As part of business, insureds and their customers sign contracts setting out the terms of their arrangements regarding price, payment terms, delivery schedule and more. But boilerplate legal terms, which often aren’t even read, also contain binding terms and may contain insurance requirements.
Clients often ask me about such requirements, including those requiring the insured to add their customer as additional insured and/or to obtain a waiver of the right of subrogation.
Waiver of subrogation and additional insured status provide extra risk protection to the customer at no cost. Typical insurance requirements in contracts include language similar to: ‘YOU shall cause your commercial general liability insurance referred to above to name CUSTOMER as an additional insured and to be endorsed with a waiver of subrogation in favour of CUSTOMER.’ If clients bring this type of contract to brokers, the brokers should tell the clients the process includes the insurer – which may not necessarily agree to either or both. So, the broker will be obliged to contact the insurer and make such requests, which may take time to answer.
For example, an insurer may be willing to add an additional insured but may send a request to waive a right of subrogation to their legal department to review. This can cause delay, so brokers should advise the insured and the customer that the insurer’s decision may take time.
Customers seek additional insured status to access the insured’s policy in the event of a loss. Without additional insured status, if a loss happens the client (the insured) would be responsible for damages it has caused, and the customer responsible for damages caused by its negligence.
Let’s say the customer has an unstable ramp, which causes the insured’s employees to drop and damage goods being delivered. As additional insured, the customer could make a claim against the insured’s policy rather than its own. Making claims against the insured’s policy reduces the number of claims a customer makes against its own insurance, effectively using the insurance of its goods and services providers as its primary insurance – and its own as excess insurance.
A request for additional insured status is often accompanied by one for the insurer to waive its right of subrogation. In law, an insurer has a right of subrogation: to recover damages it’s paid from the party that caused the loss. Waiving that right means the insurer is agreeing not to collect damages it has paid from the party that caused the loss – in this case, the customer of the insured (or the customer’s insurance).
What’s more, the law says an insurer cannot subrogate against its own insured.
So why would a customer ask for both additional insured status and a waiver of subrogation?
Waiver of subrogation does not protect the customer from a third-party claim. For example, if a third party suffers damages while providing services and makes a claim against the customer, the customer would be protected by the insured’s insurance if it has been added as an additional insured. But it would not be protected from the claim by a waiver of subrogation.
Why would an insurer agree to waive its right of subrogation? The decision is made case by case, and there are many occasions where an insurer will refuse to waive its right of subrogation. Under certain circumstances, though, insurers may waive subrogation to minimize litigation costs.
In some cases, the insurance section of a contract may require the client to have more insurance than it already holds, obliging the client to explain its existing insurance to its customer or to obtain additional insurance. Both scenarios can further delay a contract signing or make the business unprofitable for the insured.
It’s probable many contracts are signed without having read the terms and conditions. As a result, contractual obligations regarding insurance may not be met. Importantly, if required under the contract, failure to add an additional insured or obtain a waiver of subrogation is a breach of contract, which among other things could lead to termination of that contract.
For example, if a customer who’d required being added as additional insured suffers a loss but was not insured, it has a further claim against the insured for failing to add the customer as an additional insured. And, without adding the additional insured, the insured’s insurance will not extend to the customer’s damages. So, the insured would have no coverage for such a loss.
It’s important to remind clients to forward any contracts they’re considering to their broker and legal counsel for review. Neither adding additional insureds nor waiving the right of subrogation is fulfilled by the insured, so time should be allocated to communicate with the insurer. Communication with the insured’s potential customer is also important to avoid surprises if the insurer does not agree to either of the terms.
If managed properly, requests to add additional insured and waivers of subrogation should not delay the insured’s business deal.
Michael Carey is a corporate commercial lawyer in Toronto with more than 20 years of experience in insurance law and the drafting and negotiating contracts. He can be reached at email@example.com. This article is excerpted from one that appeared in the February-March issue of Canadian Underwriter.