Building Your Business Business Insurance Waiver of Subrogation Under Property Insurance By Marianne Bonner Marianne Bonner Facebook Twitter Marianne Bonner, a certified CPCU and ARM, has covered small business insurance topics for The Balance since 2013. She worked in the insurance industry for 30 years as an analyst and underwriter among other roles and holds multiple professional designations. Along with The Balance, Marianne has written many articles for International Risk Management Institute's Risk Report. learn about our editorial policies Updated on September 13, 2022 Fact checked by Taylor Tompkins Fact checked by Taylor Tompkins Twitter Website Taylor Tompkins has worked for more than a decade as a journalist covering business, finance, and the economy. She has logged thousands of hours interviewing experts, analyzing data, and writing articles to help readers understand economic forces. She joined The Balance in 2022 as its Economics Editor. learn about our editorial policies In This Article View All In This Article Subrogation Clause Permitted Waivers Mutual Waivers Unilateral Waivers Construction Projects Photo: Oscar Wong / Getty Images When you and another party agree to do business together, you may sign a contract that contains a waiver of subrogation provision. Such a provision typically requires one or both parties to give up the right to sue the other. This article will explain how waivers of subrogation may affect your commercial property insurance. The effect of waivers on your general liability, commercial auto, or workers' compensation insurance is addressed in a separate article. Key Takeaways Subrogation clauses allow an insurer to assume the right to recover damages from a third party if your insurer has paid you for a property claim. You can waive your right to subrogation in a couple of different ways. Contracts often have a waiver of subrogation in landlord/tenant situations or in construction contracts. Check with your insurance before signing a waiver of subrogation. Subrogation Clause Many commercial property policies contain a subrogation provision similar to the one found in the ISO Property Conditions form. This clause applies if your insurer has paid a claim for property damage or loss of income that is covered by your policy. The clause states that if you have the right to recover damages from someone else, those rights are transferred to your insurer. For example, suppose that you operate a business called Accurate Accounting. Your company rents office space in a building owned by Prime Properties. You have insured your office contents under a commercial property policy. Note Commercial property policies sometimes require you to protect your insurer's rights to subrogate against another party. You cannot voluntarily absolve the other party of liability or otherwise interfere with the insurer's right to pursue a claim against that party. A company called Classic Consulting rents an office next to yours. One evening a fire breaks out in Classic Consulting's office. The fire spreads to your office, damaging several desks and computers. According to the Fire Marshall, the fire was caused by a smoldering cigarette butt left in a trash can in Classic's office. Your property insurer pays for the damage to your property. It then tries to recover the amount it paid by suing Classic Consulting for property damage. If you had no property insurance, or if your insurer had not paid your claim, you would have had the right to sue Classic Consulting for property damage. Since your insurer compensated you for the loss, your right to sue Classic Consulting is transferred to your insurer. Permitted Waivers The standard subrogation clause allows you to waive your rights of subrogation before a loss occurs. Thus, you may sign a contract in which you agree to waive your right to sue another party for losses that may occur in the future. The standard subrogation clause also allows you to waive your right to sue another party after a loss occurs if the other party is one of the following: an insured under your policya company you own or controla company that owns or controls youa tenant of yours For example, suppose that your company, Accurate Accounting, owns 100% of Classic Consulting. In this case, your company may waive its right to sue Classic Consulting for the fire damage to your property after the fire has occurred. Mutual Waivers Many contracts contain a mutual waiver of subrogation. In a mutual waiver, the parties agree to waive their rights to sue each other. Typically, the waiver applies only to losses that are covered by commercial property insurance. For example, suppose that your business, Accurate Accounting, has signed a lease with your landlord, Prime Properties. You agree that property insurance will serve as the primary source of recovery for damage to the landlord's building or to your personal property. The property insurance may consist of a single policy (covering the building and your personal property) or two separate policies. Note Mutual waivers typically occur in landlord and tenant contacts, and construction contracts have them at times as well. Suppose that you and Prime Properties have each purchased a separate property policy. The lease contains a mutual waiver of subrogation. One night a defective coffee maker in your office space causes a fire. The fire causes $10,000 in damage to your personal property and $50,000 in damage to the building. Your insurer pays your claim and Prime's insurer pays Prime's claim. Your landlord has waived its rights to sue you for property damage covered by property insurance. Thus, a landlord's insurer is barred from suing you to recover the payment it made to its insured. Unilateral Waivers Some contracts contain a unilateral or one-sided waiver of subrogation. The landlord requires that the tenant waive its right to sue the landlord for any damage the landlord may cause to the tenant's property. However, the landlord retains its right to sue the tenant for damage the tenant causes to the landlord's property. Note When contained in a lease, a unilateral waiver usually benefits the landlord. Suppose that the tenant accidentally damages the landlord's property. The landlord's insurer reimburses the landlord for the loss and then seeks recovery for the loss payment by suing the tenant. If you are a tenant, try to avoid signing a lease that contains a unilateral waiver of subrogation. Construction Projects Waivers of subrogation are also common in contracts involving construction projects. Suppose that Busy Builders, a general contractor, signs a contract with Prime Properties to build a new office complex. The contract contains a mutual waiver of subrogation. Busy Builders hires all of the subcontractors (electrical, concrete, painting, etc.) needed for the project. The contract between Busy and the subcontractors also contains a mutual waiver. Note If a subrogation waiver is proposed by either party, you should check with your insurance before signing the contract. In both contracts, the parties agree to waive their rights to sue one another to the extent that losses are covered by commercial property insurance. Busy Builders purchases a builders risk policy (a type of property policy) covering the construction project. The policy includes Prime Properties, Busy Builders, and all subcontractors as insureds. If a fire (or other covered peril) causes damage to the building during its construction, the loss should be covered by the builder's risk policy. If the insurer pays a claim, it cannot attempt to recover its loss payment by suing Prime Properties, Busy Builders, or any of the subcontractors. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Allstate. "Subrogation: What Is It and Why Is It Important?" International Risk Management Institute, Inc. "Insurance Coverage—Waivers of Subrogation." GDI Insurance Agency. "What is a Waiver of Subrogation?" Norris McLaughlin. "Why Waive Subrogation?" Hirschler. "What Is a “Waiver of Subrogation” in a Construction Contract?"