Find out why it’s important to understand waivers of subrogation and indemnification in project contracts — as well as what they mean and how they work.
When your team is preparing for a big project, there are several factors to consider when it comes to contract administration and risk management.
Do you understand all your project provisions? Are you using “good paper” for your service agreements and project engagements? Does your company conduct large project reviews prior to quoting and signing project contracts?
One question we like to ask members frequently: Are you quickly signing a GC’s standard project contract without looking through it? If so, you may be signing away your insurance provider’s rights to attach a claim to someone who was negligent and impacted your work (they fell off a lift and hurt one of your installers, for example).
That’s why it’s important to understand waivers of subrogation and indemnification: what they mean and how they work. Let’s cover the basics here.
A Waiver of Subrogation
To “subrogate” means to “substitute” or put one person in the place of another with respect to specific rights or claims. Subrogation is the assumption by a third party (like your insurance company) of another party’s legal right to collect a debt or damages.
A car accident is a good and simple example. Let’s say you’re involved in a car accident that was caused by someone else. After the accident, you submit your claim to your insurance carrier to “indemnify” (compensate) you (more on that term below).
As a result, they pay for medical bills and car repairs—but they also seek subrogation (a refund for themselves from the other driver’s insurance company) by pursuing legal action against the driver. In other words: They put themselves in your shoes against the person responsible for the accident to recover from that person (or that person’s insurance carrier) the losses they sustained on your behalf.
In simple terms: A waiver of subrogation can create a situation where your insurance company can indemnify (compensate) you for your losses, but you sign away their right to make themselves whole for losses (or to recover the losses they sustained). With a mutual waiver of subrogation, all parties waive their rights of subrogation against each other.
An Indemnification Clause
To “indemnify” means to compensate for damages or losses sustained and/or for expenses incurred.
Insurance companies “indemnify” their policyholders against loss in events like fire, vandalism, and hail. An insurance policy can be compared to a contract for indemnity: You suffer the loss, but the insurance company pays.
For example: Perhaps, in your role, you are exposed to certain liabilities due to the nature of your job. You enter into a project contract with another organization on behalf of your employer and, somewhere along the way, the relationship takes a turn. As a result, you’re personally named in a lawsuit—even though you were acting on behalf of the organization that employs you.
An indemnification clause protects one party from liability if a third party or third entity is harmed in any way. It contractually obligates one party to compensate another for losses or damages.
In the example we’re using above, as a director or officer of an organization, you will be indemnified if you are involved in a lawsuit—as long as it’s a result of your duties on behalf of the organization (assuming you were acting in good faith). If you’re sued, then the organization pays your legal expenses under the indemnification clause.
Questions About Reducing Risk?
Still have questions about waivers of subrogation and indemnification when it comes to project contracts? TrueNorth Companies, an NSCA Business Accelerator, is ready to help. They understand the work integrators do, and they can help ensure that you have adequate insurance coverage at a competitive price. Learn more here.
Chad Henry is a risk management specialist at TrueNorth Companies, an NSCA Business Accelerator.
