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
- Pays an additional premium to add the waiver of subrogation to its workers
- Faces a premium increase because the lack of a recovery on its workers
compensation lien inflates its loss experience.
- 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.
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.
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.
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.
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