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.

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.

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. The insured client receives payment promptly 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.

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.

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 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's an Example of Subrogation?

An 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.

What's 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 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.