It is very common for the insurance requirements in a construction contract to include a provision requiring the subcontractor to waive all rights against the owner and general contractor for recovery of damages to the extent these damages are covered by the sub’s workers’ compensation and general liability or commercial umbrella liability insurance.
Owners and general contractors insist on this provision because they want to protect themselves from being held liable for injuries to a subcontractor’s employee. Typically, the contractor giving the waiver asks its insurance company to attach a “Waiver of Subrogation” endorsement to its Contractors Workers Compensation policy.
The endorsement states that the insurance company will not enforce its right to recover payments it makes to an injured worker from the person or organization listed on the endorsement. It applies only to the extent that the employer insured by the policy performs work under a written contract requiring the employer to obtain the insurance company’s waiver.
The endorsement does not directly or indirectly benefit anyone not listed on the endorsement. With this endorsement on the policy, the company cannot attempt to recover payments it made to an injured worker from the company listed on the endorsement, even if that company was responsible for the injury.
Consequently, the loss impacts the employer’s experience modification and may increase future premiums. In addition, the endorsement usually carries an additional premium for the employer, normally some percentage of the premium attributable to the job.
The endorsement and the waiver agreement in the contract do not bind the injured employee. The employee still has the ability to sue the owner and general contractor for his injuries, and construction contracts commonly require the subcontractor to defend and indemnify the owner and general contractor from such suits.
Therefore, it is probable that the employer will pay an additional premium for the endorsement, face higher future workers’ compensation premiums for the loss, and pay higher future liability insurance premiums because its policy will cover the other parties’ liability.
For example, assume the subcontractor’s employee suffers serious injuries when tools and materials fall off a scaffold and strike him. He collects workers’ compensation benefits for medical costs and lost wages.
The subcontractor’s workers’ compensation policy includes the Waiver of Subrogation endorsement, so the insurance company cannot recover any of its payments. The worker sues the owner and general contractor for pain and suffering, but the contract requires the subcontractor to cover the owner’s and general contractor’s liability, so the subcontractor’s liability insurance pays for the lawsuit.
In that situation the subcontractor’s insurance effectively pays twice for the same injury to the same worker.
Owners and general contractors require waivers for several reasons. Insurance consultants, brokers, and risk managers usually encourage them because waivers protect liability insurance and reserve it for other claims, which can make a contractor’s liability coverage more attractive to insurers and may lower premiums.
Subcontractors often do not resist these requirements because they feel they lack negotiating leverage and their insurance companies are usually willing to provide the endorsement.
A few states have limited the use of Waiver of Subrogation in their workers’ compensation systems; some jurisdictions make such contract provisions unenforceable or allow employers to recover some proceeds from third-party suits.
In most states that allow waivers, contractors should work with professional insurance agents experienced in construction insurance to find appropriate coverage and to handle contractual issues such as waivers. If you're unsure how a provision affects your risk, talk to an agent.
Above all, contractors must read and understand their contracts so that these agreements do not become an ugly surprise after a loss.
Frequently Asked Questions
What is a waiver of subrogation endorsement?
It is an endorsement that prevents an insurer from seeking reimbursement from a third party who may have caused an employee’s injury when the employer is contractually required to waive that right.
Who typically pays for the endorsement?
The employer usually pays the additional premium for the endorsement, and the cost may be passed through in the contract or affect the employer’s future premiums.
Can an injured employee still sue the owner or general contractor?
Yes; the endorsement binds the insurer but does not prevent the employee from bringing a lawsuit against other parties.
Do all states allow waivers of subrogation?
No; some states restrict or prohibit waivers of subrogation in workers’ compensation contexts or limit their enforceability.