Subrogation

Someone recently asked me about subrogation and specifically waiver of subrogation so I thought I would write about it. Subrogation is a form of assignment of claims. For example if there is an insured loss, as part of the insurance payment, the insured in endorsing the check is assigning their rights to make a claim to the insurance company. The insurance company could then make a claim against another party or parties who may have been negligent in causing the damage or loss covered by the insurance. In contract insurance provisions many companies will include a waiver of subrogation to prevent the other party’s insurance company from suing them for their potential negligence. The rationale is simple, I’m requiring you to carry insurance, so I don’t want your insurance company turning around and suing me. Without a waiver of subrogation they could do that.

How much could their insurance company sue you for? The insurance company has no greater rights than their insured has under their contract with you. I’ve had contracts people ask about limitations of liability for buyers. In most cases the way a limitation of liability provision is drafted, both parties will be precluded from all types of damages other than direct damages. The supplier will want to add a financial cap on their liability. The buyer may want to exclude specific sections from that limitation. If the contract doesn’t have a waiver of subrogation provision and the buyer hasn’t put a cap on the buyer’s liability, the buyer could potentially have unlimited liability. So just like supplier’s wanting to cap their financial liability, buyers also need to cap their financial liability. This way if the supplier insurance company were to sue under subrogation of claims, it would cap the amount they can recover. What’s an appropriate cap for Buyers liability? For small contracts it could be capped at no more than the contract value. For large value contracts, if you exclude payments that you owe, it could be much less than the contract price.