Subcontractors: Workers' Compensation Risks vs Benefits

Waivers of subrogation present interesting issues in most contracts, but they can pose particular problems within the context of worker’s compensation.  Companies who are not careful with how they manage their contracts can find themselves between a rock and a hard place, with the rock being their own employees and the hard place being companies who contract for their services.

What is Subrogation And Waivers of Subrogation?

Subrogation allows companies (most often ensure companies) to sue others for expenses paid out on behalf of a third party. 

Waivers of subrogation effectively prevent this type of lawsuit from taking place and thus are generally disfavored by insurance companies, who may require additional endorsements for which they charge extra premiums to allow insurers to engage in the practice.

What Do Waivers Of Subrogation Have To Do With Workers' Compensation?

Within the field of workers compensation, waivers of subrogation often occur between construction companies and their subcontractors. 

Contractors will often have the employees of several different subcontractors working on their job sites.  Those employees represent a significant liability to the general contractor for workplace accidents and injuries resulting from acts of negligence.  The main contractor can limit their liability, and hence their insurance premiums, by requiring subcontracts to waive their subrogation rights and assume all responsibility for any on-site injuries to their own employees.

Why Would Subcontractors Take On This Risk?

"Many subcontractors agree to these conditions as a necessary cost of doing business, fearing a potential loss of business if they try to negotiate on matters that can seem relatively insignificant," says Kevin Forbes, Vice President at ECBM.  Kevin continues, "Paying higher premiums to obtain the waiver of subrogation endorsement from their workers compensation insurance makes more sense than losing the revenue from working with a specific general contractor.  Still, this can leave a subcontractor with a large uncovered liability."

An Example:

Imagine a scenario where an electrician employed by a subcontractor suffers a job-site injury as a result of the general contractor’s negligence.  Specifically, let’s imagine that a worker suffered a head injury when an unsecured forty foot tall industrial ladder fell over and landed on him. 

• The subcontractor submits the claim to their worker’s compensation insurance who covers the medical expenses and lost wages parts of the damages. 
• The worker though may have negligence-based lawsuits available to him against the contractor whose damages will exceed the amount paid out by the worker’s compensation claim. 
• The subcontractor and their insurer have already waived its ability to recover the expenses it paid for under the worker’s compensation claim.

The Result In This Example:

Depending on the contracts between subcontractor and employee and subcontractor and general contractor, the subcontractor could be on the hook not just for the worker’s compensation claim but also for additional amounts won by the employee in their negligence lawsuit. 

What’s worse is that some states will even allow the employee to make a double recovery:  to have their medical bills and lost wages covered by worker’s compensation and then to recover those amounts again in a civil lawsuit and thus be reimbursed for expenses they never paid for. 

Avoiding these types of losses requires companies to know the relevant provisions of their contracts and their insurance policies.  Talk to your broker today to ensure you have adequate protection to avoid paying for losses you cannot control.