Waiver of Subrogation – The Most Misunderstood Clause in EPC & Fabrication Contracts

 Waiver of Subrogation – The Most Misunderstood Clause in EPC & Fabrication Contracts

In project contracts, teams debate indemnity caps for hours.

But quietly sitting in the insurance section is a clause that can create real litigation exposure.

Waiver of Subrogation:

Most people include or delete it without fully mapping the risk.

First, What Is Subrogation?

Under insurance law principles recognised in the Insurance Act, 1938, when an insurer pays a claim, it acquires the right to step into the shoes of the insured and recover the amount from the responsible third party.

In simple terms:

Insurance pays → Insurer can sue the party who caused the loss.

Why It Becomes Critical in Fabrication Models

A very common project structure:

✔ Principal supplies free-issue material

✔ Fabricator performs job work

✔ Insurance is arranged by fabricator

Now imagine a fabrication loss — fire, collapse, structural failure.

If waiver of subrogation is removed:

Insurer pays fabricator

Insurer investigates root cause

Insurer alleges defective material supplied by principal

Recovery action begins

Even if fabrication is entirely vendor scope, causation disputes are technical and arguable.

Without waiver → insurer recovery risk exists.

With waiver → insured loss stays within the insurance pool.

Why Mature EPC Contracts Retain It

In infrastructure and renewable projects:

• Multiple parties contribute to the same output

• Risk overlap is structurally unavoidable

• Insurance is meant to absorb project risk — not trigger internal litigation

Waiver of subrogation prevents insurer-driven disputes that can derail timelines and relationships.

What a Balanced Clause Looks Like

A well-structured waiver should:

✔ Apply only to insured losses

✔ Be limited to the extent of insurance proceeds

✔ Exclude fraud / wilful misconduct

✔ Be properly endorsed in the insurance policy

This maintains commercial fairness while protecting project continuity.

 Final Thought

Indemnity caps control contractual liability.

Waiver of subrogation controls insurance recovery risk.

In fabrication models involving free-issue materials,

the latter often has greater practical impact.

Risk in contracts is never eliminated.

It is either consciously allocated — or accidentally assumed.