Subrogation in Insurance: What it Is and Why It's Important

What Is Subrogation?

Subrogation is a term describing the right held by most insurance carriers to legally pursue a third party that caused an insurance loss to an insured. This allows the insurance carrier to recover the amount of the claim it paid to the insured for the loss.

Understanding Subrogation

Subrogation refers to the act of one person or party standing in the place of another person or party. It effectively defines the rights of the insurance company both before and after it has paid claims made against a policy. Also, it makes the process of obtaining a settlement under an insurance policy easier.

When an insurance company pursues a third party for damages, it is said to "step into the shoes of the policyholder." Thus, the carrier will have the same rights and legal standing as the policyholder when seeking compensation for losses. If the insured party does not have the legal standing to sue the third party, the insurer will also be unable to pursue a lawsuit as a result.

How Subrogation Works

In most cases, an individual’s insurance company pays its client’s claim for losses directly, then seeks reimbursement from the other party or their insurance company. In such cases, the insured typically receives prompt payment. Then the insurance company may pursue a subrogation claim against the party at fault for the loss.

Insurance policies may contain language that entitles an insurer, once losses are paid on claims, to seek recovery of funds from a third party if that third party caused the loss. The insured does not have the right to file a claim with the insurer to receive the coverage outlined in the insurance policy or to seek damages from the third party that caused the losses.

Subrogation (sometimes shortened to "subro") in the insurance sector, especially among auto insurance policies, occurs when the insurance carrier takes on the financial burden of the insured as the result of an injury or accident payment and seeks repayment from the at-fault party. The subrogation process can take weeks, months, or even years to complete, dependng on the complexity of the case, state regulations, and other factors.

Example of Subrogation

One example of subrogation is when an insured driver's car is totaled through the fault of another driver. The insurance carrier reimburses the covered driver under the terms of the policy and then pursues legal action against the driver at fault. If the carrier is successful, it must divide the amount recovered after expenses proportionately with the insured to repay any deductible paid by the insured.

Subrogation is not only relegated to auto insurers and their policyholders. Subrogation also occurs within the health care sector. If, for example, a health insurance policyholder is injured in an accident and the insurer pays $20,000 to cover the medical bills, that same health insurance company is allowed to collect $20,000 from the at-fault party to reconcile the payment.

Subrogation Process for the Insured

Luckily for policyholders, the subrogation process is extremely passive for the victim of an accident when another party is at fault. The subrogation process is meant to protect insured parties; the insurance companies of the two parties involved work largely behind the scense to mediate and come to agreement over the payment.

Policyholders are simply covered by their insurance company and can act accordingly. The insured party benefits because the at-fault party must make a payment during subrogation to the insurer, which helps keep the policyholder's insurance rates low.

In the case of any accident, it remains important to stay in communication with the insurance company. Make sure all accidents are reported to the insurer in a timely manner and let the insurer know if there should be any settlement or legal action. If a settlement occurs outside of the normal subrogation process between the two parties in a court of law, it is often legally impossible for the insurer to pursue subrogation against the at-fault party. This is due to the fact most settlements include a waiver of subrogation.

Benefits of Subrogation

In insurance, subrogation allows your insurer to recover the costs associated with a claim, such as medical bills, repairs costs, and your deductible, from the at-fault party's insurer (assuming you were not at-fault). This means that both you and your insurer can recoup the costs of damage or harm caused by somebody else.

It also means improved loss ratios, profits, and underwriting revenue for the insurer, plus added customer satisfaction and protection.

Waivers of Subrogation

A waiver of subrogation is a contractual provision where an insured waives the right of their insurance carrier to seek redress or compensation for losses from a negligent third party. Typically, insurers charge an additional fee for this special policy endorsement. Many construction contracts and leases include a waiver of subrogation clause.

Such provisions prevent one party’s insurance carrier from pursuing a claim against the other contractual party in an attempt to recover money paid by the insurance company to the insured or to a third party to resolve a covered claim. In other words, if subrogation is waived, the insurance company cannot "step into the client's shoes" once a claim has been settled and sue the other party to recoup their losses. Thus, if subrogation is waived, the insurer is exposed to greater risk.

The Bottom Line

Subrogation allows insurance carriers to legally pursue claims a third party that caused an insurance loss to one of its insureds. This enables the insurer to pay claims files by its insurers sooner, and then recover the claim amount from the parties who are at fault for the loss. Subrogation allows insured to receive payments sooner and helps keep their premiums low.