Conventional Subrogation

Conventional Subrogation

Investopedia / Michela Buttignol

What is Conventional Subrogation

Conventional subrogation is the relationship between the insured and insurer as defined in an insurance contract, specifically when the insurance contract grants rights of subrogation to the insurer.

Key Takeaways

  • Conventional subrogation allows an insurance company to recover funds from a third party that caused a loss once damages have been paid to the policy holder.
  • Conventional subrogation means a policy holder cannot both file a claim with their insurer and also separately seek damages from a third party that caused losses.
  • With conventional subrogation, the insurance company is stepping into the shoes of the policy holder in pursuing a third party for damages.

Understanding Conventional Subrogation

Conventional subrogation, also called contractual subrogation, defines the rights of the insurance company after it has paid claims made against a policy. Insurance policies may contain language that entitle 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 both file a claim with the insurer to receive the coverage outlined in the insurance policy and to also seek damages from the third party that caused the losses.

When an insurance company pursues a third party for damages, it is said to step into the shoes of the policyholder, and thus will have the same rights 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. Some insurance contracts also contain a waiver of subrogation provision.

Contractual subrogation can create uncomfortable situations for policyholders. The insurer is left free to pursue its legal rights of recourse against a third party once it pays the insured party for its claim, regardless of the relationship between the third party and the insured. For example, a homeowner may file a claim for damages caused by a family friend's child, only to have the insurance company pursue the family friend of the homeowner for any losses incurred.

As a legal concept, subrogation is designed to allow injured parties to receive compensation from the party or parties that caused the injuries. Conventional subrogation is outlined in the agreement made between the insured and the insurer.

In most cases, courts will allow the language of the contract to dictate the subrogation rights, but in some cases the courts may allow subrogation rights defined through laws to take precedence. If a regulation (such as one pertaining to workers' compensation) defines subrogation rights, then those rights will be used, even if a contract exists stating otherwise.

Benefits of Subrogation to Policyholders

Subrogation makes obtaining a settlement under an insurance policy go smoothly. In most cases, an individual’s insurance company pays its client's claim for losses directly, then seeks reimbursement from the other party, or his insurance company.

The insured client receives payment promptly, which is what he pays his insurance company to do, then the insurance company may pursue a subrogation claim against he party at fault for the loss.