Imagine a shipping company loses control of a vessel due to a storm and is forced to abandon it. You will compensate your client for the loss of their ship, under the terms of their insurance policy.
What happens if, a few months later, the ship is recovered? You’ll be entitled to receive the salvaged vessel. Rather, that will be the case if the assured subrogated their rights to your insurance company when the claim for their loss was settled.
Let’s analyse what subrogation is and to what extent it can have an impact on your claims handling process.
What does subrogation mean?
The word “subrogation” comes from Latin.
- Sub means “in the place of, under”.
- Rogare can be translated as “to propose, ask”.
The combination of both literally means “putting in the place of another” or “substitute”. In fact, subrogation is often referred to as the doctrine of “substitution”.
What does subrogation imply in practical terms?
Subrogation is part and parcel of the indemnity clause, which lays out the obligation to compensate the insured for any damages or losses in return for the premiums paid.
This legal mechanism allows insurance carriers to “step into the shoes of the policyholder” when seeking compensation for losses. Whatever rights of action the assured may have against the third party at fault will shift to you as an insurer.
You will thus be entitled to sue and recover damages from the third party who caused the insurance loss or is legally liable for it.
In a nutshell, subrogation is your best shot at salvaging losses incurred by paying on insurance policy claims.
What are the principles underlying subrogation?
There are two core concepts behind subrogation.
- It seeks to lay responsibility for a loss on the party who ought to bear it. Hence, the insurer enforces the policyholder’s rights against the wrongdoer.
- It prevents the assured from recovering anything beyond the amount of the loss suffered. If they could recover both under the insurance policy and in legal proceedings from the liable third party, claims may be perceived as a potential for windfall profit.
What are the principles underlying subrogation?
There are two core concepts behind subrogation.
- It seeks to lay responsibility for a loss on the party who ought to bear it. Hence, the insurer enforces the policyholder’s rights against the wrongdoer.
- It prevents the assured from recovering anything beyond the amount of the loss suffered. If they could recover both under the insurance policy and in legal proceedings from the liable third party, claims may be perceived as a potential for windfall profit.
Which parties are involved in subrogation?
Policyholder
Insurance carrier
At-fault third party
How does subrogation work?
As an insurer, you want to process your claims as swiftly as possible. That’s why you may pay your client’s claim for losses directly, and seek reimbursement of your funds by pursuing a subrogation claim against the party at fault for the loss. But, in order to take this step, you need the assured’s authorisation to proceed in their name.
In practice, most insurance policies contain clauses granting the insurer the right of subrogation. So, the general rule is that subrogation may happen without any further formalities, as long as the insured has been indemnified for their insured loss.
What about if there isn’t a subrogation clause in the insurance policy? The defendants may argue that you haven’t been subrogated in the insured’s rights, which could cause your claim to fail altogether.
You can overcome this hurdle by getting your insured to sign a letter of subrogation (“subrogation receipt”) on payment of the claimed amount.
What’s a subrogation receipt?
It’s a document providing evidence that your assured’s claim has been settled. By signing it, the insured will release all subrogation rights to you.
A subrogation receipt may read like this:
Received of the ________________ the sum of ______ Dollars ($_____), being in full payment of all claims and demands for loss and damage by ________ on the ________ day of ____, 20____ to the property at _____________ described in Policy No. __________ issued by said Company.
And in consideration of such payment the undersigned hereby assigns and transfers to the said Company each and all claims and demands against any person, persons, corporation or property, arising from or connected with such loss or damage, (and the said Company is subrogated in the place of and to the claims and demands of the undersigned against said person, person, corporation or property in the premises), to the extent of the amount above named.
What are the benefits of subrogation?
- Recouping costs caused by a third party.
- Improving your loss record.
- Keeping your policyholder’s insurance rates low.
What else do you need to know about subrogation?
• You may not exercise subrogation rights against your own assured.
If the assured caused the damage, it doesn’t make sense that you could seek to recoup the payment of the loss. In principle, insurance extends to loss caused by the negligence of the assured. That cover would be lost if you were to take back with subrogation what you have given with the insurance.
• You may compel the assured to let you use their name in a claim.
If the insured refuses to let you take their place, you may bring proceedings against both the insured and the third party at fault.
• You may be asked to include a waiver of subrogation in the insurance policy.
This provision would prevent you from suing the third party to recoup your losses. You’d be thus exposed to greater risk.
The bottom line is that subrogation protects your economic interests while ensuring at-fault parties bear their responsibility. So, get your insured to sign a subrogation receipt and cover your bases.
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