Mutual waiver of subrogation: Overview, definition, and example
What is a mutual waiver of subrogation?
A mutual waiver of subrogation is a clause in a contract or insurance policy where two parties agree to relinquish their right to seek compensation from each other for any damages or losses covered by insurance. In simpler terms, it prevents one party’s insurer from pursuing the other party (or vice versa) for reimbursement of claims paid out by their insurance company. This clause is typically included in business agreements or insurance policies to avoid unnecessary litigation and ensure that insurance companies, rather than the parties involved, handle any claims.
For example, if two businesses are working together on a construction project, and one of them suffers a loss that is covered by their insurance, the mutual waiver of subrogation clause prevents the insurance company from suing the other business for reimbursement.
Why is a mutual waiver of subrogation important?
A mutual waiver of subrogation is important because it helps prevent lawsuits between business partners, clients, or parties involved in a contract after an insured loss occurs. By waiving the right of subrogation, both parties ensure that the costs are covered by insurance without having to deal with additional legal disputes. It also helps maintain a positive working relationship by eliminating the potential for a costly and adversarial process.
In business relationships, such as construction contracts, service agreements, or leasing contracts, this clause is important for minimizing conflicts and reducing the burden of pursuing damages from the other party involved.
Understanding mutual waiver of subrogation through an example
Imagine a manufacturing company and a logistics company enter into a contract where they agree to work together to produce and distribute products. The contract includes a mutual waiver of subrogation clause to protect both parties.
Later, a fire damages the manufacturing plant, and the insurance company compensates the manufacturer for the loss. Because of the mutual waiver of subrogation, the insurance company cannot pursue the logistics company for the damages caused by the fire. Similarly, if the logistics company were to suffer a loss, the manufacturer’s insurance company would not be able to claim compensation from the logistics company.
In another case, a landlord and tenant may include a mutual waiver of subrogation in their lease agreement. If the tenant’s insurance covers damage to the property, the tenant’s insurer cannot seek reimbursement from the landlord for the loss, and vice versa.
An example of a mutual waiver of subrogation clause
Here’s how a mutual waiver of subrogation clause might appear in a contract:
“Both parties hereby waive any rights of subrogation against each other for any claims covered by insurance, including but not limited to damages, losses, or injuries arising out of the performance of this Agreement. This waiver applies to both parties' respective insurers.”
Conclusion
A mutual waiver of subrogation is a valuable clause in contracts and insurance policies, particularly for businesses working closely together or engaging in projects with shared risks. It helps avoid legal disputes by preventing insurance companies from pursuing each other for claims that have already been covered. By incorporating this clause into agreements, businesses can ensure smoother operations and maintain positive relationships, even in the event of an insured loss.
For SMB owner-managers, understanding the benefits of a mutual waiver of subrogation can help mitigate legal risks, reduce conflict, and promote a cooperative approach to handling insurance claims.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.