In the shoes of another: The basics of subrogation
Subrogation is often explained as 'stepping into the shoes of another,' and is a way insurers can recover losses in some cases.
Editor’s note: The following article comes courtesy of PropertyCasualty360’s sister site FC&S Expert Coverage Interpretation, and keeps with our Friday schedule of delivering articles covering the nitty-gritty details of P&C insurance, tips for professional development, articles looking at the industry’s more niche concepts, and the history of certain lines and programs.
While insurance policies differ depending on what exactly is being insured, many have similar clauses. All policies have clauses identifying what is covered, what perils are excluded, how settlement is to be made and other provisions.
One of these common provisions is the subrogation provision. Insurance companies have departments of employees handling subrogation files. But what exactly is subrogation?
Subrogation is often explained as “stepping into the shoes of another.” Merriam-Webster defines it as: “The assumption by a third party (such as a second creditor or an insurance company) of another’s legal right to collect a debt or damages.” What this means is that if the insurance company paid a claim to an insured that another party should have paid, the insurance company can “step into the shoes of” the insured and pursue that other party for reimbursement of the funds it paid to the insured.
Policies do not define the term directly, but do provide some explanation. For example, the ISO personal auto policy it reads:
“Our rights to recover payment: A. If we make a payment under this policy and the person to or for whom payment was made has a right to recover damages from another, we shall be subrogated to that right. That person shall do:
- Whatever is necessary to enable us to exercise our rights; and
- Nothing after loss to prejudice them.”
The homeowners policy wording is slightly different, addressing an insured’s right to waive subrogation against another party as long as that waiver occurs before a loss happens:
“Subrogation An ‘insured’ may waive in writing before a loss all rights of recovery against any person or organization. If not waived, we may require an assignment of rights of recovery for a loss to the extent that payment is made by us. If an assignment is sought, an ‘insured’ must sign and deliver all related papers and cooperate with us.”
The commercial property policy references subrogation in the loss payment section as follows:
“Our payment under the provisions of this paragraph does not alter any right of subrogation we may have against any entity, including the owner or insurer of the adjoining building, and does not alter the terms of the ‘transfer of rights of recovery against others to us’ condition in this policy.”
What all these clauses are doing is telling the insured that if the insured turns to his own policy for coverage when another party was responsible for the loss, that the policy will pay him for the loss, and then go against the responsible party to be reimbursed for the payment that was issued.
For example, an insured is sitting at a stoplight when his vehicle is struck from behind by another vehicle. The insured and the other driver exchange insurance information. Rightfully the other party should pay the insured for damages to his vehicle, but the insured prefers to work with his insurer instead of the other party’s insurance company. The insured files a claim with his own insurer which pays him for the loss, minus the insured’s deductible. Because the insured filed against his own company, the deductible must be paid.
The insurance company, once the loss has been paid to the insured, then contacts the other insurance company to collect what it paid out to its insured because the other party was at fault for the loss and is liable for the damages. The insurers discuss the claim and the other party’s insurer pays the insured’s company the amount that was paid to the insured, including the amount of the deductible. The deductible amount is included because had the insured filed against the at-fault party’s company, no deductions would have been made. In order to be made whole, the deductible amount the insured paid needs to be paid to him as well. The insured’s company will then return the amount of the deductible to the insured. The insurer has stepped into the shoes of the insured since it paid him for the loss. Therefore, it is entitled to receive payment from the other insurer.
The homeowners policy clause regarding subrogation mentions waiving subrogation rights before an event happens. The commercial property also contains this feature under the “transfer of rights of others against us” condition. A waiver of subrogation is a legal agreement where the insured in writing waives the right to pursue the other party for any damages that may happen as a result of a contract with that other party. This is frequently seen in construction and lease agreements.
It’s important to note that the waiver of subrogation must be completed before any loss occurs. Once a loss has occurred, it is too late for an insured to decide to waive the insurer’s opportunity to subrogate against the at-fault party. Because the insurer will pay for a loss caused by another party, the insurer maintains the right to pursue that other party. Unless a waiver has been executed before the loss occurs, the insurer is within its right to try to collect payment from the at-fault party.
Generally speaking, an insurer steps into the shoes of the insured when handling subrogation following a loss. This happens when an insured is paid for a loss that should have been paid by another at-fault party. Through subrogation, the insurer seeks the reimbursement of the amount paid out by the insurer. The insurer then provides the insured with the deductible and any amounts not covered by the insured’s policy. Only those rights of recovery that were agreed to by the insured in a contract prior to a loss can be waived; an insured cannot waive the insurer’s right to subrogate once the loss has occurred.
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