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Why a Waiver of Subrogation Matters in Construction Insurance

Construction contracts often involve one insurer and various insureds (that is, parties entitled to protection from the insurance contract).

If there’s a dispute between insureds and one of them seeks and gets compensation from the insurer, the other insured is at risk of a claim by the insurer. The insurer’s claim, acting in the shoes of one insured against the other, is made in the name of the insured itself. That is, unless there’s a waiver of subrogation.

What Is Subrogation?

Subrogation is a legal principle that lets one party exercise the rights of another party. In the context of insurance, subrogation lets an insurer do two things:

  1. The insurer can require an insured party to sue someone who has caused them financial loss. (If an insurer exercises this right, it sues the offending party in the name of the insured.)
  2. If the insured receives some reduction in the loss covered by their insurance policy, the insurer can claim back that financial benefit from the insured.

Both rights can only be exercised in relation to the loss that the insurance policy covers. For example, if someone damaged your car, your home insurer couldn’t sue that person on your behalf – it could only sue that person if they damaged your home and you subsequently made an insurance claim. 

In certain scenarios, the right of subrogation can be lost or waived. That’s what we’ll talk about in the next section.

How Waivers of Subrogation Work

Here’s an example of how a waiver of subrogation works. Rob the Builder Pty Ltd (Rob) has been contracted to build an office building. Rob then engages Frank the Sparky Pty Ltd (Frank). The client, who owns the land, demands that Rob purchases professional indemnity insurance to cover all the subcontractors involved: Frank, Peter the Chippy Pty Ltd (Peter), and so on. 

Rob then purchases a professional indemnity insurance policy from Promptly Covered Insurance (Promptly) to cover himself and the subcontractors. During the build, Rob thinks Frank’s job isn’t up to code, which means the whole electric installation will have to be replaced at a cost of $800,000.

To cover that cost, Rob makes a claim under his policy from Promptly, which is paid … promptly! Following Rob’s claim, the insurance company wants to sue Frank, in Rob’s name, to recover the amount paid to Rob.

Under most insurance contracts, insureds are obliged to disclose relevant information to their insurer. That means the insurer might receive relevant information from an insured party – which, in a scenario like Rob and Frank’s, could be the very same party that the insurer itself is suing. 

In the above example, Frank, thinking Rob might sue him, notifies Promptly that a claim may be made against him. In accordance with his insurance contract, Frank discloses to Promptly all his actions in the electrical installation. Rob then makes a claim under his insurance policy with Promptly, which sues Frank to recover the money it paid to Rob – but with full knowledge of the case, thanks to Frank’s earlier disclosure.

Why a Waiver of Subrogation Matters

This kind of situation happens frequently, although it can get much more complex. That’s why a waiver of subrogation in insurance contracts is so important. If there is a waiver of subrogation, the insurer has waived (that is, given up) the right to pursue a nominated party. In our example, a well-designed subrogation clause would mean that Promptly has no right to sue Frank for any compensation paid to Rob.

The Supreme Court of Victoria considered the waiver of subrogation in a May 2024 decision. The Court stated that the waiver of subrogation can be by way of either:

  • a clause in a contract
  • by conduct, when the insurer, by action or omission, shows that it will not seek to recover an amount paid to an insured
  • by conduct, when the insurer has behaved in a way that is inequitable.

Importantly, the waiver of subrogation by conduct is challenging because, if it is disputed by the insurer, it requires complex litigation. As such, the best prevention is a good waiver of subrogation clause.

Takeaways for Construction Contractors

In the above example, it’s in Rob and Frank’s best interests that their insurance broker drafts a waiver of subrogation to protect them from claims by Promptly in the event of a dispute between them.

If you’re a head contractor or a subcontractor, make sure your broker includes a waiver of subrogation in your insurance contract. Disputes between insureds do happen, and you don’t want to be sued by your insurer – especially if they have full knowledge of your case.

For independent advice about your construction insurance, get in touch with our dispute resolution team. We can help you prevent insurance disputes before they occur, and, if necessary, refer you to an appropriately experienced insurance brokerage.

The content of this page is for information only. The content does not constitute legal advice and should not be relied upon as such. You should obtain advice that is specific to your circumstances before taking any action.