For contractors, often the construction contract will require you to provide contract works and third-party insurance policies. The contract may ask for these to have a cross liability and waiver of subrogation clause. So what are these and why has the principal asked you for it? This article explores these terms and reasons why they would be included in a construction contract.
The clause will often read like this:
Any insurance required to be effected in joint names in accordance with the Contract shall include a cross liability clause in which the insurer agrees to waive all rights of subrogation or action against any of the persons constituting the insured and for the purpose of which the insurer accepts the term ‘insured’ as applying to each of the persons constituting the insured as if a separate policy of insurance had been issued to each of them.
A cross liability clause obliges the insurer to cover each of the insured parties as if they had taken out insurance separately. The key reason to request this clause is to ensure the insurance responds to a liability that one insured party has incurred towards another insured party in carrying out the works.With this clause the principal is looking to ensure that each individual party has adequate insurance and to minimise the risk that any of the parties will end up in dispute with each other over liability.
Let’s look at an example. A contract works policy taken out by the contractor covers the contractor and all subcontractors. In the event that Subcontractor A drops a load of steel from a crane and it lands on Subcontractor B’s temporary works then the policy will respond to cover the liability A has incurred towards B. The claim can be made and the principal can be reasonably assured that the project will continue, save the delays from the incident. If there is no cross liability clause within the policy then a breach by one of the insured parties may result in the other insured parties not being indemnified. In the situation of Subcontractor A’s load of steel dropping on Subcontractor B’s temporary works the insurer may deny cover citing that the property was owned by the insured and hence excluded under the policy. The two subcontractors then go into dispute over liability potentially affecting the project, exactly the scenario the Principal is seeking to avoid.
A waiver of subrogation clause prevents the insurer from stepping into the shoes of the insured and seeking recovery from a third-party insured under the same policy.
As an example, an insured contractor is liable for property damage to a third-party but the principal has contributed to the damage in some way. Usually the insurer would step into the shoes of the contractor and seek a contribution from the Principal. However the waiver of subrogation will prevent the insurer from recovering a contribution from the principal. In this instance the waiver has worked to the favour of the principal by protecting them from claims.
A waiver of subrogation has the effect of allowing parties to avoid becoming engaged in complex lawsuits and insurance claims but still receiving the protection of the insurance policy. If an insurable event occurred and there were several parties on the construction site with varying levels of contribution to the cause of the event there lies the risk of claims and counterclaims by the various insurance parties. This can cause huge damage to the Principals project as relationships between the parties breakdown and claims take their toll on contractors to the point where the delivery of contracted works may be impossible. The principal is likely looking to avoid the possibility of this situation occurring.
If your construction contract has a cross liability and waiver of subrogation clause it’s best to consult your insurance broker to ensure your insurance meets the requirements prior to signing.