What is a Waiver of Subrogation for Work Comp? Are there Risks?

Businesses are often asked by their customers, general contractors and/or vendors to add a waiver of subrogation to their workers compensation policy. The provisions of this waiver can be confusing, and it can be difficult to know whether you should agree to such a stipulation.

Should you sign a waiver of subrogation? Before you can answer this question, you need to have a full understanding of the agreement you are about to make and how it could affect your workers’ compensation risk and any associated costs.

What is a Waiver of Subrogation?

If you sign a waiver of subrogation clause, you are agreeing to waive (give up) your work comp insurance carrier’s right to seek damages from another party. Why might this be important? Say your employee is working on a construction job site and is injured as a result of the negligence of your customer or a contractor from another company.

While your workers compensation coverage may pay for bills associated with that injury, your insurance company will likely want to pursue damages from the negligent party to recover its payment. However, if you agreed to add this waiver, you are essentially informing your insurance carrier that it is fully responsible for covering the costs for that injury and that the carrier can’t take any legal action.

What Are the Risks of a Waiver of Subrogation?

Businesses are often asked by their customers, general contractors, and/or vendors to add a waiver of subrogation to their workers' compensation policy. The provisions of this waiver can be confusing, and it may be difficult to know whether agreeing to such a stipulation is in the best interest of your business.

Should you sign a waiver of subrogation? Before answering this question, it's essential to have a full understanding of the agreement you’re about to make and how it could impact your workers’ compensation risk, costs, and overall financial stability.

What is Subrogation in Workers' Compensation?

Subrogation is the right of your workers' compensation insurance carrier to recover costs by seeking damages from a third party if that party is responsible for an employee’s injury. In workers’ compensation, this process allows your insurer to recover funds it paid out for the employee’s claim by holding the responsible party accountable.

What is a Waiver of Subrogation?

If you sign a waiver of subrogation clause, you are agreeing to waive (give up) your insurance carrier’s right to seek damages from another party.

Why might this matter? Imagine your employee is working on a construction site and is injured due to the negligence of another contractor or the customer. Although your workers' compensation coverage may pay for the medical costs and lost wages, without a waiver of subrogation, your insurance company would typically pursue the negligent party to recover these expenses. However, if you agreed to the waiver, your insurer cannot take legal action against the third party, meaning the costs are fully absorbed by your policy alone.

Types of Waivers of Subrogation in Workers' Comp

Waivers of subrogation in workers' compensation can be:

• Blanket Waivers: These apply broadly across multiple contracts, often used when a business frequently deals with clients requiring subrogation waivers.
• Specific Waivers: These apply to a single contract or specific third-party, and are typically easier to negotiate or limit.

Understanding the type of waiver being requested can help you assess the potential impact on your workers' compensation policy and choose a more manageable option, if needed.

What Are the Risks of a Waiver of Subrogation?

The direct cost to add a waiver is often around $50 per endorsement. While this may seem minimal, waiving subrogation rights could expose your business to significant indirect financial risks:

1. Impact on Experience Modification Rate (E-Mod): Since the insurance carrier cannot recoup the expenses from the responsible third party, the entire claim cost is added to your company’s E-Mod calculation. This could increase your workers' comp premium for up to three years, significantly raising costs.
   Example: Let’s say a claim without a waiver could have led to the insurer recovering $50,000 from the negligent party. With the waiver, that full cost is included in your E-Mod, potentially increasing your premiums for several years.
2. Reduced Potential for Dividends: Many workers' compensation policies offer dividends to companies with low claims costs. Adding a waiver of subrogation increases the likelihood of higher claims costs, which can reduce or eliminate any potential dividends, leading to further financial impact.
3. Administrative and Contractual Risks: Adding a waiver could also mean additional administrative burden or make it harder to secure favorable rates with other insurers, especially if your E-Mod significantly increases. High-risk E-Mod ratings could also limit your eligibility for certain contracts that require low-modification ratings.

Legal and Contractual Implications

Waivers of subrogation are especially common in industries like construction, manufacturing, and services, where general contractors or clients may require them as part of their contractual terms. It’s essential to understand these requests within the context of each contract and assess whether they are negotiable.

Should You Add a Waiver of Subrogation if Asked?

Before agreeing to a waiver, it’s worth trying to negotiate. Some companies are firm on requiring the waiver, while others may be open to revising or removing it from the terms. If removal is not an option, consider the following:

1. Evaluate Injury Risk: Assess the likelihood of employee injury on job sites or due to third-party negligence. If the risk is high, it may be best to avoid agreeing to the waiver.
2. Consider Financial Impact: Calculate potential increases in your E-Mod and estimate how the waiver might affect future premiums, dividend potential, and contract eligibility.

Once you’ve weighed these factors, you’ll be in a better position to decide if the waiver of subrogation is worth the potential financial burden.

Current Trends and Regulations

Stay informed on any state-specific regulations or updates that may impact subrogation rights. In recent years, subrogation has become a critical component in managing workers' compensation costs, especially in high-risk industries. Regulatory changes or notable court rulings may influence whether waivers are enforceable or standard in certain contracts.

Need Assistance?

If you’re still unsure whether to sign a waiver of subrogation or need help assessing the potential impacts on your business, our risk advisors can guide you. Contact us today to determine the best solution for your company.