TRANSFER OF THE RIGHTS OF RECOVERY (SUBROGATION)

(June 2019)

INTRODUCTION

Insurance is a contract of indemnity. This means that an insured is not entitled to benefit because of a loss. It is entitled only to be returned to the financial position it was in before the loss.

The insured should not be able to collect from both the insurance company and the third-party responsible for the loss. That is enrichment. Instead, any rights the insured has or may have against another party pass to the insurance company when it pays a covered loss. That right is limited to the amount incurred in paying the loss. This transfer of rights prevents the insured from gaining due to a loss but still holds the party that caused the damage responsible for its actions.

The insurance company is free to proceed against the party or parties that caused or contributed to the loss and possibly recover all or part of its loss payment. This transfer is a basic and fundamental element of insurance. However, it is also a transaction that has caused many problems over the years because of situations and circumstances when the insured wants to retain those rights.

The Insurance Services Office (ISO) recognizes these concerns and provides the insured with a way to waive its rights of recovery under certain circumstances. This article explains the circumstances when the insured can do so without negatively affecting its coverage.

Related Court Cases:

Waivers of Subrogation and Definition of "Work to Be Insured" Were Ambiguous

Specific Lease Provision Put Risk of Loss on Landlord

Property Owner's Waiver of Subrogation Barred Action

“Made Whole” Doctrine Did Not Apply To Insurance Company’s Subrogation Rights

Court Considers Applicability of Waiver of Subrogation

ANALYSIS OF THE TRANSFER CONDITION

The Transfer of the Rights of Recovery Against Others to Us condition is found in CP 00 90–Commercial Property Conditions. It explains how the insured's right of recovery against another party transfers to the insurance company. This concept is frequently referred to as subrogation.

Related Article: CP 00 90–Commercial Property Conditions Form Analysis

If the insured that receives payment from the insurance company has any rights of recovery against another party, those rights transfer to the company but only after the insurance company makes a payment. The rights transferred are limited to the extent of the payment made because the insurer cannot use this condition to enrich itself.

The insured that receives the payment must do everything necessary and possible to secure and protect its rights of recovery that the insurance company will be using. It must not do anything after a loss to impair those rights.

Rights of recovery can and are frequently waived. This is often referred to as a waiver of subrogation. The Transfer of the Rights of Recovery explains which waivers the insurer will accept. All others are considered violations of the policy condition.

1. The insurance company will accept any waiver that is s in writing and was prepared and executed prior to the loss.

2. The insurance company will accept a waiver issued after a loss only to the following parties:

• Another party that this insurance covers
• A business entity the named insured owns or controls
• A business entity that owns or controls the named insured
• A tenant in the named insured's building or premises

Example: Fred owns the middle building in a string of five connected buildings. His store, Fred’s Fine Fish, is on the street level and two tenants live in the apartments above the store. One of Fred's tenant’s candle burns down and starts a small fire that spreads through the ceiling space to the neighboring building. The owner of the neighboring building has a methamphetamine (meth) lab and the small fire causes the meth chemicals to ignite and explode. The explosion destroys Fred’s building along with the other five buildings.

Fred’s insurance company pays his loss and assumes his rights of recovery. It can pursue both Fred’s candle-burning tenant and the owner of the neighboring building because of the neighbor having chemicals onsite that caused the explosion. Due to the waiver language in the policy, Fred has the right to waive his recovery rights against the tenant at any time. If he does the insurance company will have no right to pursue that tenant but can still pursue the neighboring building owner.

RELEASE FROM LIABILITY AGREEMENTS

To an increasing extent, property owners include the release of liability clauses in rental agreements with their tenants. Tenants and building owners prepare and execute mutual agreements where neither holds the other liable for fire damage to the other's property. The same is true for general lessees and their tenants. To a lesser extent, building owners and occupants of buildings execute similar mutual releases with owners and occupants of adjacent or adjoining properties.

These waiver and release agreements were carefully drawn up and prepared by attorneys and led to an increasing number of requests for waiver of subrogation clauses in property insurance policies.

The result was the provision outlined above. One reason to grant a waiver of subrogation rights without charge is based on the fact that fire rates and premiums include both direct loss experience and experience due to negligence by third parties. Another reason is that the rate and premium for a building are the same whether the owner or another party occupies it. The rights waived therefore do not increase the insurer’s exposure.