(June 2013)
INTRODUCTION
Insurance is a contract
of indemnity. This means that an insured is not entitled to benefit because of
a loss. It is entitled only to be returned to the position it was in before the
loss.
The insured should not be
able to collect from both the insurance company and the third-party responsible
for the loss. That is enrichment. Instead, any rights the insured has or may
have against another party pass to the insurance company when it pays a covered
loss but only as they relate to the loss paid. 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.
The insurance company 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. However, it is also a transaction
that has caused many problems over the years because of situations and
circumstances when the insured wants to retain those rights.
The Insurance Services
Office (ISO) recognizes these concerns and provides the insured with a way to
waive its rights of recovery under certain circumstances. This article explains
the circumstances when 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 Us. It explains how the
insured's right of recovery against another party transfers to the insurance
company. This concept is frequently referred to as subrogation.
Related Article:
CP 00 90–Commercial Property Conditions Form Analysis
If the insured that
receives payment from the insurance company has any rights of recovery against
another party, those rights transfer to the company but only after it makes a
payment. The rights transferred are limited to the extent of the payment made
because the insured cannot use this condition to enrich itself.
The insured that receives
the payment must do everything necessary and possible to secure and protect the
insurance company's rights and not do anything after a loss to impair them.
The insured may waive its
rights of recovery against another party. This is usually referred to as a
waiver of subrogation. The waiver must be in writing and be prepared and
executed prior to the loss. A waiver may be issued after a loss to only
the following parties:
- Another party that this insurance covers
- 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
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Example: Fred
owns the middle building in a string of five connected buildings. His store,
Fred’s Fine Fish, is on the street level and two tenants live in the
apartments above the store. One of Fred's tenant’s candles burns down and
starts a small fire that spreads through the ceiling space to the neighboring
building. The owner of the neighboring building has a methamphetamine (meth)
lab and the small fire causes the meth chemicals to ignite and explode. The
explosion destroys Fred’s building along with the other five buildings.
Fred’s insurance
company pays his loss and assumes his rights of recovery. It can pursue both
the tenant and the owner of the neighboring building because of the chemicals
that caused the explosion. However, Fred has the right to waive its recovery
rights against the tenant at any time.
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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 other's
property. The same is true for general lessees and their tenants. To a lesser
extent, building 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 waiver of subrogation clauses in property
insurance policies.
The result was the
provision outlined above. One reason to grant a waiver of subrogation rights
without charge is based on the fact that fire rates and premiums include both
direct loss experience and experience due to negligence by third parties. Another
reason is that the rate and premium for a building is the same whether the
owner or another party occupies it. The rights waived do not restrict this
insurance.
Related Court Cases:
Broad
Subrogation Clause Waives All of Insurer’s Rights
Mutual
Subrogation Waiver Clause Barred Recovery by Property Owner's Insurer
Lessee’s
Premium Payments Nullify Subrogation Claim
