Does anyone else share the impression that in the more than occasional discussions between negotiators about the ubiquitous “Waiver of Subrogation” provision, one or the other should be asking himself or herself – “What is a Waiver of Subrogation Anyway?” This isn’t an issue limited to Leases or even to Retail Real Estate Law or even to real estate law. Negotiations take place about Subrogation Waivers all the time, and yet there is a feeling that some people are arguing about these provisions and don’t even know what they are.
This is somewhat surprising since almost every attorney knows what “subrogation” means. There is no reason to reinvent the wheel. Here is what you’ll find at http://legal-dictionary.thefreedictionary.com/subrogation:
“Subrogation n. assuming the legal rights of a person for whom expenses or a debt has been paid. Typically, an insurance company which pays its insured client for injuries and losses then sues the party which the injured person contends caused the damages to him/her.” Example: Fred Farmer negligently builds a bonfire which gets out of control and starts a grass fire which spreads to Ned Neighbor’s barn. Good Hands Insurance Co. has insured the barn, pays Neighbor his estimated cost of reconstruction of the barn, and then sues Fred Farmer for that amount. Fred Farmer will have all the “defenses” to the insurance company’s suit that he would have had against Ned Neighbor, including the contention that the cost of repairing the barn was less than Ned Neighbor was paid or that Ned Neighbor negligently got in the way of fire fighters trying to put out the grass fire.”
So, each party’s insurance carrier has a right of subrogation and can seek to recover what it might have paid to cover its insured’s loss. The insurance carrier in question is the property insurance company because it, not the liability insurance company, pays such losses.
Although, I’ll cover this below in more detail and with examples, here it is simply: You don’t need a Waiver of Subrogation in an insurance policy in order for parties to an agreement to waive claims, one against the other, or even in one direction only. But, if a party doesn’t have a waiver of subrogation in its insurance policy, its own insurance company won’t pay any claims it makes against that policy – the policy will be as if it wasn’t in force. So, if you release your claims against the other contracting party, you want to be sure that your insurance policy allows you to do so. That “permission” is the Waiver of Subrogation.
Why does the “released” party care? After all, the other party can’t come after it because the other party already released its claims. And, the other party’s insurance company can’t come after it either, because it has not “claim” to take by way of subrogation. The reason is that if the insurance is invalidated, it is likely that there is no money now available to do whatever the insurance proceeds were supposed to do, like repair a fire-damaged building.
Now, in more detail. If a Lease or other contract provides that each party waives any claim it might have against the other party for losses to property, then the insurance company for the party suffering the loss essentially has lost its subrogation right and can’t recover what it pay to its own insured for the loss. That’s because the property insurance carrier has no greater right to make a claim against the other party for causing the loss than its own insured had. And, its own insured already waived that right.
Here is why an insured party wants to make sure its own insurance policy allows it to release people from claims. If an insurance policy doesn’t let its own insured waive claims its own insured may have against people who can cause damage for which the insurance company will have to pay, the insurance company can and will deny coverage. This means that if the insured did not have the right under ITS OWN INSURANCE POLICY to waive such claims, its insurance company would say: “we’re not paying you for the loss because you cost us money by waiving claims against the other party and we expected to recover what we pay you by chasing the other party.”
That may be the way it used to work and that may be why you sometimes see convoluted language like – “you go first (get a Waiver of Subrogation in your policy) and then we’ll go (and get one in our policy).” “If you have to pay for one, we’ll pay for it.” “If you don’t get one, we won’t get one.”
Somehow, that doesn’t make sense. With only a business exception, the party causing a loss doesn’t need to make sure that the other party gets a Waiver of Subrogation. What it wants is a waiver of claims because if the Lease or other contract has a waiver of claims, the insurance company can’t chase the party that caused the loss. That makes it the insured’s own problem. Now, the caveat – the business exception – in the form of an example: A Tenant is not only concerned that it, itself, isn’t sued by the Landlord or the Landlord’s insurance company, it wants to see that its Landlord’s property insurance (think – fire insurance) remains in force and it doesn’t want to see that the carrier refuses to pay for repairing the building because the Landlord waived its claims against the Tenant. It want the improvements rebuilt. That’s a good reason for a Tenant to want to make sure that its Landlord’s property insurance policy has a Waiver of Subrogation.
So, here is where we are. If the parties’ Lease or other agreement has a provision wherein either or both parties waives property damage claims against the other, then the parties will want to make sure that doing so doesn’t invalidate their OWN property insurance coverage. That means they will want to have a property insurance policy with a Waiver of Subrogation provision.
Next time, I’ll rant about how easy it is to have such a Waiver of Subrogation provision in a property insurance policy and that it is “free” and you don’t often don’t even need to ask for it
I’m hoping this Blog entry says nothing new to the reader, but I know that most practitioners have never thought this through even though they’ve spent a lot of time arguing about Waivers of Subrogation.
As always, I extend a standing invitation to be told that I’ve misspoken – either about my sense of how often this topic is misunderstood or has been argued about and especially about how right or wrong my understanding of Subrogation Waivers may be.