Subrogation occurs when an insurer pays insurance proceeds and then steps in the shoes of its insured and sues third parties responsible for the loss. The insurer pursues a subrogation claim in order to recoup the proceeds it paid to or on behalf of its insured. For instance, if a property insurer or builder’s risk insurer paid the insured (e.g., owner), the insurer may want to stand in the shoes of the insured-owner in order to pursue a claim against the contractor, etc. responsible for the loss.
Construction contracts oftentimes address an insurer’s right to subrogate by including waiver of subrogation language. Waiver of subrogation language would be included that states that the property insurer (builder’s risk insurer) is waiving its rights to pursue a subrogation claim against a party covered by the provision. The waiver of subrogation language would prevent a property insurer, etc. from paying an owner a claim and then stepping in the shoes of the owner to recover its proceeds against the contractor potentially responsible for the owner’s damages.
Oftentimes, the waiver of subrogation comes up in the builder’s risk insurance / property insurance context. It can come up in the CGL context too through a CGL endorsement known as the “Waiver of Transfer of Rights of Recovery Against Others to Us.” Without this endorsement, the CGL policy typically provides that the insured will transfer rights against others (liable to the insured) to the insurance carrier. With the endorsement, however, this subrogation right is being waived against the parties identified in the endorsement.
If you are negotiating a construction contract, consider issues associated with a waiver of subrogation. Most standard form construction contracts contain waiver of subrogation language. It is important to be familiar with the waiver of subrogation language so that if need be, you can consult with your insurance carrier / broker in order to ensure that the waiver of subrogation language will not be construed as a violation of the insurance policy.
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