Improve the Bottom Line Using Subrogation Waivers

James T. Dixon | Brouse McDowell

The premium a company pays for its general liability insurance is based on several factors. More obviously, the rate will be based on the limits of insurance obtained and the applicable deductible. Less obviously, however, classifications, rates and exposure bases also come into play. The Insurance Services Office (ISO) publishes a classification system used by many insurance companies and, for construction companies, the assigned classification is based on the nature of the work performed. For example, concrete construction companies are in classification 91560. The general thinking is that similar companies face similar risks and similar losses.

A rate is then charged for each classification, and those vary by carrier and by state. Further, insurance companies assign one rate to a company’s premises and operations risk (e.g., personal injury from a slip and fall at the office or jobsite) and another to its products and completed operations risk (e.g., personal injury from the collapse of a wall). Finally, an “exposure base” is applied to the rate, and that base could be set based on the size of a building or the annual sales of a company. Fortunately, construction executives have a partner in their insurance agent, who can help wade through this complicated area and find the right insurance at the right price.

Once insurance is in place, contractors can help themselves in ways that extend beyond having effective safety protocols. One of those ways is through the effective use of subrogation terminology in their contracts and insurance policies. In the insurance context, when an insurance company pays a claim, it can step into the shoes of its insured and recover what it paid from the party responsible for the loss. That process is called subrogation. While some subrogation rights are obtained through equity, the rights are most frequently defined by the contract. The insured can waive the insurance company’s subrogation rights by contract, but the insured must be careful. Before entering into a construction contract that waives the insurer’s subrogation rights, the insured should know whether it has the right to do so as set forth in the insurance policy. The standard form published by the ISO, for example, gives the insured permission to waive the carrier’s subrogation rights. That is not always the case, though.

This is where we get to the heart of the matter: What should a construction company look for in its contracts when it comes to subrogation waivers? To give itself the opportunity to pay lower insurance premiums and avoid legal expenses, a construction company can ask the project owner to waive its property insurance carrier’s subrogation rights. In this context, “property insurance carrier” includes those that issue popular builders’ risk policies. Achieving a waiver of this nature would prevent the owner’s insurance carrier from first paying for a loss, and then standing in the shoes of the owner to recover that loss from the contractor, if the contractor was at fault. Likewise, subcontractors can obtain subrogation waivers from general contractors and project owners.

The most popular standard form agreements in use in the construction industry are written to help contractors on this issue. The American Institute of Architect’s A101 Standard Form of Agreement Between Owner and Contractor, through its A201 General Conditions, includes a waiver of subrogation in Article 11.3. The same can be found in Section 10.3.2 of the ConsensusDocs 200. And, whether working with standard or custom forms, there are numerous scope issues that can be the subject of negotiations, including whether the waiver only applies to losses during construction, the insurance that is called for in the contract, damage to the work, design errors, claims for deductibles and retentions, or situations where the other parties have also provided subrogation waivers.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email

Subrogation Defense for Contractors: What to Do When an Insurance Carrier Sues You

Hendershot Cowart

A homeowner or property owner (your client or customer) files a claim with their homeowners or property insurance for damage. The insurance company then comes after you, alleging it was a construction or design defect that caused the damage resulting in a claim. This is known as a subrogation claim. The insurance company is seeking to recoup its claim losses by suing your construction or design business.

If you’ve been sued by an insurance carrier – or if an insurance carrier has intervened in an existing suit filed by the homeowner – alleging defective work, building code violations, failure to adhere to plans and specs, negligent supervision, etc., there are available defenses.

What Does Subrogation Mean in Insurance Settings?

Subrogation occurs when an insurance company “steps into the shoes of its insured” and sues a contractor, subcontractor (i.e., roofers, plumbers, electricians), architect, or design professional on behalf of its policyholder. Usually, insurance companies pay the policyholder for the damages in question and then seek reimbursement from the contractor.

Insurance companies gain subrogation rights when they pay their policyholders and believe other parties are at fault. This is known as conventional or contractual subrogation as insurance policies routinely include a provision granting subrogation rights to the insurer.

There are generally several elements to a valid subrogation claim:

  1. The insurance company paid the claim to the insured (usually the homeowner or property owner)
  2. The insurance company must not have “volunteered” to pay the insured
  3. The insurance company paid the claim to protect its own business interests
  4. The claim paid must be one for which the insurance company was not primarily liable
  5. Subrogation must not work any injustice to the rights of others

How Do You Fight Subrogation Claims?

Subrogation claims may be defended on a technical front – arguing that the claim does not meet the strict requirements of a valid subrogation claim.

Another available defense is the statute of limitations for legal actions based on negligence. In Texas, the statute of limitations is two years.

A skilled attorney can also attack the underlying claim of liability:

  • Was the property damage properly assessed?
  • Is another party liable?
  • What was the basis for calculating the dollar amount of the claim?

Some construction contracts include a subrogation waiver clause. A contract attorney with subrogation experience can review your contract to determine whether the waiver is enforceable. Additionally, some construction contracts limit the scope of subrogation claims, meaning you may only face liability for areas of the home or property you worked on.

As with other lawsuits, the burden of proof rests with the party who brings the lawsuit. Our lawyers can help you address the plaintiff’s claims one by one using every available defense.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email

Florida Court Gives Parties Assigned a Subrogation Claim a Math Lesson

Lian Skaf | The Subrogation Strategist

Although the focus of most subrogation cases is usually on proving liability, determining the appropriate measure of damages is just as important. Sometimes turning on a nuanced argument for recoverability, an adverse holding can significantly boost or reduce the total damages in a case. The Court of Appeal of Florida, Fourth District (Court) recently decided such an issue in a case involving subrogation, holding that the defendants owed much more than they originally anticipated.

In Five Solas v. Ram Realty Servs., No. 4D19-2211 2021, 2021 Fla. App. LEXIS 7546, the Court reviewed the appropriate setoff in damages that the defendants were entitled to when measuring the recoverable damages. The Court reversed the lower court’s holding, which held that the defendants were entitled to a setoff that limited the jury’s award to $104,481.75. Instead the Court held that the defendants were only entitled to a setoff equal to the excess recovery over replacement cost.

The case involves, among other things, property damage sustained by building owner Five Solas (Owner) and its lessee William Price, P.A. from a collapsed wall originating from the property of the defendants, Ram Realty Services, LLC and Sodix Fern, LLC d/b/a Alexander Lofts (collectively referred to as Defendants). Owner’s carrier, Foremost Insurance Company (Foremost), paid out its policy limit of $430,518.25 to Owner for damage to the building. Owner then pursued its claim against the tortfeasors for the remaining damages not paid by its carrier.[1] Foremost also pursued a subrogation claim, but settled its subrogation claim with Defendants, assigning its subrogation rights to Defendants.

Owner’s case against Defendants went to trial and the jury determined that the replacement cost of the building was $943,829.00 and the fair market value of the building – the amount tortfeasors are responsible for – was $535,000.00. After the verdict, the trial court subtracted the amount Foremost paid to its insured ($430,518.25) from the jury’s fair market value determination ($535,000.00) to reach a judgment of $104,481.75, to be paid by Defendants. Owner then appealed arguing, among other things, that it was entitled to be made whole and that Owner should reap “the benefit of its bargain” in contracting for a replacement cost insurance policy.

The Court found that since Foremost paid Owner for constructing a new building and not the fair market value of the old building, the two measures of damages were different. Recognizing that Plaintiffs were entitled to be made whole before Defendants – as assignees of Foremost – could pursue a subrogation claim, the Court held that Defendants were only entitled to a setoff related to the subrogation claim for any amounts that exceeded the greater of the replacement costs allowed and the fair market value of the building. In this case the greater of the two measure of damages was the replacement cost, $943,829.00.

Because Defendants were only entitled to a subrogation setoff for payments in excess of the amount needed to make the insured whole, the Court found that the setoff should have been limited to the combined amount received from the tortfeasors ($535,000.00) and the amount paid by the carrier ($430,518.25) that exceeded the total replacement cost ($943,829.00): the sum of $21,689.25. Thus, the setoff was $21,689.25. Given that the Court states in its opinion that Defendants should pay the fair market value of $535,000.00, it would be consistent for the lower court to render a judgment against Defendants for Owner’s building damages claim – after setoff – in the amount of $513,310.75, rather than the $104,485.75 as determined by the trial court.

Even though this case does not deal with a subrogation matter directly, it involves the effects of subrogation payments and highlights damages issues that can be crucial in subrogation cases. Because the Court found that Owner was entitled to the benefit of its bargain for replacement cost insurance, it essentially viewed the damages valuations in separate categories: what is legally recoverable and what is contractually recoverable.

The contract with Foremost was not for what the owner was already entitled to, but for replacement cost. Thus, while Defendants were certainly free to settle with Foremost, and Foremost was free to assign its subrogation rights to Defendants, those rights had no bearing on the measure of damages for the legally recoverable amount Defendants would owe. The assignment of Foremost’s subrogation claim would, however, affect the amount of any setoff calculation made by the Court associated with the assigned subrogation claim. In this case, because the jury found that the replacement cost was the greater of the two measures of recovery, Defendants were only entitled to a setoff based on the amount that the replacement insurance payment and the amount received from Defendants exceeded the total replacement cost.

This case is important as it showcases how damage issues can have huge swings on the value of a case, regardless of a strong theory of liability or even a favorable verdict. While this particular swing was beneficial to the plaintiffs in this matter, damage holdings can have dramatic swings in both directions. Thus, it is important for subrogation professionals – particularly those who are also representing the insured’s interests – to look at state specific damage laws as early in the life of a case as possible.

[1] Although William Price, P.A. also pursued damages, the discussion of its damages is not relevant to this post.

Court of Appeal Puts the “Equity” in Equitable Subrogation

Garret Murai | California Construction Law Blog

Subrogation as a concept is well understood in insurance circles. According to the Institute of Risk Management Institute’s glossary of insurance terms subrogation is “the assignment to an insurer by the terms of [a] policy or by law, after payment of a loss, of the rights fo the insured to recover the amount of the loss from one legally liable for it.” In other words, if an insurer comes out of pocket for something someone else broke, the insurer can turn to that responsible party for reimbursement of its out of pocket costs.

Typically, subrogation is, as stated in IRMI’s glossary of insurance terms, a matter of contract and the rights and responsibilities of parties are set forth within the terms of a policy. However, subrogation may, as stated in IRMI’s glossary, also be matter of law. And this is where equitable subrogation comes in.

“Equitable subrogation,” according to IRMI, is “the right of subrogation granted under common law when one party has made a payment on behalf of another and becomes entitled to whatever recovery rights the other party has against a responsible third party.”

In Pulte Home Corporation v. CBR Electric, Inc. (2020) 50 Cal.App.5th 216, the 4th District Court of Appeal examined a trial court decision finding against an insurer’s equitable contribution claim against several subcontractors in a construction defect lawsuit.

The Pulte Home Case

Pulte Home Corporation was the developer, owner and general contractor of three single-family developments in Murrieta, California. Pulte contracted with various subcontractors to perform work at the developments. Under the terms of Pulte’s subcontracts the subcontractors agreed to defend and indemnity Pulte against “all liability, claims, judgments, suits, or demands for damages to persons or property arising out of, resulting from, or relating to” their work.

In 2013 and 2014, two groups of homeowners filed lawsuits against Pulte alleging various construction defects at the developments. Pulte tendered defense of the lawsuits to its subcontractors and their insurers pursuant to the indemnity provision in the subcontractors and later filed a cross-complaint against 34 subcontractors for express indemnification and breach of contract. Pulte was defended during the litigation by its insurance carrier, St. Paul Mercury Insurance Company.

During the course of litigation, Pulte and several of the subcontractors settled with the plaintiffs for approximately $80,000. The defense costs leading up to the settlement totaled approximately $253,000.

In separate lawsuit, St. Paul sued the subcontractors for reimbursement of an equitable portion of the defense costs it incurred under an equitable subrogation theory. Following a bench trial, the trial court denied St. Paul’s claim on two grounds.

First, the trial court found that St. Paul had not established a “causal connection” between the subcontractors and damages suffered by the homeowners because the subcontractor’s failure to defend Pulte had not “caused the homeowners to file their lawsuit[s] against Pulte and thereby necessitate th[e] defense costs to be incurred.” Second, the trial court found that equitable subrogation is an all-or-nothing claim, and that St. Paul had failed to show that it could shift the entire costs of defense to the subcontractors.

St. Paul appealed.

The Appeal

On Appeal, the 4th District explained that:

Subrogation is defined as the substitution of another person in place of the creditor or claimant to whose rights he or she succeeds in relation to the debt or claim. By undertaking to indemnify or pay the principal debtor’s obligation to the creditor or claimant, the “subrogee” is equitably subrogated to the claimant (or “subrogor”), and succeeds to the subrogor’s rights against the obligor. In the case of insurance, subrogation takes the form of an insurer’s right to be put in the position of the insured in order to pursue recovery from third parties legally responsible to the insured for a loss which the insurer has both insured and paid.

“Equitable subrogation,” explained the Court of Appeal, includes eight elements:

  1. The insured suffered a loss for which the defendant is liable, either as the wrongdoer whose act or omission caused the loss or because the defendant is legally responsible to the insured for the loss caused by the wrongdoer;
  2. The claimed loss was one for which the insurer was not primarily liable;
  3. The insurer has compensated the insured in whole or in part for the same loss for which the defendant is primarily liable;
  4. The insurer has paid the claim of its insured to protect its own interest and not as a volunteer;
  5. The insured has an existing, assignable cause of action against the defendant which the insured could have asserted for its own benefit had it not been compensated for its loss by the insurer;
  6. The insurer has suffered damages caused by the act or omission upon which the liability of the defendant depends;
  7. Justice requires that the loss be entirely shifted from the insurer to the defendant, whose equitable position is inferior to that of the insurer; and
  8. The insurer’s damages are in a liquidated sum, generally the amount paid to the insured.

As to the first element, the Court of Appeal explained that the trial court had incorrectly interpreted the first element to require St. Paul to show that its insured Pulte suffered a loss for which the subcontractors were “entirely” responsible. Acknowledging that the trial court’s decision appeared to have also relied on the seventh element, “that the loss be entirely shifted from insurer to the defendant,” the Court explained that “the word ‘entirely’ in that context refers not to the total amount the plaintiff (or subrogee) paid, but refers instead to “the claimed loss” (in the second element) that the subrogee is seeking from the defendant on the ground the defendant is primarily liable (third element) for that loss”:

We conclude the trial court’s interpretation of how subrogation operates, which defendants urge us to adopt, is incorrect. While it is true that a subrogee insurer can seek the entire cost of defense – for example, if the insurer is an excess insurer and is claiming the general liability insurer is primarily responsible for the entire loss – a subrogee is not required to do so. In other words, subrogation entirely shifts the claimed loss, but the claimed loss doesn’t have to be entire loss the subrogee suffered.

As to the trial court’s finding that St. Paul had not established a “causal connection” between the subcontractors and damages suffered by the homeowners because the subcontractor’s failure to defend Pulte had not “caused the homeowners to file their lawsuit[s] against Pulte and thereby necessitate th[e] defense costs to be incurred,” the Court of Appeal again disagreed:

Rather than ask whether defendants’ failure to accept Pulte’s tender caused Pulte (and later St. Paul) to incur those costs, the trial court instead asked whether defendants’ failure to accept Pulte’s tender caused the construction defect actions themselves. Under such a causation analysis, a subcontractor’s breach of its duty to defend could never have a causal connection to defense costs. This is because its duty to defend does not arise until after the general contractor is sued and tenders its defense. Such an analysis would have the undesirable result of cloaking subcontractors with impunity for breaching their contractual duties. The proper inquiry is whether defendants’ breach caused Pulte to incur the loss St. Paul is claiming in this litigation (i.e., defendants’ share of the defense costs). The answer to that question is yes.


So there you have it.  As the Pulte court stated: “Equitable subrogation is, as the name suggests, based on equity.” While an insurer may attempt to shift the entirety of its defense costs to others whom it believes are responsible, it is not required to. Further, a defendant’s obligation to reimburse an insurer an equitable portion of its defense costs does not hinge on whether the defendant’s failure to defend an insurer’s insured caused the insurer to incur defense costs, but rather, whether the acts or omissions of the defendant caused or allegedly caused the lawsuit to be filed to begin with.

California Court Invokes Equity to Stretch Anti-Subrogation Rule Principles

Gus Sara | The Subrogation Strategist | May 2, 2019

In Western Heritage Ins. Co. v. Frances Todd, Inc. 2019 Cal. App. Lexis 299, the Court of Appeals of California, First Appellate District, addressed whether a commercial condominium association’s carrier could subrogate against the tenants (aka lessees) of one of its member unit owners. After examining the condominium association’s declarations, as well as the lease terms between the owner and the lessees, the court held that the association’s carrier could not subrogate against the lessees because they were implied co-insureds on the policy. To reach its decision, the court explained that an insurer steps into the shoes of its insured, not the party with whom it is in privity. Although the first-party property portion of the association’s insurance policy did not, as required by the association’s declarations, have the owner listed as an additional named insured, the court held that it would be inequitable to treat the association as the sole insured for purposes of determining Western Heritage’s right to bring a subrogation action.

In Western Heritage, William R. de Carion d/b/a Surfwood Properties (de Carion or Lessor), owned a commercial unit within a multi-unit commercial building. The building was managed by the East Shore Commercial Condominiums Owners’ Association (the Association). As a unit owner, de Carion was a member of the Association. The Association’s Declarations of Codes, Covenants and Restrictions (CC&Rs) required the Association to procure fire insurance for the commercial units by adding the unit owners as additional named insureds. The CC&Rs also prohibited owners and their “tenants” from procuring their own fire insurance policies for the premises. In 2013, de Carion leased his commercial space to Frances Todd, Inc. d/b/a The Wooden Duck, Eric Todd Gellerman and Amy Frances Feber (Lessees).

The lease agreement required Lessees to keep the premises in good repair. It also included a “yield up” clause, requiring Lessees to surrender the premises at the end of the tenancy in substantially the same condition as they received it, except in the event of a “casualty.” The lease also required that Lessees indemnify de Carion for any liability resulting from Lessees’ negligence, and required Lessees to maintain liability insurance. The lease made no mention of fire insurance.

In 2014, a fire erupted within Lessees’ space. The fire damaged de Caron’s unit and other nearby property. At the time of the fire, the Association had a fire insurance policy with Western Heritage, which paid to repair the damages. Despite the requirement in the CC&Rs that unit owners be added as additional named insureds on the Association’s policy, the policy did not have de Carion listed as an additional named insured with respect to first-party property coverage.

In 2015, Western Heritage filed a subrogation action against Lessees. In 2016, Lessees filed a motion for summary judgment, arguing that they were implied co-insureds under the policy. Western Heritage opposed the motion, arguing that the defendants were not implied co-insureds because the lease held Lessees responsible for property damage and the Association was not a party to the lease.

The Court of Appeals acknowledged California precedent holding that a lessee is not responsible for negligently caused fire damages where the lessor and lessee intended the lessor’s fire policy to be for their mutual benefit. The court cited prior decisions holding that if the lease states that fire insurance will be used to repair fire damages, then all parties to the lease are considered co-insureds to the policy, thereby barring subrogation. The court further cited cases holding that if a lease holds the lessor responsible for repairing damages caused by fire, then it is implied that the lessor will procure insurance on the premises for the benefit of the tenant as well.

Focusing on the facts of this case, the court found that the lease required Lessees to maintain liability insurance, but not fire insurance, implying that de Carion would carry fire insurance. Further, the court found that the CC&Rs governing the property required the Association to name de Carion as an additional named insured on the Association’s insurance policy. In addition, the court found that owners such as de Carion, and tenants such as Lessors, were prohibited by the CC&Rs from purchasing individual fire policies. Further, the court noted that the “yield-up” clause in the lease provided that Lessees would surrender the premises in substantially the same condition as it was on the first day of the lease, except that Lessees would not be responsible for repairs caused by casualties. Thus, the yield up clause implied that Lessor would procure fire insurance for the benefit of Lessees. Considering these findings together, the court held that Lessees were implied co-insureds on the Western Heritage policy.

In reaching this holding, the court rejected Western Heritage’s arguments that: 1) it stood in the Association’s shoes, not de Carion’s shoes, for purposes of subrogation; and 2) de Carion was only listed as an additional insured under the commercial liability section of the policy, not the first-party fire coverage. As argued by Western Heritage, pursuant to the anti-subrogation rule, because the Association did not add de Carion as an additional insured for the loss at issue, it could proceed against Lessees. The court noted, however, that although the Association did not add de Carion as an additional named, it was contractually obligated to do so by the CC&Rs. In addition, the CC&Rs provided that the insurer who issued the Association’s and de Carion’s first-party coverage would include a waiver of subrogation clause waiving subrogation against both owners and tenants in the Association’s condominiums. In light of the Association’s contractual requirements, as set forth in the CC&Rs, the court held that it would be inequitable to treat the Association as the sole insured for purposes of Western Heritage’s right to bring a subrogation action to recover the amounts it paid under its fire policy.

The Western Heritage case reminds subrogation professionals that courts may invoke equitable principles when determining subrogation-related issues. Although courts often consider the insured with whom the insurer is in privity to be the party in whose shoes the insurer steps, courts may invoke equitable principles to determine that the insurer steps into the shoes of all named insureds under the policy, even insureds with whom the insurer is not in privity. In addition, Western Heritage reminds us that, when determining whether a commercial lessee in California is an implied co-insured on its lessor’s insurance policy, it is important to look at all of the terms of the lease to determine whether the lessee will be held responsible for damages caused by casualties. Even if the lease does not, explicitly, hold a lessee responsible for damages caused by casualties and require the lessee to have fire insurance, the lessee may be deemed an implied co-insured. If the court finds that the lessee is an implied co-insured, subrogation against the lessee will be barred.