Subrogation

What Is Subrogation?

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

Key Takeaways

  • Subrogation is a term describing a legal right held by most insurance carriers to legally pursue a third party that caused an insurance loss to the insured. 
  • Generally, in most subrogation cases, an individual’s insurance company pays its client’s claim for losses directly, then seeks reimbursement from the other party's insurance company.
  • Subrogation is most common in an auto insurance policy but also occurs in property/casualty and healthcare policy claims.
  • Subrogation allows the at-fault party's insurer to reimburse the victim's insurance company.
  • That insurance company will then reimburse the insured, along with any deductibles paid.

Understanding Subrogation

Subrogation literally 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 easier the process of obtaining a settlement under an insurance policy.

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 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 receives prompt payment, and 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 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.

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 auto policyholders. Another possibility of subrogation 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 very passive for the victim of an accident from the fault of another party. The subrogation process is meant to protect insured parties; the insurance companies of the two parties involved work to mediate and legally come to a conclusion over the payment.

Policyholders are simply covered by their insurance company and can act accordingly. It benefits the insured in that 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 an accident, it is still 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 and profits for your insurer.

Waivers of Subrogation

A waiver of subrogation is a contractual provision whereby an insured waives the right of their insurance carrier to seek redress or seek 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 the 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.

Does Subrogation Affect the Insured Victim?

The subrogation process, which is meant to protect insured parties, is very passive for the insured victim of an accident from the fault of another insured party. The insurance companies of the two parties involved work to mediate and legally come to a conclusion over the payment. Policyholders are simply covered by their insurance company and can act accordingly. It benefits the insured in that the at-fault party must make a payment during subrogation to the insurer, which helps keep the policyholder's insurance rates low.

What is a Waiver of Subrogation?

A waiver of subrogation is a contractual provision whereby an insured party waives the right of their insurance carrier to seek redress or seek 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 the subrogation clause. This prevents the insurance company from "stepping into the client's shoes" once a claim has been settled and suing the other party to recoup their losses. Thus, if subrogation is waived, the insurer is exposed to greater risk.

What Is the Broad Legal Definition of Subrogation?

Subrogation, in the legal context, refers to when one party takes on the legal rights of another, especially substituting one creditor for another. Subrogation can also occur when one party takes over another's right to sue.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. Legal Law Institution. "Subrogation."

Take the Next Step to Invest
×
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.
Service
Name
Description