Equitable Subrogation

Equitable Subrogation

Investopedia / Zoe Hansen

What is Equitable Subrogation

Equitable subrogation is a legal doctrine that allows a party that has made payments on behalf of another party to lay claim to the recovery of damages or funds from a third-party. Equitable subrogation is a legal concept that allows one party to replace another party when it comes to a legal right. It is most commonly associated with the insurance industry, specifically in relation to the settlement of claims.

Equitable subrogation is considered equitable because one party pays the obligation of another party. The party that pays the obligation is referred to as the subrogee, and the party that has its obligation paid is called the subrogor.

Breaking Down Equitable Subrogation

Equitable subrogation is one of the key elements of modern insurance policies and the process of claiming and paying out insurance. Individuals and businesses purchase insurance in order to protect themselves from specific risks. They pay a premium to the insurer for this protection, with the insurer indemnifying the insured for the risks covered in the policy. The insurer is responsible for settling claims that are made against the policy. In some cases, such as floods, there is unlikely to be a third party to be held responsible for the damages. In other cases, however, the damages may be caused by a third party. In such cases, the insurer will pay the policyholder for the claim, and in return will retain the right to sue the third party — unless there is a waiver of subrogation provision.

For example, a homeowner purchases homeowners insurance from an insurance company. The neighbor of the policyholder loses control of a fire outside their home, and the fire ultimately causes damage to the policyholder’s home. The homeowner files a claim with their insurance company, and the insurer pays out the claim so that the homeowner can fix the property. When the claim is settled, the homeowner cedes their rights to sue the neighbor over to the insurer, who can then sue the homeowner to recover funds lost from paying out the claim.

Non-Insurance Uses of Equitable Subrogation

In theory, the concept of equitable subrogation can apply to a number of situations involving liability, but in practice, it only applies in cases in which one party has set up an agency relationship with another party. That means that if one party is legally acting as the agent of the second party, that first party could be a subrogee by paying the obligation of a third party to the second party. In practice, however, this situation would be more likely to go to court, and the third party would be required to pay the second party directly.