A Few Thoughts on Subrogation and the Waiver Thereof

Economic Outlook for Arizona Design Professionals

In exchange for payment of a claim under a policy of insurance, the policyholder surrenders to the Insurer the right to recover the monies paid to settle the claim from any parties that may have been responsible for the damages which gave rise to the claim (i.e. to subrogate). Architects, Engineers and other Design Professionals customarily see a requirement in the Professional Services contracts they sign with their Clients to waive their rights of subrogation.

Most of the insurance policies that Architects, Engineers and other Design Professionals purchase either have a provision built into the policy, or allow an endorsement to the policy for an additional premium, to permit this waiver as long as it is done in writing prior to a claim.

Does this materially impact the typical Architect, Engineer or other Design Professional?  Yes and No!  If, at the time your insurance coverage was placed, your Broker ascertained that such a waiver was permissible, you can sign the contract with no perceptible repercussions. If coverage was not arranged in advance, there may be delay while an underwriter evaluates the contract, processes an endorsement and issues an invoice for an additional premium (typically about $100 per waiver with some carriers).

What happens when there is a claim?  Let’s say that during the course of construction an unbraced, or improperly braced wall, is blown over by gusting winds.  And just to make things a bit more exciting, let’s say that several of the masonry contractor’s employees are injured in the process – no deaths mind you, just a few broken bones!

Let’s all get out our contracts and see how the risk management team performed during the contract negotiations!  Much to our joy, we find that everyone – the Owner, Contractor, Architect, Engineer and all their subs – were required to provide certificates of insurance evidencing that waivers of subrogation had been secured by each party.  So, the Builders’ Risk carrier pays to have the damaged wall repaired and the Workers’ Compensation carrier pays to have the injured workers’ medical and disability expenses paid.  End of story!

But what if, to our chagrin, we find that waivers were not required or provided by each of the parties?  Lest this turns into a legal treatise, let it suffice to say that the attorneys are all going to be very busy (not to say ecstatic, too)!  We may see subrogation claims from the Builders Risk carrier and the Workers’ Comp carrier trying to affix liability to the Contractor and/or Architect, Engineer or various subcontractors / subconsultants to see if they can recover from the General Liability and/or Professional Liability carriers of those parties under various theories of law.  What could have been a somewhat simple process, resolved in a rather short period of time, has now become a lengthy legal exercise involving, potentially, dozens of people who might otherwise have spent their time far more productively.

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