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Workers Compensation Solutions - Workers Compensation Insurance

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A waiver of subrogation is an endorsement to a workers' compensation policy that prohibits the insurance carrier from filing suit against a firm (usually a developer/contractor) for subrogation rights in a workers compensation claim.  It also prohibits the insurance carrier from enforcing its' lien rights should the injured employee pursue a third-party claim.  It does not prohibit the injured employee from filling suit against the firm identified in the waiver of subrogation. 


This example should help you to understand:


First, let's name the parties involved:


     Insured:  Joe's Trim Carpentry, Inc.  (also referred to in this example as the sub-contractor)


     Employee:  Bill Smith (he is a carpenter working for Joe's Trim Carpentry, Inc.)


     General Contractor:  Acme General Contracting, Inc.  (also referred to as the certificate holder)


     Foreman:  Tom Jones (he works for Acme General Contracting, Inc.)


     Insurance Company:  ABC Insurance Company


The agreement…


Joe, from Joe's Trim Carpentry, is desirous of doing work for Acme General Contracting on a large job they are about to begin.  Acme, likes the work that Joe does and they are interested in working with Joe as well.  They are okay with the bid he has put in, but they want Joe provide them with a certificate of insurance showing proof of worker's compensation along with a Waiver of Subrogation in their favor.  Joe just wants the work, so he calls his agent and asks them to take care of it for him.  The agent tells Joe that there is a small charge involved and Joe says go forward so he can get the job.  The waiver is issued and Joe begins work on the job.


A claim occurs…


Bill Smith, an employee of Joe's, gets' injured in an accident while on the jobsite of Acme General Contracting.  The claim occurred when Tom Jones, foreman for Acme General Contracting, backed his company truck up and struck Bill as he was carrying some materials to the area in which he was working.  Unfortunately, Bill was badly hurt and was transported to the local hospital for treatment.


Joe notifies ABC Insurance Company of the claim and they begin paying for Bill's medical bills and later his disability as he is unable to return to work for an extended period.  Months later, Bill is able to return to work, although initially, he is only able to return to work in a light duty-capacity.  After further recovery with physical therapy, he is finally able to return to work full-duty and the claim is able to be closed. 


Total Cost of the Claim:  $80,000.


Normally, ABC Insurance Company would try to file a lien if Bill Smith, the injured employee, were to file suit against Tom Jones and Acme General Contracting.  By doing this, ABC Insurance Company has the ability to recover some, if not all, of the $80,000. in claim expenses paid to Bill Smith and thereby reducing the claim costs and lowering the loss ratio of Joe's Trim Carpentry, Inc. for the purposes of workers' compensation.


In this case, however, Joes' Trim Carpentry agreed to the Waiver of Subrogation and therefore, ABC Insurance Company is prohibited from pursuing reimbursement for the claim.  Further, the loss ratio for Joe's Trim Carpentry is negatively impacted, even though the claim was clearly caused by a third party.  Their future costs for workers' compensation will increase, probably dramatically. 


As to Acme General Contracting and their foreman, Tom Jones, even though ABC Insurance Company is prohibited from recovering funds paid out on the claim, there is nothing prohibiting Bill Smith, the injured employee from filing a suit for damages.  In fact, Bill Smith may end up with a double recovery.  His medical bills and disability were paid by ABC Insurance Company and he should have no trouble obtaining a large settlement in his lawsuit as well.


As to Acme General Contracting, the Waiver of Subrogation they demanded protects them from the subrogation from ABC Insurance Company, but as identified above, not from Bill Smith.


The winners in all this…


Bill Smith, the injured employee. (only from a financial perspective.  Remember, he was injured.)


The losers…


Joe's Trim Carpentry, Inc. 

Acme General Contracting, Inc.

Tom Jones, the foreman for Acme General Contracting, Inc.


The Long and Short of it…


In today's world, more and more developers, general contractors are asking for/requiring Waivers of Subrogation.  In order to get the work, the subcontractors are agreeing to provide them.  For the purposes of workers' compensation insurance, the upfront cost is not much (from $0. to $200.).  However, the back end cost of not being able to recover claim costs against a contractor, if they were to cause the claim, can be large.  Even larger, if the contract calls for the subcontractor to name the general contractor as an additional insured on the general liability insurance as well.  In this scenario, not only would the sub-contractor pay for the workers' compensation injuries, but they could end up paying for the third party suit against the general contractor as well.


Last Item …


Some states are amending their workers' compensation laws to make Waivers of Subrogation, null and void or not enforceable, as they consider them to be "against public policy".  Further, the courts are starting to weigh in on the issue as well.  In the State of Florida, they are still enforceable, at this time.

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