When negotiating contracts with a client, sometimes their eyes roll when we come to the section on insurance, particularly that awkward phrase, “waiver of subrogation.” What is subrogation and what does it mean to waive it? Simply put, subrogation is the right of a party, typically an insurance company, to pay a loss then sue the party or parties who are liable for the loss. A waiver of subrogation precludes an insurer from such an action.

A recent case in Connecticut illustrates the importance of the subrogation waiver. On February 7, 2010 a natural gas explosion killed five, injured a dozen more and caused extensive damage to a power plant under construction.

The accident occurred during a “gas blow,” which is a commissioning procedure whereby natural gas is forced through the plant piping at a high rate in an effort to clean out the gas supply lines to the gas turbine. These operations are perilous because any spark from such debris or from static electricity can ignite the gas. Here, the gas was discharged into a confined area, where workers were engaged in welding and other activities.

Not surprisingly, lawsuits followed. The facility owner’s insurance carrier ultimately paid approximately $200 million in settlement of claims. The carrier then sued the subcontractors, the gas turbine manufacturer, and the sellers and transporters of the natural gas. The defendants denied liability and moved for dismissal based in part on language in the contract that explicitly waived the carrier’s right of subrogation. Among other theories, the carrier argued that the accident was caused by the recklessness of the subcontractors, which rendered the waiver of subrogation void as against public policy. Last Friday, the U.S. District Court for the District of Connecticut ruled on the motions to dismiss.

In language that must have given the subcontractors pause, the court found that the plaintiffs’ allegations supported a finding of recklessness. The court based this finding on allegations that, despite knowing that the gas blow process was inherently dangerous, the subcontractors designed the gas blows for discharge into a confined space with numerous sources of ignition. They also failed to follow their own commissioning procedures, lacked experience and expertise regarding the gas blow process, failed to modify the process after being warned of the dangers associated with discharge into a confined space, and discharged an employee because he attempted to develop a safer procedure.

The court found that the waiver of subrogation was valid and enforceable, and then had to squarely address the issue of whether public policy requires a different result in cases of recklessness and strict liability. Drawing a distinction between claims in a setting that would leave tort victims without compensation and situations like this that would leave an insurance carrier without reimbursement from a third party for an otherwise covered loss, the court found no public policy in favor of the carrier: “[T]he plaintiffs knowingly agreed to insure the construction of the Kleen Plant and neither the construction contract nor the insurance policy provided an exception or exclusion for reckless or ultrahazardous conduct.” The carrier’s claims against the subcontractor for subrogation were dismissed.