“Subrogation” as a Misapplied Term of Art

I’m in the process of revisiting the concept of “misapplied” terms of art, which I discuss in MSCD chapter 1. The idea is that it doesn’t make sense to use doctrinal terms of art in contracts if simpler terminology is available.

Today’s candidate for a misapplied term of art is the noun subrogation (and the verb subrogate). Here’s the Black’s Law Dictionary definition of subrogation:

subrogation (səb-rə-gay-shən) n. (15c) 1. The substitution of one party for another whose debt the party pays, entitling the paying party to rights, remedies, or securities that would otherwise belong to the debtor. • For example, a surety who has paid a debt is, by subrogation, entitled to any security for the debt held by the creditor and the benefit of any judgment the creditor has against the debtor, and may proceed against the debtor as the creditor would. Subrogation most commonly arises in relation to insurance policies. 2. The equitable remedy by which such a substitution takes place. 3. The principle under which an insurer that has paid a loss under an insurance policy is entitled to all the rights and remedies belonging to the insured against a third party with respect to any loss covered by the policy.

Here’s an extract from EDGAR that uses the verb subrograte. I’ve marked the change I’d make:

Notwithstanding any payment made by the Capital Corporation hereunder or any set-off or application of funds of the Capital Corporation by the Administrative Agent or any Bank, the Capital Corporation shall not be entitled to be subrogated to [read will not acquire] any of the rights of the Administrative Agent or any Bank against JD Luxembourg or any guarantee or right of offset held by the Administrative Agent or any Bank for the payment of the Luxembourg Obligations, until all amounts owing to the Administrative Agent and the Banks by JD Luxembourg on account of the Luxembourg Obligations are paid in full in cash.

Here’s another extract. I deleted, as being redundant, the part referring to subrogation:

Until all of the Guaranteed Obligations have been paid or performed in full, the Performance Guarantor shall not exercise any right of subrogation to, and the Performance Guarantor waives, to the fullest extent permitted by law, any right to enforce, any remedy which the Trust now has or may hereafter have against the Servicer or the Seller in respect of the Guaranteed Obligations and the Performance Guarantor waives any benefit of, and any right to participate in, any security now or hereafter held by the Trust for the Guaranteed Obligations.

Here’s an extract from a lease that uses subrogation to convey its insurance-related meaning, followed by my version:

Original Version: All fire and extended coverage insurance policies carried by either Landlord or Tenant shall provide for a waiver of rights of subrogation against Landlord and Tenant on the part of the applicable insurance carrier.

My Version: In all fire and extended coverage insurance policies carried by either Landlord or Tenant, the insurer must waive any right to exercise rights and remedies of the insured against another with respect to any loss covered by the policy.

The bottom line: in contracts you can always use something simpler and clearer than subrogation and subrogate.

By the way, I’m wondering whether I can come up with a better word than “misapplied”.

About the author

Ken Adams is the leading authority on how to say clearly whatever you want to say in a contract. He’s author of A Manual of Style for Contract Drafting, and he offers online and in-person training around the world. He’s also chief content officer of LegalSifter, Inc., a company that combines artificial intelligence and expertise to assist with review of contracts.

12 thoughts on ““Subrogation” as a Misapplied Term of Art”

  1. I prefer your wording of the subrogation waiver language in the lease, but I think there still is value in using the term of art. When a tenant brings its lease to its insurance broker to obtain the appropriate policy, I don’t have faith that every insurance broker would catch that and include a waiver of subrogation in the policy. My guess is that many of them do a quick scan and look for a few keywords and clauses (commercial general liability…policy limit…full replacement value…plate glass…subrogation…indemnity), and tailor the policy based on what they see in that cursory scan.

    Could this be a place to compromise because it is probable that users of the contract are going to jump to conclusions if traditional language is missing, and do so in a way that could negatively impact a client?

    • I concur, as a mater of practicality. “Waiver of subrogation” is a specific, known label that allows people not to care about what it means. A business person tells the broker that she needs a waiver of subrogation and he gets it for her.

    • Sorry for the delay in responding; Chris’s comment prodded me.

      How about using “Waiver of Subrogation” as a heading? That the approach I use for expressing warranties: I don’t want to use the verb warrants, but I recognize the value of the label.

      • That sounds like a perfectly good solution. Based on your advice, I do the same thing for introducing statements of fact.

  2. I don’t have an issue with changing the language in the contexts of loans, guarantees or other self contained commercial arrangements that only are about the rights between the parties to the contract. I would view your first 3 examples as falling into this category. However, when the language speaks to insurance concepts (your 4th example) and what kind of insurance parties are telling each other they need to go get from their insurers, I don’t believe that “simplication” is necessarily better or serving the clients interests better.

    Also, I point out that (with your 4th example your attempt to simplify the lease) you have dramatically changed the meaning and contractual extent of what is required. Even if I agree with the idea of getting rid of the 3 word phrase “rights to subrogate” in favour of your use of 9 words “right to exercise rights and remedies of the insured” (which I don’t), you can’t just substitute “another” for “Landlord and Tenant”.

    The landlord needs the insurer to attach a rider so that the insurer will not stand in the shoes of the tenant to sue the landlord for wrongs/negligence of the landlord against the tenant. The landlord has no interest in taking away the rights of the insurer to go after others. For a simple example, if some maniac drives through the plate glass windows of a tenant’s premises and the tenant’s insurance pays for the repairs, the insurer should have the right to go after the driver of the car that caused the damage. A contractual term that required the insurer to include a rider that waives subrogation rights against “another” would encompass not just the Landlord but also the maniac driver of the car that drove through the window. That goes too far. Perhaps this issue would be fixed in your phrase by replacing “another” with “the other party to this Lease”.

    Generally, I am very hesitant to unilaterally change insurance terms that I think are archaic or hard to understand. The biggest insurer in the world (i.e. the Lloyds list) is not even an “entity” or “person” in the sense that commercial lawyers understand. It is a very strange animal that I don’t pretend to understand and there is language that has been used in insurance wordings for 100s of years that invoke whole risk allocation paradigms. You would have to be very up on the inner workings of insurance law in order to be able to know for sure whether the reference to an insurance term in a contract you are thinking of changing is or is not a term of art. If it is not a term of art – take your best shot at reworking the language. If it is a term of insurance art you better be really confident that: (a) you understand its entire meaning and relevance in the insurance market (b) your new “plain language” substituted language embodies that entire meaning, and (c) that the client’s insurance brokers and the insurance companies that the brokers decide to underwrite the policy with are going to properly interpret the “simplified language” you have used to issue policies and riders that meet the requirements of the parties. I can bet with near 100% certainty, that even if a contract used your simplified language, the insurance policies themselves would continue to issue riders that use the insurance term “waiver of subrogation”.

    If your simplified terms are used in the insurance context, someone in the chain of communication from the contract to the insurer is going to have to interpret your “simplified” language to communicate in terms that the insurance company is going to understand (i.e. the client wants waiver of subrogation against x). Who is going to do that? The client (who is neither a lawyer or an insurance professional)? The insurance broker? Hopefully, the insurance broker might identify that someone has decided to use “simplified” language to describe what the entire insurance industry only understands with the term “subrogation” but I wouldn’t want to bet the farm on that. Also, I would be very nervous about my own liability if the simplified language was used and my client didn’t get the required waiver and was being sued by the landlord for breach of contract. Would I pass the negligence bar for providing a contract that doesn’t use the industry buzz words “waiver of subrogation” (because of my believe that it is an archaic word that should not be used?) when there would no doubt piles of evidence that the term is universally used across the insurance industry and perhaps some evidence that it would be reasonable to foresee that brokers would not understand the plain language to be a requirement for obtaining what they have always referred to as waiver of subrogation? Your idea of putting the title “Waiver of Subrogation” in the title might address this but if you argue that the phrase is inappropriate for the text, how is it appropriate for the title?

    Subrogation is just one example of strange terms common in insurance. Others I can think of include “named insured”, “additional named insured”, “additional insured”, “loss payee”, “severability of interests”, and “own occupation” (in disability policies). No doubt there are dozens more. I guess my basic point is that while I cheer on efforts to simply language in contracts generally, extreme caution should be exercised before being the lonely voice in the herd calling for insurance terms used in a contract to be substituted with what I view as simpler or more plain English descriptions of the applicable insurance concepts.

    • OK, I waive the white flag! Thank you for taking the time to explain all this.

      My goal would be to avoid rocking the insurance boat while at the same time helping people understand what they’re agreeing to. I assume that my suggestion in my reply to Sterling’s comment, that one use the heading Waiver of Subrogation, wouldn’t satisfy you. How about doing as I did with coupled with an interest: supplement the “before” example by adding at the end “, so that …” (or something to the same effect), and explaining what the effect of the waiver would be?

      • I can accept adding language that purports to explain the jargon that is used. However, if your description is not spot on then you run the risk that you have said 2 things that are not the same and in that case which is correct? Would the industry understanding of the term (with all of the bells and whistles that go with it) or your description of what you thought you were doing with the jargon be what the courts interpreted as the intent?

        I enjoy your blogs on drafting and trying to break habits that blindly include words and provisions without thinking. At the end of the day, being a clear thinker/drafter is something that you can add onto a good core knowledge of the substantive areas of law that the contract deals with – being a clear thinker/drafter is not a substitute for having that core knowledge. I bet that the percentage of lawyers that actually are expert in understanding insurance law and Lloyds wordings would be in the 0.1% of practising lawyers (or less). In an ideal world a lawyer with leading insurance expertise fully trained in your MSCD approach would create an article with a few dozen of the most commonly seen insurance provisions and suggest simpler provisions. Maybe those could then be used and would find their way into contracts over time. It would be nice, …. but I don’t hold up much hope for more projects like the ABA Silverado Accord on opinions.


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