What is a Subrogation Waiver and Why it Matters in 2022

What is a Subrogation Waiver?

What is a Subrogation Waiver

What is a Subrogation Waiver and Why it Matters

What is Subrogation?

Subrogation is the act of substituting the insurer for the insured in order to obtain indemnity from a third party for a loss covered by insurance.

To put it another way, the insurer has the right to recover any loss payments made to the insured from a negligent third party.

Assume, for example, that a careless driver fails to stop at a red light and crashes into Megan’s car, causing $5,000 in damage. If she has collision insurance on her vehicle, her insurer will pay the physical damage loss to the vehicle (less any deductible) and then seek payment from the negligent motorist who caused the accident. Megan could also try to collect directly from the negligent motorist for the damage to her car.

What is a Subrogation Waiver?

A Subrogation Waiver is an endorsement that prevents an insurance company from recovering money from a negligent third party. An owner client may require this endorsement from their vendors in order to avoid liability for claims made on their job site.

A Subrogation Waiver is frequently available in two forms. The language will either specifically name the entity against which the carrier waives its right to subrogation, or it will take the form of a blanket waiver of subrogation. If the carrier provides a Blanket Waiver of Subrogation, the named insured must give permission to subrogate against a third party.

A Subrogation Waiver waives an insurance carrier’s right to seek reimbursement from a third party for money paid on a claim. It does not limit or improve the coverage terms of either the vendor or the owner client.

Purpose of Subrogation

Subrogation serves three primary purposes.

  1. Subrogation prevents the insured from being paid twice for the same loss. In the absence of subrogation, the insured could seek compensation from both his or her insurer and the party who caused the loss. Because the insured would profit from a loss, the principle of indemnity would be violated.
  2. Subrogation is used to hold the negligent party liable for the loss. The insurer can collect from the negligent person who caused the loss by exercising its subrogation rights.
  3. Finally, subrogation helps to keep insurance rates low. Subrogation recoveries are reflected in the rate-making process, which tends to keep rates lower than they would be if subrogation did not exist. Despite the fact that insurers pay for covered losses, subrogation recoveries reduce the loss payments.

Importance of Subrogation

The general rule is that when an insurer exercises its subrogation rights, it is only entitled to the amount paid under the policy.

Some insureds may not be fully compensated after a loss due to insufficient insurance, payment of a deductible, or legal expenses incurred in attempting to recover from a negligent third party.

However, many policies now include a provision stating how a subrogation recovery is to be shared between the insured and the insurer.

The insured cannot impair or interfere with the insurer’s subrogation rights after a loss. After a loss, the insured cannot do anything that interferes with the insurer’s right to sue a negligent third party.

For example, if the insured waives the right to sue the negligent party, the insured also waives the right to collect from the insurer for the loss.

Life insurance contracts are not subject to subrogation. Life insurance is not an indemnity contract, and subrogation applies only to indemnity contracts.

The insurer is not permitted to subrogate against its own insureds. The basic purpose of purchasing insurance would be defeated if the insurer could recover a loss payment for a covered loss from an insured.

What is a subrogation waiver in the case of homeowner’s insurance?

A general rule is that an insured cannot waive the insurer’s right of subrogation against a third party who caused the loss unilaterally without jeopardizing policy coverage.

The homeowner’s policy, however, contains an important exception to this general principle. The subrogation clause allows the insured to waive all rights of recovery against any person in writing before a loss occurs.

Assume, for example, that Jerome lives in one unit of a duplex and rents out the other. The lease may state that Jerome, as the landlord, waives his right to sue the tenant if the tenant causes a loss negligently (such as a fire). If the tenant causes a loss, the waiver protects the tenant from a subrogation recovery by Jerome’s insurer. However, for the waiver to be effective, it must be in writing before the loss occurs.

What is a subrogation waiver in the case of auto insurance?

If you are at fault for the accident, your insurance company will pay for the damage to your vehicle, less any deductible.

If another driver causes damage to your car, you can either seek compensation from the negligent driver (or his or her insurer) or seek payment from your own insurer.

If you collect from your own insurer, you must relinquish subrogation rights to your insurer, who will then seek payment from the negligent party who caused the accident.

If you recover the entire amount of your loss, your insurer will refund your deductible.

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