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Subrogation Defined

Subrogation occurs when an insurance company pays a claim and then uses the insured's right to sue the other party for causing the loss as a way to recover their funds. This seems reasonable, so why do business contracts commonly include a "waiver of subrogation" clause?

Business contracts often require that one party or the other be primarily responsible for providing insurance. The purpose of including a waiver clause is to have the party carrying the insurance waive any rights of recovery against the other party for claims covered by the insurance. The intent is to reduce risks significantly by preventing the insurance company from circumventing the contract's intent of making one party financially responsible for the losses through the purchase of insurance.

However, it's also possible that overly broad language in the contract might leave the insured agreeing to take on far more responsibility than is reasonable. In such a case, agreeing to a blanket-waiver of subrogation might not be in the best interests of you and your insurance company. The party that transfers all of its responsibilities onto the insurance of others distorts the basic principle of liability, which is that the guilty party should pay.

Whenever you're presented with a contract that requires you to purchase insurance for the interests of another and includes a waiver of subrogation, be certain to review the provisions with your attorney -- and with us.
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Further Reading
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