"Things I think you might want to know..."  -- Art Pape

Two Reasons Not To Waver on Waivers
Acrrel News, May 2004

Certificates of Insurance:
The Illusion of Protection
Probate & Property

By Arthur E. Pape

Recently I have encountered two interesting aspects of the doctrine of subrogation. 

When is a waiver of subrogation of practical use in a CGL Policy?

Section IV (8) of the CGL Policy [1] provides that “If the insured has rights to recover all or part of any payment we have made under this coverage part, those rights are transferred to us.  The Insured must do nothing after loss to impair them.”  Thus, prior to a loss the insured may waive its right to recover from a third party. 

Several times I have been asked:  “When would someone benefit from a waiver of subrogation in a CGL Policy?”  If another is to benefit from a CGL policy, it is normally named an additional insured.  I was hard pressed to answer this question until I came across the following instance:  The CGL Policy consists of a short insuring agreement which states that the insurer will pay damages that the insured becomes legally obligated to pay because of bodily injury or property damage to which the insurance applies.  The insuring agreement is followed by a far longer list of exclusions to which the insurance does not apply.  Exclusion  excludes coverage for “’property damage’ to ‘your work’ arising out of it or any part of it and included in the ‘products completed operations hazard’.”  Thus, if a contractor, which carried the completed operations hazard (and most do), installs a defective product, the insurance company provides neither defense nor coverage for damager arising out of the product.  However, Exclusion  does not apply if the damaged work or the work out of which the damage arises was performed by a subcontractor.  Thus, a general contractor's CGL Policy should defend and pay claims of damages resulting from defective work if the defective work was performed by a subcontractor. Virgil Kalchthaler and Morningside Terrace, Inc., 224 Wis. 2d 387, 591 N.W. 2d 169 (1999 Wisc. App.).

After paying the claim, the general contractor's insurer would be subrogated to the general contractor's claim against the subcontractor.  In this case, the subcontractor, which would normally not be named an additional insured by the general contractor, would benefit greatly if his subcontract contained a waiver of subrogation by the general contractor.  Without the waiver of subrogation the subcontractor could be liable for major league damages.  Further, should the subcontractor tender the general contractor’s claim to his liability insurer, that liability insurer would deny the claim based on Exclusion .

When is a waiver of subrogation effective?

As noted above, the CGL Policy implicitly permits a waiver of the insurer's subrogation rights prior to a loss.  The Property Policy [2] is explicit.  Commercial Property [Policy] Condition “I” provides that an insured may “waive its rights against another party in writing prior to a loss.” 

In addition, there are three instances in which an insured may waive its rights against another party after a loss.  The first instance is in favor of someone insured by the same insurance.  This is redundant because insurance rule #1 is that the insurer may not sue its insured.  The second instance is where the beneficiary of the waiver is a business firm that the insured owns or controls or that owns or controls the insured. 

The third instance, which may be of greatest interest to ACRELians, is where the beneficiary of the waiver is a tenant of the insured.  Thus, even where the tenant’s lease does not contain a waiver of subrogation, if the tenant negligently causes damage to the leased premises, the landlord/insured may waive the insurance company’s subrogation rights against the tenant, notwithstanding that the waiver is given after the event which caused the loss. 

[1] All references are to CG 00 01 10 01 written by ISO Commercial Risk Services, Inc.

[2] All references are to CP 90 07 88 written by ISO Commercial Risk Services, Inc.