What is Waiver of Subrogation Coverage?

When performing work for general contractors or other larger entities, subcontractors are usually required to provide certificates of insurance. The certificates of insurance are generally required to evidence the contractor’s insurance program, but in many instances, they require something else. Subcontractors are often asked to change the terms of their insurance policies to the benefit of the other party.

A very common provision requested in a certificate of insurance is “additional insured” status, where many of the rights of the general liability policy are granted to a third party, such as a general contractor. In addition to additional insured status, many parties will also request the subcontractor’s insurance carrier grant them a “waiver of subrogation” clause.

So what’s the purpose of waiver of subrogation? First understand that subrogation is the process where an insurer pursues reimbursement from another insurer for claims they paid that were caused by the actions of their policyholder. Waiver of subrogation prevents the insurer from pursuing reimbursement the other insurer for such claims.

For example, a general contractor requires waiver of subrogation status from a subcontractor on General Liability, Commercial Auto and WC policies. The subcontractor‘s insurer grants the request and a certificate of insurance is issued.

Later on the job site, a general contractor employee drops a tool while on the second level, striking a subcontractor employee on the first floor. The employee is rushed to the hospital for a head injury and damage to his eye. The subcontractor’s workers compensation policy responds by paying for the medical bills and lost wages of the injured employee. The total claim is expected to run about $185,000.

Under normal circumstances, the subcontractor’s workers compensation insurer would then subrogate against the general contractor’s general liability policy for reimbursement of the $185,000. However, since the subcontractor agreed to grant the general contractor waiver of subrogation status, the subcontractor’s workers compensation insurer is blocked from doing so. The end result is that the general contractor’s insurance program is spared from having to pay for the actions of their employee that resulted in bodily injury to a third party.

The general contractor’s loss history stays clean while the subcontractor’s workers compensation experience modification gets hit with a big loss. The subcontractor will have to pay increased premiums for 3 years due to the increased experience modification and ARAP penalty.

In the end, the increased premium costs could be greater than the amount the subcontractor made on the job in the first place. A waiver of subrogation doesn’t sound all that threatening at first glance, but as shown above, the results can be very expensive. As with any change to your insurance protection, granting a waiver of subrogation should not be agreed to lightly.