Subrogation in construction

Subrogation is the substitution of one person in the place of another in relation to a claim. That is, one person (the subrogee) ‘steps into the shoes’ of the other (the subrogor) and is assigned with all their rights and remedies.

Subrogation commonly arises in construction in relation to insurance policies, where the insurer will often need the right to step into the shoes of the insured in order to pursue a claim against a third party with a contractual obligation to the insured. This allows the insurer to attempt to recover the cost of the compensation they may have paid to the insured. By assigning their rights and remedies, the insured is prevented from pursuing a claim against the third party themselves, although if the insurer recovers more than the compensation (plus expenses) they will generally pass this back to the insured.

It is not uncommon in construction to be asked to change insurance policies to waive subrogation rights; ie, the insurer agrees not to pursue a claim to recover compensation they have paid out. For example, a main contractor might demand that a sub-contractor waive their subrogation rights against them. This, in effect creates a no fault insurance scheme which inevitably results in increased premiums.

NB Insurance Policyholder Taxation Manual, published by HM Revenue & Customs on 19 March 2016, defines subrogation as: ‘the right of one person to stand in the place of another and avail him/herself of the rights and remedies of that other person, whether already enforced or not (for example, the right of an insurer who has indemnified a claimant to seek compensation from the person who caused the insured damage).’