Waiver of subrogation

How BC law treats it

Subrogation lets an insurer that has paid a claim step into the insured's shoes and sue whoever caused the loss. It is recognized at common law and in the Insurance Act, RSBC 2012, c 1. Because the insurer only has the insured's rights, if the insured has already released the wrongdoer, or agreed that a loss is the insurer's risk, the insurer has nothing to pursue. The Supreme Court of Canada developed this in a trilogy of lease cases. In Ross Southward Tire Ltd v Pyrotech Products Ltd, [1976] 2 SCR 35, and T Eaton Co v Smith, [1978] 2 SCR 749, a landlord's covenant to insure the building meant the tenant was not liable to the landlord, or its insurer, for a fire the tenant negligently caused. In Commonwealth Construction Co v Imperial Oil Ltd, [1978] 1 SCR 317, a subcontractor named under a builder's risk policy was protected from the insurer's subrogated claim. Modern commercial leases and standard form construction contracts usually state the waiver expressly. Each party agrees to insure specified risks, such as property damage, and releases the other from liability for losses that insurance covers or should have covered. The insured must make sure the policy allows a pre-loss waiver, often by an endorsement, or it may breach the policy and lose coverage.

What it means for your business

Without a clear waiver, a tenant whose employee accidentally starts a fire could face a subrogated claim from the landlord's insurer for the full cost of rebuilding. With one, the loss stays with insurance, which keeps premiums predictable and relationships intact. Landlords, tenants, owners and contractors should read the insurance and release clauses together, confirm their policies permit the waiver, and make sure the clause covers deductibles and uninsured losses the way they intend. Example: A tenant in a Burnaby industrial building accidentally causes a fire. Because the lease requires the landlord to insure the building and contains a mutual release and waiver of subrogation, the landlord's insurer pays for repairs and cannot sue the tenant.

Risks and common mistakes

Agreeing to a waiver of subrogation in a lease or contract without confirming the insurance policy permits it. Assuming the waiver covers the deductible and uninsured losses when the clause is limited to insured proceeds. Reading the indemnity clause alone without checking the insurance covenant and release that may override it. Failing to name contractors or subcontractors as insureds on a builder's risk policy when the contract requires it. Treating a waiver of subrogation as an agreement with the other party's insurer, when it is a term between the contracting parties.