Don’t let a subrogation waiver compromise your business
Don’t let a subrogation waiver compromise your business: What Directors need to know
Directors are ultimately responsible for the financial health of the organisation they represent. When I review insurance terms for clients, I do come across common issues that could potentially cause a significant risk to their financial health. One of these is subrogation waivers.
We have seen this in Manufacturing, Construction, Food, Transport / Logistics, Technology and Retail sectors together with Oil and Gas where this idea originated.
When you enter subrogation waiver into Google you find:
“An agreement between two parties in which one party agrees to waive subrogation rights against another in the event of a loss. The intent of the waiver is to prevent one party’s insurer from pursuing subrogation against the other party.”
Insurers for public, products and employer’s liability assume that you as a policyholder have equal legal status with your customers. Their standard wordings include a clause such as this:
“We will not indemnify you where liability arises from any agreement unless liability would have existed otherwise”.
In the event of a Subrogation an insurer inherits your rights and ‘step into your shoes’ to recover losses from a third party (customer or supplier) who is responsible for a claim, that your insurer has paid in full, on your behalf.
Typically, this happens when you and your client face a common lawsuit for negligence, which you are both partly at fault for. In this instance, a judgement may be awarded where your insurer incurs the total loss, giving them the right to recover a proportion of that loss back, directly from your client.
It is extremely important that your policy is endorsed specifically to meet with your contractual requirements. If you have accepted any waiver of subrogation in your contracts with clients, this must be specifically agreed with your insurer prior to acceptance of contractual terms. In reality, this often gets missed, particularly when organisations are accepting terms from a client larger than themselves
It is so important. If you go ahead without agreement from your insurer, they will simply stand aside from the loss or request the costs from you. An unexpected cost like this could cause significant challenges for your business. That’s why you need to understand the contractual terms you have in place and what risks they could pose to your business.
This is why your broker should take an interest in your customer contracts and why we think it is necessary go through the ‘small print’ with our clients.