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What Is Subrogation in Insurance?
Subrogation lets an insurance company recover money for insurance claims from a third party. Learn how subrogation works.
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Here’s a typical scenario: A worker gets injured on a sales call at a third party’s property, and the company’s insurance pays a workers’ compensation claim. Here’s where things stop being typical: After the compensation payout, the insurance company follows up by representing the injured worker in court to recover the money it paid on the workers’ compensation claim from the third party. This process is called subrogation.
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Through subrogation, an insurance company can recover money it paid out for insurance claims from the party that caused the injury or damage. Here’s a look at how subrogation clauses work in insurance and what a business owner should know.
What is a subrogation clause?
A subrogation clause allows insurance companies to pay their insured’s losses while still seeking payment or reimbursement from the third party that caused the incident. Several types of business insurance policies — primarily ones that cover commercial property, workers’ compensation, commercial auto and inland marine — can contain a subrogation clause.
A subrogation clause allows the insurance company to recover money from the at-fault party or the at-fault party’s insurance company using a debt collection process or the court system. Subrogation clauses can be found in the policyholder’s insurance contract or may be added to existing contracts.
Aside from slip-and-fall claims from employees on property owned by a third party, insurers can subrogate claims from accidents that involve machinery or equipment owned by a third party. Because businesses often rent equipment in their day-to-day operations, this aspect is crucial.
How does subrogation work?
The subrogation process starts after an injured party files an insurance claim for damages or losses they’ve suffered.
If the insurer decides to pursue a subrogation claim from the at-fault party, the situation must meet the following three conditions:
- The insurer has paid the injured party (in part or in full).
- The insurer has received permission from the injured party to pursue subrogation. (They may have automatically consented when they agreed to the policy’s terms.)
- The insurer has explained the subrogation process to the insured. (In most cases, the policy agreement documentation will already outline the process.)
Assuming these conditions are met, the insurer’s first task will be to determine who’s at fault. It will thoroughly investigate the claim event’s circumstances to establish responsibility. For example, in the case of an auto accident, the investigation will include examining accident reports, speaking with witnesses, and analyzing physical evidence from the scene.
Sometimes, fault can be shared. Using the auto accident example, the injured party’s insurer and the at-fault insurer will negotiate the share of the blame. The insurer will receive a settlement based on the proportion of fault ascribed to the injured party. (We’ll explain more about subrogation settlement negotiations later.)
The subrogation process can become highly complex when multiple parties are involved. If the other party’s insurer is uncooperative or behaves unreasonably (from the insurer’s perspective), the insurer may take the other party’s insurer to court.
The injured party’s involvement in the process will be minimal. However, they must be available to answer questions.
What is a waiver of subrogation?
A waiver of subrogation is an insurance endorsement that prohibits your insurance company from pursuing the at-fault party for compensation. For example, if you’re in an auto accident, you may choose to sign a waiver of subrogation if the at-fault driver prefers to settle.
Businesses sometimes have compelling reasons to sign a waiver of subrogation. For example, say an accident occurred at a client’s site. With a subrogation clause, your insurer would have the right to recover the portion of the loss that was your client’s fault. But your client may want your business to waive the right of subrogation so they won’t be held liable for damages, even if they’re wholly or partially responsible for a loss. If you don’t waive the right of subrogation, your relationship with your client may suffer.
Signing a waiver of subrogation may have these serious consequences:
- Signing a waiver of subrogation could potentially void your coverage or conflict with the terms of your policy.
- Granting your insurance company the right to subrogate may lower your premiums. However, waiving the right to subrogate may increase your premiums because the insurance company faces increased exposure.
Some insurers prohibit their insureds from signing waivers of subrogation because they add to the insurance company’s risk. It’s crucial to consult your insurer, insurance broker or business attorney to evaluate your legal risks when you’re deciding whether waivers of subrogation will be to your advantage or disadvantage.
Subrogation FAQs
- There isn't proper documentation to show the defendant's liability.
- There's no collection strategy in place on the part of the insurance carrier.
- The carrier doesn't have collections experience.
- There's no collections system in place to pursue the claim.
- The insurance carrier doesn't handle files properly, so there's a very low probability of a win.
- Equitable subrogation: If you suffer damage through the fault of another, your insurer attempts to get a refund from the at-fault party or their insurer. For example, suppose a neighbor's tree falls on your house due to their negligence, and your insurance pays for the repairs. In this case, your insurer might seek to recover those repair costs from your neighbor or their insurance, even though your policy terms don't directly cover this action.
- Contractual subrogation: Contractual subrogation is when your policy terms allow your insurer to recover costs from the party that's responsible for an accident. For example, if you're in a car accident that's not your fault and your insurer pays for repairs, they can seek a "refund" for those costs from the at-fault party's insurer. You give this right to your insurer in your policy, allowing it to get its money back.
- Statutory subrogation: Statutory subrogation applies to statutory insurance, like workers' compensation. For example, say one of your employees is injured on the job and receives a payment from the workers' compensation insurer. If the injury was due to negligence, such as failing to maintain safe working conditions, the workers' compensation insurer could then seek to recover the costs of the claim from you, as mandated by law.
What are the benefits of subrogation?
The main benefit of subrogation to your business is that your premium may be unaffected after you’ve made a claim because your insurer recoups the cost from the at-fault party. Subrogation reduces the insurer’s losses from payouts and can boost the insurer’s profitability.
Nicole Urbanowicz contributed to this article.
