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What is Subrogation?
Subrogation is the substitution of an individual or group for another in a legal setting. It is most often used with respect to an insurance claim or debt. It gives insurers the legal right to seek reimbursement for any losses they may pay by suing the party that caused the losses. Within the field of insurance, subrogation is when an insurance company stands in for you and takes on your legal right to pursue an organization or individual for an insurance claim.
The process of subrogation starts with the insurance provider paying for any losses associated with a claim. For example, you file an insurance claim for damages from a fire to your office building. Your insurance provider will send you payment for your claim. Then, the provider decides if they want to pursue the party that caused the damages (if it wasn’t you). It’s basically a chance for the provider to get back the money they paid you by suing a third party, but it’s also a chance for them to represent your interests in court.
Subrogation always includes three parties: the insured (you, or the policyholder), the insurer (insurance company/provider), and the party responsible for damages.
Typical Subrogation Clauses
You can find a clause in most business insurance policies that will outline the insurer’s subrogation rights. The subrogation clause can generally be found in the policy conditions in insurance services office (ISO) policies. They will fall under the heading Transfer Rights of Recovery Against Others to Us.
Most subrogation clauses have the same general purpose, though they can vary from policy to policy. Generally, they allow the insurer to recover its loss payment from any party that has caused the loss. Some examples of these different clauses are:
1. Workers’ Compensation Policies
In the standard National Council on Compensation Insurance (NCCI) workers’ compensation policy, there are two subrogation clauses. They are both titled Recovery From Others. The clauses give the insurer (like your insurance company) your rights and the rights of the injured employee to recover payments the insurer makes from anyone who is liable for a worker’s injury.
For example, if your business has a workers’ compensation policy and one of your employees is harmed in a car accident due to negligence of the other driver, your insurance company will provide the workers’ compensation benefits to the employee and will then sue the negligent driver for the cost of those benefits.
2. Commercial Property Policies
A large portion of commercial property policies contains a subrogation clause. A good example of this clause would be if you own a small space or commercial building to operate your business and have a commercial property policy to insure the building. One day, a wall bursts into flames. The fire department is able to extinguish the fire, but since your building sustains a lot of damage, you file a claim with your property insurer.
You find out that the fire was caused by an explosion from the building next door due to negligence on that building owner’s part. Your property insurer pays you for the damage but then sues the other building owner for that same amount that they paid you. Because of the subrogation clause, your property insurer has reimbursed you for the loss and assumes your right to sue the other building owner, but only for the amount that they paid you for damages.
3. Commercial Auto Policies
Any standard business auto policy holds a subrogation clause very similar to one found in an ISO property policy. This kind of subrogation clause states that if the insurer pays a physical damage or auto liability claim, and someone other than you (the insured) is liable for the damage or injury, then the insurer can sue that responsible party to recover the amount that they paid you for your claim.
4. Commercial Liability Policies
At this point, you can guess what a subrogation clause for a commercial liability policy would state. But a quick example would be, say your restaurant offers outdoor seating with a beautiful brick wall and planters. One evening, the wall collapses, injuring a customer who was sitting close to it. The customer sues your business for bodily injury and your liability insurance company pays the claim. Your insurer then turns around and sues the contractor who built the wall for payment made towards the injury claim on the basis that the contractor constructed the wall improperly, and their negligence caused the customer’s injury.
Why are subrogation clauses important?
Having a subrogation clause is important because it gives the insurer a better chance to get their money back, and any money recovered through subrogation will go directly towards an insurer’s bottom line. According to a study conducted by the Ward Financial Group, insurance companies that achieved top operating results did so because they subrogated claims near twice the rate of other companies, ultimately recovering a higher percentage of their loss payments. That’s great for those insurance companies, but what does that mean for you?
Well, this can end up benefiting your business because a company with an effective subrogation department can end up offering lower premiums. It’s a huge win-win.
However, subrogation isn’t always beneficial for business owners. If your insurer pays your claim and you then receive money from the responsible party for the damages they caused, you may be required to reimburse your insurance provider up to the amount that they paid you.
Other Subrogation Examples
- A retailer sells a bicycle, and the individual who bought it is injured while riding because a screw was loose on the bike. The individual ends up with medical expenses. The retailer’s insurance company pays the claim, but through investigation, they find that there was a manufacturing defect in the bike. As such, the insurance company turns around and pursues a subrogation claim against the manufacturer of the bike for reimbursement of the injury claim.
- A corporation obtains a builder’s risk policy and moves forward with building a new manufacturing plant. The corporation hires a general contractor who works with several subcontractors to finish the work, including a metal fabricating company. During construction, a welder leaves a tool plugged in overnight, causing a fire that results in extensive damage. The corporation’s insurer pays the claim for the damages but can turn around and pursue subrogation against the metal fabricating subcontractor based on negligent behavior.
Waivers of Subrogation
Although you can have a subrogation clause in a policy, you can also opt for a waiver of subrogation. A waiver of subrogation has become more common in today’s economy. Many companies will require one from any entity that performs any work on their behalf or comes onto their property or job site.
When a waiver is required in a contract, it means that you waive your insurance provider’s right to subrogate a third party. Generally, this is a party you have entered into a contract with. The majority of policy contracts allow you to waive your rights of subrogation as long as it is done in writing and before any loss occurs, except workers’ compensation policies. There are some risks that come with a waiver of subrogation.
- In some areas, waivers are not available, so you will need to check your state statute. You will also want to obtain your workers’ compensation policy provider’s position and agreement on waivers.
- Waivers should be built into contracts. As such, you will want to thoroughly review the contract wording to ensure the waiver is utilized appropriately for the situation. This can be beneficial in a contract between a landlord and tenant where both parties waive their rights. On the other hand, in a lot of construction contracts, mutual waivers may not be prudent or acceptable.
Waivers of subrogation can be beneficial as they can minimize lawsuits and claims between parties. Without subrogation, if a loss does occur, your insurance provider can pay the claim, and proceeds can go towards the cost of repairs without determining who is at fault. If there isn’t a waiver of subrogation in place, litigation or arbitration is more often needed in order to determine whose fault the loss was, which can mean lots of costly delays.
If you do ever require a waiver of subrogation, it’s important to make sure that the contractual language mirrors your overall policy.
In today’s economy, corporations and businesses are generally held responsible for losses or injuries to others. By having subrogation in place, you as a business owner can cut back on the time required to recover losses that you might have suffered. Subrogation can make the process of obtaining a settlement run smoothly, as your insurance company can cover your losses up front and then take the time and effort to seek reimbursement from the offending party.