What are subrogation rights, and why should you waive them?

Businessman signing contract at table

Often in professional services agreements, clients ask firms to “waive subrogation rights.” It is important to understand what subrogation rights exist, and the reason for the waiver request, before waiving those rights.

In AIA and EJCDC documents, a waiver of subrogation provision exists to reduce litigation over the cause of a loss covered by property insurance. When an insurance company pays a claim, it has the right to “step into the shoes” of the policyholder and pursue any legal recovery the policyholder might have. With property insurance, it is common for the insurer to pay the claim and then sue everyone who may have some responsibility for the loss so that the insurer can recover at least part of its claim payment. The intent of the waiver of subrogation rights is to have the property insurance cover any loss without a delay in the project caused by litigators attempting to recover on behalf of insurers; it is a blanket waiver of subrogation rights for property insurance. In a non-standard contract, not including such a waiver only provides a benefit to the property insurers and their attorneys while causing harm to the project owner by having everyone involved in the project sued by the property insurer.

There are subrogation rights that other insurers possess as well. Design firm clients often want every insurance company to waive its subrogation rights. That is not a problem with the professional liability policy of the Victor and CNA program. The CNA policy allows a policyholder, by contract, to waive subrogation rights that CNA might have under state law after a claim is paid. That waiver only applies to the policyholder waiving subrogation rights against any party—not just the client—if the waiver is required by contract before any claim is made. The waiver is automatic in that it does not require an endorsement to the policy as many other types of insurance policies demand.

If your firm encounters such a requirement in a proposed contract, the demand for a waiver of subrogation rights by the client will not hold up your negotiations and will not require you or your insurance advisor to seek a policy endorsement on your professional liability insurance policy. You do not have to explain to a client any restrictions on the waiver of claims. The waiver is valid against the party who signs the professional services agreement, the lender, tenant, or other party that might be involved in the ownership, development, or operations of the project and mentioned in the contract.

At times, prime design professionals and subconsultants mutually waive rights against each other, including subrogation rights. You are vicariously liable for the wrongful acts of your subconsultants so clients often look for recovery from you and your insurer. If you are a prime professional, carefully consider whether to limit the liability of subconsultants. Doing so limits your ability to recover from subconsultants when their negligence creates a loss for your firm. If a prime consultant waives rights against its subconsultant, it is possible that a loss paid for by the prime’s insurer resulting from the subconsultant’s negligence would end up on the prime’s loss experience only. There would be no opportunity for contribution or indemnification by the subconsultant’s insurance coverage.

It seems that a firm should do everything possible to have all parties waive subrogation rights related to property insurance coverage. Waiving rights before a professional liability claim situation rarely creates a problem since it is unlikely that a professional would have a cause of action against the owner or others that a professional liability insurer could pursue. However, carefully consider waiving any rights against a subconsultant or an independent consultant that would restrict those firms from taking financial responsibility for their negligence.

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