Insurance and Waiver of Subrogation

Thomas R. Yocum, Esq.

Subrogation is the right of one who has paid for a loss sustained by another to recover reimbursement from a third party who is legally responsible for damages.  Subrogation typically arises where an insurance company has paid a "first party loss", i.e. payments to its own insured; then, the insurance company seeks reimbursement from a third party who is legally liable for the damages, typically, based upon a negligence cause of action. 

For example, a right of subrogation arises on the part of an automobile insurance carrier when it pays for damage to a motor vehicle pursuant to collision coverage of its insured, when the damage to the vehicle was caused by the negligence of another.  The insured receives the benefit of first party insurance coverage by receiving prompt payment for its loss from the insurer.  The insured assigns its rights of recovery against the responsible party to the insurer.  The insurer then steps into the shoes of its insured for purposes of pursuing subrogation against the responsible party which often results in disputes, contested liability, litigation and expense.

The same subrogation rights arise in connection with builders risk and other property insurance on construction projects.  In furtherance of the goals of reducing disputes, and avoiding the time and expense of litigation, the AIA Document A201, Standard General Conditions, contains provisions requiring that certain insurance be maintained, and that there be a mutual waiver of subrogation by all parties, and their insurance carriers, to the extent that a loss is covered by insurance.  This provision has long been in the AIA Documents and was continued in the 2017 edition.

According to the AIA provisions, the owner is required to maintain builder's risk insurance covering the project for all improvements being constructed by contractors and subcontractors.  In the event of fire, or other casualty resulting in damage to the project work, the builder's risk insurance is intended to pay for those damages and to cover the value of improvements performed by all contractors and subcontractors. 

Even if one of the contractors or subcontractors was negligent in causing the fire or other loss, litigation should not ensue from such accident.  Rather, pursuant to the builders risk coverage, the insurer should pay for the loss, and should not seek reimbursement from any contractors or subcontractors, since subrogation has been waived.

The waiver of subrogation provision is a reasonable risk management technique which is also found in other commercial contracts, such as lease agreements.  Such provisions reduce risk and better enable parties to plan project costs.  All parties can reasonably factor into their budget the costs of insurance while avoiding the time and expense of protracted litigation that may be involved in subrogation proceedings. 

Benjamin, Yocum & Heather, LLC, 300 Pike Street, Suite 500, Cincinnati, Ohio 45202 (513) 721-5672