Waivers of Subrogation – Part 2 (It’s Free and Easy)

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Last time, I tried to lay out my understanding about “What is a Waiver of Subrogation Waiver Anyway?” When I concluded that rant, I promised to explain why I think it is easy to have such a Waiver of Subrogation provision in a property insurance policy and that it is “free” and you don’t even have to ask for it. If I am right about that, then the release of claims provisions and the Waiver of Subrogation provision should be relegated to the status of “boilerplate” or nearly so.

The very, very common form of property insurance policy form is the one promulgated by the Insurance Services Organization, Inc. (ISO), a company owned by its member insurance companies. Its standard policy has several “parts,” one of which is its “Conditions” part. That part is known as CP 00 90 MM YY, where “MM” is the month and “YY” is the year that particular version was published. This is a key part of the entire policy and by looking at the Endorsements page of a property insurance policy, you’ll see it listed as CP 00 90 MM YY (or, by way of example, translated to the 7/88 version, CP 00 90 07 88).

Why is this important? — because it says:

“I. TRANSFER OF RIGHTS OF RECOVERY AGAINST OTHERS TO US. If any person or organization to or for whom we make payment under this Coverage Part has
rights to recover damages from another, those rights are transferred to us to the extent of our payment. That person or organization must do everything necessary to secure our rights and must do nothing after loss to impair them. But you may waive your rights against another party in writing:

1. Prior to a loss to your Covered Property or Covered Income.

2. After a loss to your Covered Property or Covered Income only if, at time of loss, that party is one of the following:

a. Someone insured by this insurance;

b. A business firm:

(1) Owned or controlled by you; or

(2) That owns or controls you; or

c. Your tenant.

This will not restrict your insurance.”

[From version CP 00 90 07 88.]

This means that the standard property insurance policy allows the insured to waive claims against anyone if done so in writing before the loss and even to waive claims against a tenant after a loss. So, when a party agrees, in a contract such as a Lease, to obtain a Waiver of Subrogation in its property insurance policy, it almost certainly already has one in its policy. It was pre-printed, standard, and free. Insurance companies set their premiums as if they won’t be able to recover what they pay to their insureds on the assumption that contracts (like leases) will have a waiver of claims.

That’s the market. Waivers of subrogation are free and in the policy. Insurance companies are collecting premiums on the assumption that Landlords and Tenants have waived claims against each other on account of property damage.

What about the unusual party that self-insures for property losses? Well, isn’t the other party supposed to be in the same position as if insurance were being carried?

Why do I say, “unusual? – because most entities who are “self-insuring” do so with respect to liability insurance. And, by the way, those are the parties that certainly want to enjoy a waiver of claims in their favor. While we are on the topic, does everyone realize that liability insurance policies come with strict limitations on what the carrier will pay if the insured accidently burns down a leased building? Those who do will easily understand why a party would want a waiver of such claims in their favor.

Have I misspoken? Are there any insurance gurus out there who want to correct anything I’ve written? Add to it?

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  1. I reiterate that if a Landlord continually gives waivers of subrogation to its tenants, & there is then a multiplicity of claims as a result thereof, then the the Landlord can expect the insurer to either (i) substantially increase the Landlord’s insurance premium, or (ii) cancel the insurance policy.

    A Landlord should also be aware that the Supreme Court of Canada has ruled that where a tenant contributes towards the Landlord’s Operating Costs, there is an implied waiver of subrogation by the Landlord in favour of the Tenant.

    • Both points are germaine to the discussion. The question about “claims experience” is not “whether” a multiplicity of them will affect the insurance premium, but “whether” this is a practical concern. We are talking about property insurance, not liability insurance (though the likelihood of a multiplicity of claims there is still questionable). Here, the insurance company has already experienced the loss, probably by fire. That’s not a “likely to repeat” situation, and if it were likely for a given property, the risk is not that the insurance company has no claim against the tenant or landlord, as the case may be. It is that the property is exposed to a high risk of loss, independent of the waiver of claims. Remember, also, that it is the waiver of claims in the lease or contract that takes away the insurance company’s right to sue the “responsible” party. It is not the waiver of subrogation in the insurance policy. That only says that giving a waiver of claims won’t invalidate the policy. And, as Part 2 of the Blog posting points out, the standard, common property insurance policy in the US includes the Waiver of Subrogation in the policy for no additional premium. So, the insurance premium calculations made by the industry accept that there will be a waiver of claims in a lease and in contracts. The interesting thing about the insurance policy provision is that, as to a tenant, the claims can be waived even after the damage.

      That leads to your second point. In the states, there is also a court imposed equity in some jurisdictions that says, in essence, if a tenant was paying the premiums through its rent or additional rent, the landlord’s insurance company can’t sue the tenant for starting the fire, etc. By example, New York law holds that way. That’s probably why the insurance industry will allow landlords to waive claims against tenants after-the-fact.

      That being the case, why should a tenant care aout getting a waiver of claims in its lease? I’d say so that it doesn’t have to litigate the implied waiver issue. As to a landlord’s interest in getting a waiver of claims from its landlord, I’d say that there is no implied waiver in that direction.

      Do you agree?

  2. Lowell Berg says:

    As a leasing attorney for a major wireless carrier, I found that prospective landlords often objected to my client’s standard mutual waiver of proeprty damage subrogation claims. The usual “rationale” was that the LL’s insurer would never agree to it – a hard proposition to counter, or so I thought. But, If I read you correctly, you are suggesting that more likely than not, this was a snow job.

    How would you react to this on behalf of the tenant? (We did not want to ask for a copy of LL’s policy, because our client did not permit turning over their own policy to the LL.)

    Thank you.

    Lowell

    • I wouldn’t say, “snow job,” because that would imply that they knew otherwise. My sense is that because they don’t understand this issue at all, they are afraid to say “yes, OK.” We are all guilty of saying “no” when we don’t “know,” because that seems to be safe and protective of our interests or those of our clients. When I’ve heard this, I’ve suggested that they speak to their insurance broker, agent or consultant and ask. I’ve also suggested that their broker or agent or consultant call me. I don’t recall any lease at all where we have not included a waiver of claims and a waiver of subrogation. As an aside, the dozen or so times over the years that a landlord’s or tenant’s insurance “person” has spoken with me, the real issue was that their client didn’t explain the issue or question to them. The brokers know that the policy permits a waiver of subrogation.

      If your lease has a mutual waiver of claims as to property damage, then you don’t really care that the other party’s property insurance policy allows for such a waiver without invalidating the policy, other than to be comfortable that the insured party will still have enough money to repair the damage.

  3. Lowell Berg says:

    Ira,

    Thanks for replying so quickly.

    The last point about comfort with the level of the LL’s coverage was vital, particularly in the case of rooftop and other non-tower installations.

    You have gained a fan.

    Lowell
    berg.lowell@gmail.com
    732-900-3261

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