As a general matter, after payment of a loss is issued to an insured, the insurer is entitled to pursue any right of action the insured may have against a third party whose negligence or wrongful act caused the loss. The insurer is able to do this through subrogation.
Insurers can be subrogated only to those rights possessed by the insured. In other words, the insurer “steps into the shoes” of its insured in seeking recovery of its payment for a loss. Therefore, any defenses available against the insured would also apply to the insurer in the subrogation action.
Other Contract Provisions
Waiver of subrogation provisions are not interpreted as stand-alone provisions. Courts often look to related contract provisions when analyzing the scope of the waiver. Insurers also try to avoid the effect of a subrogation waiver by arguing that it conflicts with other provisions in the contract.
Construction contracts often contain a provision that requires the contractor to indemnify the owner of the property for damage to the property to the extent such damage is caused by the negligence of the contractor. This type of indemnity provision would seem to contradict a waiver of subrogation provision releasing the contractor from liability to extent of insurance coverage. Many subrogation waivers, however, expressly provide that the waiver is effective even when the party seeking protection of the waiver would otherwise have a duty to indemnify the owner of the property.
Many construction contracts require the owner of the property to procure builder’s risk insurance which covers damage to the portion of the property where the work is to be performed by the contractor. This is consistent with most subrogation waivers which limit their application to the work to be performed by the contractor. In some cases, however, the owner has also procured insurance covering property which was not part of the work to be performed either pursuant to the terms of the construction contract or voluntarily.
Some courts have held that subrogation waivers seemingly limited to the work to be performed can be extended to apply to damage to parts of the property outside the scope of the work because the owner procured insurance covering the damage at issue in the case.
However, parties without a subrogation waiver agreement at the time of a loss might seek to avoid litigation with a post-loss subrogation waiver. To address this situation, most insurance policies contain a provision stating that its insured must do nothing to impair the insurer’s subrogation rights after the loss without the insurer’s consent. This insurance policy provision may allow the insurance carrier to deny coverage if a post-loss subrogation waiver is executed without the insurer’s consent because the insured prejudiced the insurer’s subrogation rights in violation of the policy’s terms. Denial of coverage would be necessary in this situation because the post-loss waiver might otherwise remain effective as between the insured and tortfeasor.
Other breaches of the insurance policy by the insured can also lead to denial of coverage. Common examples of policy breaches by insureds include failure to cooperate, failure to pay premiums and material misrepresentations. When an insurer denies coverage for a loss which is subject to a waiver of subrogation, the denial of coverage effectively nullifies the subrogation waiver from the perspective of the insurer because the insurer simply refuses to pay for the loss.
In the construction context, it is easy to assume that waivers of subrogation provisions apply only to losses occurring during the construction process. However, some courts have held that subrogation waivers apply to losses which occurred after work was completed and final payment was made. When courts have addressed this issue, the determinative factor has usually been whether the contract language indicates that the parties intended the waiver of subrogation to apply to post-completion losses.
Some contracts contain a subrogation continuation clause which provides that, if insurance is to be provided on the completed project, the owner shall waive all rights under the same terms of the waiver of subrogation provision for losses covered by the insurance. Courts have generally held that a subrogation continuation clause extends the waiver to post-completion losses. Courts have been somewhat less willing to similarly extend waivers of subrogation when the contract did not contain a subrogation continuation provision.