Expert Commentary

Examining WC Waivers of Subrogation

There is no doubt that workers compensation waiver of subrogation requirements are extremely common in today's contracts, particularly construction contracts. What is less clear is why. Perhaps the contracting party hopes the waiver will provide immunity from a third-party claim arising out of their subcontractor's workers compensation claim. If this is the hope, it's a false one.


May 2010

A waiver of subrogation does not prevent an injured subcontractor's employee from filing suit against the contractor. It only bars the subcontractor's workers compensation insurer from initiating a subrogation action and/or from enforcing its lien on a third-party claim. Possibly, the only winner from the waiver is the injured employee who might actually receive a double recovery if the workers compensation lien does not have to be repaid to the employer. The contracting party loses or at least doesn't win since the waiver did not have the desired effect of preventing a third-party claim. The workers compensation insurer loses because its right of recovery was forfeited. The biggest loser is the subcontractor who:

  1. Pays an additional premium to add the waiver of subrogation to its workers compensation policy.
  2. Faces a premium increase because the lack of a recovery on its workers compensation lien inflates its loss experience.
  3. Takes a double hit when its own general liability coverage is used to resolve its employee's third-party claim due to a likely indemnification provision in its contract.

In theory, a waiver could eliminate a third-party exposure. Many jurisdictions give insurers an independent right to pursue subrogation if the injured employee opts not to bring a third-party claim. With a waiver, the insurer loses this independent right. As a practical matter, it is quite rare for an insurer to independently initiate a third-party claim. It faces the prospect of funding an attorney to pursue subrogation without a guarantee of a recovery. This pursuit becomes even riskier if it is undertaken without the cooperation of the star witness, the injured employee. The elimination of this sort of theoretical third-party claim hardly justifies a waiver of subrogation requirement.

Typical Scenario

It is far more typical for third-party claims to be initiated by the injured employee as opposed to the workers compensation insurer. Most often, the employee retains an attorney on a contingency basis to seek compensation beyond what he has received in workers compensation benefits from an at-fault party. In a third-party claim, the employee can be awarded damages for pain and suffering in addition to the lost wage and medical benefits that are also available through the workers compensation system. In the absence of a waiver of subrogation, the workers compensation insurer can place a lien on any third-party settlement or verdict to recover the benefits paid to the injured employee. In this circumstance, the insurer recovers up to two-thirds of his workers compensation payments lien while conceding one-third to cover the attorney's contingency fee (assuming a one-third contingency fee arrangement).

In the scenario where the employee initiates the third-party claim, and there is a waiver of subrogation endorsement attached to the workers compensation policy, the contractor who required the waiver receives absolutely no benefit from the waiver. The claim is not barred because the injured employee who initiated the claim is not bound by the waiver. The third-party award does not get reduced even though the workers compensation insurer has waived their right to recover its payments from the award. In many jurisdictions, when there is a waiver, the injured employee gets to keep the full award which essentially gives the employee a double recovery for the indemnity and medical benefits already received through the workers compensation claim. Giving a double recovery to an injured employee while providing no benefit to the contractor that included the waiver of subrogation in its contract was certainly not the intent of requiring the waiver, but in many cases, it is the reality.

Why Do It?

With such questionable value, why are subrogation waivers routinely required in contracts? There are many culprits. General liability insurers look favorably on companies that obtain waivers from their subcontractors. It is a fairly standard question on general liability applications and the right answer can affect the insurer's appetite for the risk and the premium charged. Requesting waivers has also become a "best practice" for brokers, insurance advisers, and risk managers. Few are willing to have their competence questioned because they failed to follow an industry norm—even if the norm is largely pointless.

It is advisable for subcontractors to resist workers compensation waiver of subrogation requirements whenever possible. The problem is they lack the leverage necessary to force the general contractor to drop this requirement. Unless their bargaining position changes for the better, subcontractors will likely need help from state legislatures or will need to mount court challenges to rid themselves of the waiver of subrogation requirements that they now face.

State Response

New Hampshire has taken a lead in this area by amending its workers compensation law in 2004 to make waivers of subrogation against public policy. Section 281–A:13 (VI) now prohibits any provision in any agreement that requires an employer or an employer's insurer to waive any rights of subrogation. Similarly, Kentucky, New Jersey, and Missouri have declared waivers of subrogation contrary to public policy and therefore null and void.

The Maine courts have also weighed in favorably for subcontractors on this issue. In Fowler v. Boise Cascade Corp., 948 F.2d 49 (1st Cir. 1991), the court held that a waiver of subrogation did not prevent the employer from enforcing its lien against the employee who made the third-party recovery. In a bit of an end-around, the employer could not enforce its lien against the contractor that required the waiver, but it could enforce its lien directly against the employee who received the third-party settlement. While not completely declaring waivers of subrogation contrary to public policy, Wisconsin—like Maine—allows employers to recover on their liens even when there is a waiver of subrogation endorsement.

Conclusion

While the preceding paragraphs highlight some states where subcontractors aren't required to forego a third-party recovery even when there is a waiver of subrogation in place, these states are very much in the minority. It is a cruel irony for subcontractors that they are forced to accept waivers of subrogation to secure work from general contractors, and, yet, the waiver may not benefit the general contractor but could cause great harm to the subcontractor's loss experience. Until universal change comes to the industry, subcontractors can only push back on waivers where they can and, of course, work as safely as possible to avoid the multiple claim hits that can come from injuries to their employees.


*The Albert Risk Management Consultants claims management team (Glenn Brown, Lisa Hartman, William Quinn, Jr., David Ackerman, and David A. Tweedy) contributes articles on claims topics. You can reach Glenn Brown at


Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

Like This Article?

IRMI Update

IRMI Update is a free newsletter providing you with thought-provoking industry commentary every other week, including links to free articles from industry experts. You will get two new, practical risk management tips every month and be the first to receive important news regarding IRMI Conferences and webinars.

Learn More



Featured Video
IRMI Subscriber Promo

Featured Products

Quality Risk Management Fieldbook

Quality Risk Management FieldbookNEW!

This step-by-step guide is not a textbook but is the perfect resource if you lead a small business, nonprofit, government entity, or political subdivision and do not have risk management expertise or staff. Everything is included to help you work alongside your insurance agent to protect and preserve your organization. Learn more.

IRMI Glossary of Insurance and Risk Management Terms

Glossary of Insurance and Risk Management Terms

This best-seller from IRMI gives you quick answers to questions involving unfamiliar insurance terminology. The definitions are written in plain English with a focus on practical application. Learn more.

Navigation

Social Media