer) will include “subrogation waiver” provisions. These are most often found in construction and lease contracts. A subrogation waiver clause prevents the insurance company (which steps into the insured’s shoes after paying a loss) from suing the other party to the contract, which likely caused the loss. additionally, surrogacy waiver clauses found in contracts are usually upheld by the courts.
Because insurance policies almost always include terms that prevent the insured from taking any action that limits or diminishes the insurer’s right of subrogation, what happens if you sign a contract that includes a waiver of subrogation? The simple answer is: you, the insured, have breached the insurance contract. Bottom line: The insurance company will deny you coverage and will not cover your loss under the insurance policy.
What if, however, you entered into a contract with a party who then subcontracts a portion of the work, and the subcontract contains a waiver of subrogation? such a problem occurs more often than you might expect and was an issue that was brought up in Travelers Compensation. co. v. crown corr., inc., 2011 wl 6780885 (d. ariz. 2011). In that case, the Sports and Tourism Authority, the owner of University of Phoenix Stadium, entered into a contract with the Arizona Cardinals and Hunt Construction for the design and construction of Arizona Cardinal Stadium. To complete the stadium, Hunt signed a subcontract with Crown Corr, Inc. design the external enclosure system of the stadium. Unbeknownst to the sports and tourism authority, the hunting crown subcontract contained a waiver of subrogation provision.
After the stadium opened, during a wind and rain storm, certain panels installed by crown corr fell off the exterior of the stadium, causing approximately $1.5 million in damage. Sports and Tourism Authority, the owner of the stadium filed his claim with Travelers, who paid the claim, and then filed a lawsuit against Crown Cor (as a surrogate for the owner of the stadium) to recover the $1.5 million claiming negligent construction. crown corr responded by filing a motion to dismiss, stating that the contract it entered into as a subcontractor contained a waiver of subrogation clause.
The court held that although the stadium owner did not enter into the subcontracting agreement with Crown Corr, Inc., it was entitled to review the agreement containing the subrogation waiver clause. Travelers, as surrogates, put themselves in the shoes of their policyholders and are bound by these agreements. the court went on to say: “insurers are in the best position to protect themselves against subrogation waivers entered into by their insureds prior to purchase of the insurance policy by (1) inserting an exclusion into their policies that allows insurers to deny coverage if any insured waives the insurer’s subrogation rights, (2) increase premiums to compensate for expenses incurred by the loss of his or her subrogation rights, (3) investigate whether a prospective insured has already waived any right of subrogation subrogation, (4) require insureds to warrant at the time a policy is issued that their insureds have not and will not waive subrogation rights from insurers, and (5) obtain reinsurance to cover any waiver of rights of surrogacy”. Based on this, the court held that the travelers were bound by the waiver of subrogation rights and could not assert claims against crown corr.
While Crown Cor narrowly escaped liability under the court’s ruling, many policyholders are not so fortunate. In most cases, if an insured enters into a subrogation waiver without the insurer’s knowledge, the insurer is within their rights to deny coverage and leave the insured to their own devices and cover the loss out of pocket. .
Based on the above, the question now is: what if I am presented with a contract that contains a waiver of subrogation? Do I have to reject the contract? Should I demand that the provision be removed? should I sign it and hope the insurance company never finds out? No! The simple answer is to present this problem to your insurer. the insurer will likely enter into an endorsement allowing the subrogation to be waived. Unsurprisingly, this endorsement will come with a higher premium, as the insurer has to recoup the risk from it through higher prices. Also, it goes without saying that if you have entered into an agreement with a subrogation waiver and then seek insurance, make sure you do not hide it from the insurer, as the tactic could result in coverage being denied in the event of a loss . . Another easy solution is to consult an attorney who specializes in this area who understands the risks involved in these types of waivers and who can negotiate with the insurer to ensure you don’t go without coverage.
frank cragle is a trial attorney and a member of the hirschler fleischer insurance recovery team. He handles a variety of commercial business disputes, including insurance recovery and policyholder claims. Frank also spends a substantial portion of his time on corporate tort litigation and intellectual property claims. For more information, contact Frank at 804.771.9515 or [email protected]