130.6-13

TRANSFER OF THE RIGHTS OF RECOVERY (SUBROGATION)

(December 2008)

BACKGROUND

Insurance is a contract of indemnity. When the insurance company pays the insured for a covered loss, any rights the insured has or may have against another party that is or may be responsible for the loss pass to the company. 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. When the insured surrenders its rights of recovery to the insurance company, it 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 but it is also a transaction that has caused many problems over the years because of situations and circumstances at times where the insured wants to retain those rights.

Insurance Services Office (ISO) recognizes those concerns and provides the insured with a method to waive its rights of recovery under certain circumstances. This section explains the circumstances under which the insured can do so without negatively affecting its coverage.

ANALYSIS OF THE TRANSFER CONDITION

One feature of CP 00 90–Commercial Property Conditions is the Transfer Of The Rights Of Recovery Against Others To The Insurer Condition. It explains how the insured's rights of recovery against another party transfers to the insurance company. This concept is frequently referred to as subrogation.

If the insured receiving payment from the insurance company has any rights of recovery against another party that may have caused the loss, those rights transfer to the insurer only after it makes a payment. However, the rights transferred are limited to the extent of the payment made.

The insured receiving the payment must do everything necessary and possible to secure and protect the insurance company's rights and to do nothing after a loss to impair those rights.

The insured may waive its rights of recovery against another party. This is commonly referred to as a waiver of subrogation. The waiver must be in writing and be prepared and executed prior to the loss. However, a waiver may be issued to any of the following parties after a loss:

• Another party covered by this insurance
• 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

RELEASE FROM LIABILITY AGREEMENTS

To an increasing extent, property owners include 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 property of the other. The same is true for general lessees and their tenants. To a lesser extent, 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 subrogation waiver clauses in property insurance policies.

The result was the provision outlined above. A strong argument in favor of granting a waiver of subrogation rights without charge is based on the fact that fire rates and premiums include both direct loss experience as well as experience due to negligence by third parties. This goes with a similar argument that the rate and premium for a building is the same whether it is occupied by the owner or by another party. The rights waived do not restrict this insurance.

Please refer to PF&M Sections 131_C067, Broad Subrogation Clause Waives All Of Insurer’s Rights, 131_C018, Mutual Subrogation Waiver Clause Barred Recovery By Property Owner's Insurer and 131_C064, Lessee’s Premium Payments Nullify Subrogation Claim, in Court Cases, for several interesting court cases involving subrogation.