When you are asked for a certificate of insurance, it’s very likely that you’ve been asked to include Waiver of Subrogation. Do you really understand what this means for your business? Some business owners don’t. In this article we help clear up some of the confusion.
What is Subrogation?
Subrogation describes the legal right of an insurance carrier to sue a negligent third party that caused an insurance loss that they had to pay.
“Subrogate” means to substitute something or someone for another with regard to a legal right or claim. A waiver of subrogation is a provision in a contract that gives up this right. If you sign the contract and your insurance company pays out a claim you file, the insurance company cannot recover that money from the third party that was at fault in the claim.
How Waivers of Subrogation Work
Often found in general liability, commercial auto, and workers’ compensation insurance. It often comes in two formats. It will be either specifically name an entity that the carrier waives its’s right to subrogate against or it will be in the form of a Blanket Waiver of Subrogation.
General Liability
Waivers of subrogation are used in liability insurance to reinforce a transfer or risk from one party to another in a contract. Most General Liability policies contain a condition that prohibits you from waiving your rights after a loss has occurred. There are two basic types of waiver endorsements used on liability policies, scheduled and blanket.
- Scheduled – this endorsement states that the insurer will not sue the party listed in the endorsement if you have waived your rights of subrogation against them.
- Blanket- this endorsement affords broader coverage. It typically states that if you have agreed in a contract to waive your rights to sue someone, the insurer will not sue that party.
Commercial Auto
The Commercial Auto policy contains a “transfer of rights of recovery” clause similar to the one on a liability policy. This clause prohibits post-loss waivers only. This means that before a loss occurs you may waive your rights to sue someone in a contract without notifying your auto insurance. Your insurer may add either a scheduled or blanket waiver endorsement to your policy.
Workers Compensation
The standard National Council of Compensation Insurance (NCCI) Workers’ compensation policy contains a subrogation clause entitled “Recovery from Others”. It states that the insurer has your rights, as well as the rights of your workers who are entitled to workers compensation benefits, to recover its payments from anyone liable for the injury. Under this clause, if your insurer pays benefits to an injured worker and another party is liable for the injury, your insurer assumes your rights and those of your injured employee, to sue that party to recover the value of the benefits it paid.
An injured worker can sue a third party, even if they’ve already received workers’ compensation benefits from their own employer. However, if the worker’s suit is successful, they may then be required to reimburse their employer’s insurer for those benefits. This is to prevent the worker from obtaining double recovery for a single injury, preventing the worker from “double-dipping”.
Laws regulating Waivers of Subrogation vary from state to state. In the State of Florida, waiver of subrogation is permitted.
The Value of Waiver of Subrogation Clause
A waiver of subrogation clause is placed in a contract to minimize lawsuits and claims between parties. The risk, once assigned to the insurers by the parties, is determined to stop there, without allowing the insurer to seek costs from a third party. This guarantees that if a loss occurs, the owner’s insurer pays the claim and the insurance proceeds can be used to fund the cost of repairs without determining who was at fault. Without waiver of subrogation, litigation or arbitration is frequently needed to determine whose fault caused a loss, which can lead to costly delays.
Other Important Endorsements
Typically when you are asked to prove you have waiver of subrogation included in your policy, it comes along with several other endorsements required as well. One of them is Additional Insured and Primary and Non-contributory. Let’s review these as well.
Additional Insured
Additional insureds (AI) are needed because policies only protect the parties named in the policy documents. They are a common occurrence in businesses in which one party hires another to provide a product or a service. This entity that is added on as an AI to your policy, enjoys the full coverage from your policy without being held responsible for its premiums or upkeep.
To start, an endorsement may broaden or restrict the coverage provided by an insurance policy. The AI endorsement is one that broadens the “Who Is An Insured” definition in a policy. The intent of this definition is to change this “Who Is An Insured” section of an insurance policy to extend coverage to the AI for the negligent acts or omissions of the vendor or those acting on the vendor’s behalf.
Additional Insured vs. Additional Named Insured vs. Blanket Additional Insured
When you are reviewing your contracts, pay particular attention to the additional insured requirements. Are they requiring you to add them as Additional Insured, or Additional Named Insured? The main difference between these two is that Additional Insured is somewhat limiting. They will have coverage under your policy only for incidents that are related to the primary policy holder’s work and responsibilities.
Let’s review an example:
ABC Pool hires XYZ Pavers to repave the area around the pool for one of their customers. ABC Pool is aware of the fact that it might be sued if XYZ Pavers acts negligently and injures a third party. ABC Pool doesn’t want to use their General Liability policy as a first coverage for claims that come from a subcontractor. Instead, it wants the contractor’s policy to serve as primary coverage for the claim. THIS is why ABC Pool requires XYZ Pavers to add them as AI under XYZ Pavers liability policy. ABC Pool’s own liability policy will afford backup coverage.
In the example above, XYZ Pavers is only offering coverage to ABC Pools arising from this specific job. But what if you are entering a contract and they are requiring to be an “Additional Named Insured”? You are granting them full policy coverage without any limitations as you do with “Additional Insured”, which means their coverage is not limited to a certain job, nor is it time specific. As long as you pay your premiums, they are included in the coverage. The “Additional Named Insured” will also get notification if and when the policy is changed or cancelled.
A Blanket Additional Insured endorsement is a form of additional insured language through which a named insured can extend their coverage to multiple third parties without having to specifically name or request it to be endorsed onto their insurance policy individually. This endorsement helps businesses by including language that extends additional insured status to any entity with which they have a contractual agreement to perform a job for. Here are a few limitations that come with this type of AI endorsement:
- Notice of Cancellation- if your vendor wants to receive notices of cancellation with regards to your policy, this requires inclusion as an additional insured under your policy. Having a blanket for your additional insureds means you are not required to add them onto your policy individually therefore they would not be able to receive updates regarding to your policy.
- Contracts Required- a signed contract between two parties is required to trigger blanket additional insured status on your policy.
- Completed Operations- language for blanket endorsements lacks coverage for completed operations, which can create a significant gap for many types of projects
Additional insured endorsements are in no way a substitute for entities having their own insurance policies. As we discussed, additional insured endorsements can have a number of limitations and restrictions that aren’t always obvious until a claim is filed.
Primary and Non-Contributory
Your insurance can become more and more confusing as vendors, contractors, and subcontractors become involved through projects it becomes unclear which party is required to respond first. Primary and Non-Contributory (PNC) endorsements are a common insurance addendum that protects those listed as additional insureds from costly third-party liability. When multiple policies are involved, the primary endorsement specifies the order in which they apply. In other words, the party that is designated as the primary will be responsible for contributing to a claim first. The noncontributory portion determines whether and which other parties can be required to contribute toward the claim should it exceed the limits of the primary’s insurance coverage.
How The Bunker Can Help
Many business choose to transfer or accept risk through contracts, purchase orders and lease agreements. However, not all contracts are created equal. Understanding the terms of a contract, the extent of liability assumed in the indemnity agreement, and the insurance requirements, including the coverage you are agreeing to provide or afford via certain endorsements like the ones we discussed above are critical to minimizing future liabilities and exposure to losses. If you are interested in The Bunker Insurance & Risk Management helping you make sure you understand what you are promising others, you can contact us the following ways:
- Call or text us at 954-239-7346
- Email me: ciara@bunkeryourrisk.com
- Request more information
I look forward to helping you move your business from danger to a safe place, with The Bunker.