A waiver of subrogation is a provision that prohibits an insurer from pursuing a third party to recover damages for covered losses. Waivers of subrogation are found in various contracts, including construction contracts, leases, auto insurance policies, and more.
Sometimes, construction contracts contain a waiver of subrogation clause. In these clauses, the owner waives all rights to sue third parties, such as contractors and subcontractors, for damages caused by perils covered in the owner's insurance policy. Under this provision, the owner's insurer also agrees that they will pay covered losses and will not seek to recoup these losses from the negligent party.
The waiver of subrogation clauses has exceptions. If the owner's property insurance does not insure against a specific risk, the owner may seek recovery from the responsible party. Also, if the loss exceeds the insurance policy's limit, the owner may pursue the responsible party.1
Waiver of subrogation clauses in lease contracts function similarly. The insurer cannot stand in proxy for the owner to recover damages. If the injured party's insurance covers the claim, it must be paid, and no further action against the third party may occur.
These clauses protect the landlord and tenant from expensive litigation costs and interruptions to the terms of the contract. Subrogation of waiver clauses can also help preserve amicable relationships between landlords and tenants.
When a landlord includes a waiver of subrogation clause in a lease, the company issuing the tenant’s renter’s insurance policy usually requires an additional premium for coverage of losses paid by the insurer as a result of acts or omissions by the landlord.
This extra cost is applied because the waiver of subrogation clause prevents the insurer from asserting a claim against the landlord for the amount paid to the insured, or on behalf of the insured, in resolution of a covered claim.
For example, if the tenant’s guest sustains injuries incurred when a lighting fixture unexpectedly falls from the ceiling of the leased premises, the tenant’s insurance carrier is unable to assert a claim against the landlord for the amount paid in resolution of a claim by the guest against the tenant. Similarly, if the lighting fixture fell on the tenant’s expensive, antique table, the waiver of subrogation prevents the tenant’s insurance company from asserting a claim against the landlord for the amount paid to the insured for the damage to the table.
Some leases contain mutual waivers of subrogation, where both the landlord and the tenant waive recovery rights against each other for any claimed loss covered by insurance. In some states, existing statutory law may override a waiver of subrogation and permit claims to be brought; however, in most states, limitations of liability may absolve negligent defendants of responsibility.2