5 Things Landlords and Tenants Need to Know About Subrogation Clauses

Legal Compliance Resource
November 18, 2013 — 1,525 views  

The waiver under the subrogation clauses are often overlooked or misunderstood by a large number of landlords as well as tenants. However, these clauses are very important to both parties and play an important role in allocation of risk functions. Any failure to consider the scope of these provisions could lead to a significantly high amount of risk exposure for either party. Subrogation plays a major role in settling of insurance policies. These provisions allow the insurance company the right to proceed with legal action against any third party whose negligence could have caused the losses that are covered by insurance. The clause allows the insurance company to help the insured parties to obtain a recovery of the claimed insurance amount.

Understanding the Subrogation Rights

For example, if a tenant causes any incident that leads to the destruction of the landlord's property, the landlord's insurance company would compensate the landlord for the loss. However, if the lease does not contain any of the provisions under the subrogation rights, the insurance company can then pursue legal action against the tenant to recover the claim amount.

A waiver under the subrogation clauses allows each of the parties involved to allocate any risk of loss pertaining to the lease agreement to their insurance providers. The concept is based on the fact that both parties are allowed to allocate risk among each other at the time of the formation of their contract. This waiver would operate in a manner to waive any rights of recovery against both the parties entering a lease contract as long as the extent of the loss is covered by the insurance providers.

In such a scenario, it is very important that the landlord, as well as the tenant. address these following considerations when reviewing and negotiating a waiver of subrogation in their lease contracts.

  1. The Subrogation Waiver Must Benefit Both Parties – It is very important to make sure that the waiver under your contract, regardless of being a tenant or the landlord, benefits both parties in the contract. Always make sure that the contract states the same as this may cause trouble in the future if the waiver benefits only one party.
  2. Subrogation Waiver Can be Applied to all Policies Required Under the Lease -  In most cases, the subrogation clause applies only to the insurance policies pertaining to the property of both parties. However, you should also know that the subrogation waiver can be applied to any and all insurance policies that are required by the lease contract. You should also confirm if your insurance policies permit such waivers.
  3. Limits on the Waiver's Scope – Make a note about all the limitations pertaining to the subrogation waiver. This could imply that the waiver be applied to only certain insurance proceeds from the result of a loss or only to those proceeds specifically mentioned in the lease.
  4. Provision for Additional Insured – If there are insurance policies under the lease to which the subrogation cannot be applied, make sure that the other party is still protected by naming them as additional insured
  5. Ensuring Consistency – You must also take care to ensure that the waiver of these provisions in the lease are reviewed for indemnification to ensure all the provisions required to maintain consistency and adequate risk allocation that each of the parties have agreed upon.

Legal Compliance Resource