Waiver of Subrogation: Definition, How It Works, and When to Use It

Key takeaways

• A waiver of subrogation is a contractual provision that prevents an insurer from pursuing a third party to recover losses the insurer paid to its insured.
• Common in construction contracts, leases, and some auto settlements, waivers reduce litigation between contracting parties but shift recovery risk to insurers.
• Insurers often charge an extra premium or refuse to allow waivers because they lose the right to recover from responsible third parties.
• Before agreeing to a waiver, review policy terms, consider exceptions (policy limits, uncovered risks, state law), and consult your insurer or attorney.

What is subrogation — and what does waiving it mean?

Subrogation is the insurer’s legal right to “step into the shoes” of the insured after paying a claim and pursue a negligent third party to recover the insurer’s payout. A waiver of subrogation removes that right: once the insurer pays a covered claim, it cannot sue the party responsible for the loss.

This waiver is usually created by:
* a clause in a contract (e.g., construction contract, lease), or
* an insurance endorsement added to the policy, often for an additional charge.

How waivers of subrogation work (simple sequence)

1. Parties agree to a waiver in a contract or obtain an endorsement on an insurance policy.
2. A covered loss occurs and the insurer pays the insured under the policy terms.
3. Because of the waiver, the insurer cannot file suit against the third party who caused the loss to recover the payout.

Common contexts and practical effects

Construction contracts

• Frequently included to avoid project delays and disputes between owners, contractors, and subcontractors.
• Owner’s insurer pays covered losses and agrees not to pursue contractors for recovery.
• Typical exceptions: losses not covered by the owner’s policy, or amounts exceeding policy limits, may still be recoverable from a negligent party.

Landlord–tenant leases

• Landlords and tenants may waive subrogation to prevent litigation over property damage or injuries that are otherwise covered by insurance.
• Insurers may charge higher premiums for tenant renter’s insurance or require an endorsement when a waiver is included.
• Some states limit the effectiveness of waivers through statutory law.

Auto claims and private settlements

• An injured party may accept a settlement and sign a waiver of subrogation, preventing their insurer from pursuing the at-fault party later.
• Accepting such a waiver can forfeit future recovery rights — consult your insurer or attorney before signing.

Benefits and drawbacks

Benefits
* Reduces the chance of protracted litigation and preserves business relationships.
* Speeds claims resolution and can minimize disruptions (important in construction projects).
* Limits exposure for parties who are not primarily responsible for losses.

Drawbacks
* Insurers bear the recovery risk, which can translate to higher premiums or refusal to waive subrogation.
* A waiver may bar recovery even when the other party was clearly negligent.
* State law or policy language may limit the enforceability of a waiver.

When to agree to a waiver of subrogation

Consider a waiver when:
* Avoiding litigation and delays is more valuable than pursuing recovery.
* The parties have adequate insurance limits to cover likely losses.
* Both sides negotiate reasonable carve-outs (e.g., exceptions for gross negligence or willful misconduct).

Avoid or modify a waiver when:
* Your insurer prohibits waivers or will increase premiums significantly.
* Potential losses could exceed policy limits and you need the right to seek additional recovery.
* State law or contract context makes a waiver risky or unenforceable.

Practical advice

• Check your insurance policy for subrogation language before signing a contract.
• Ask your insurer whether it will allow a waiver and what premium or endorsement is required.
• Negotiate carve-outs for gross negligence, intentional acts, or losses beyond policy limits.
• Have an attorney review waiver clauses to confirm enforceability and alignment with your risk tolerance.

Bottom line

A waiver of subrogation can simplify relationships and speed claim resolution by preventing insurers from suing other contract parties. It reduces litigation risk but shifts recovery risk to insurers — often at an additional cost or with insurer restrictions. Carefully weigh the cost, coverage limits, and legal implications, and consult your insurer or counsel before agreeing to a waiver.