Subrogation is a legal right that is granted to insurance companies. It permits them to get reimbursement for expenses they’ve incurred by suing the party that created the loss.
Insurer Steps Into Insured’s Shoes
Subrogation rights for insurers allow the insurer to “step into the insured’s shoes.” This illustration demonstrates how it operates.
Jill recently bought a brand new refrigerated vehicle to make use of for her business of floral design. The vehicle is insured with the terms of a commercial auto policy which includes collision and comprehensive insurance. When she gets to the repair shop during the day, Jill finds out that her car was badly damaged by a driver who hit and run. She informs the commercial auto insurance. The insurer declares that the van is a full loss and compensates Jill $50,000.
The insurer then obtains footage from a video camera that confirms Ted as being the one who caused damage to Jill’s vehicle. The insurer then sues Ted in the amount of $50,000. which is the sum it received from Jill to cover the cost of her loss. If Jill had no physical damage coverage the insurer would be able to pursue Ted for the harm that he caused to her vehicle. Because her insurance company paid her compensation for her damage, her right to bring a lawsuit against the driver was transferred to her insurance company. In turn, the insurer “steps into Jill’s shoes,” which means it acquires the rights Jill is entitled to in suing the driver.
Typical Subrogation Clauses
The majority of commercial insurance policies include an agreement that outlines the rights of insurers to subrogate. Within ISO policy the subrogation clause typically is found in policy’s conditions in the section titled Transfer of Rights of Recovery Against Others to us. Subrogation clauses differ, but all serve the same function. They allow insurers to recuperate their loss-paying obligation from the person who was responsible for the loss.
- Commercial Property Policies
There are many residential property contracts that have a subrogation provision such as the one below:
If any individual or company that we make a payment under this coverage section is entitled to claim damages from another person, those rights are granted to us in proportion to our amount.
This example shows how this clause works:
Jennifer has a small commercial structure which she utilizes to run a pet grooming company. She is insured for the building through the terms of a commercial property policy. A few days later, Jennifer was busy with her furry client when the wall of her office suddenly bursts into flames. The fire department comes in and put out the flame. Jennifer’s house suffers extensive damage, and she files an insurance request with her home insurance company.
The fire started because of an explosion in the boiler of the next building. The boiler went up due to the owner of the building (Bill) did not maintain the boiler properly. Jennifer’s insurer compensates her for the damages caused by the fire, before suing Bill to recover the money they gave to Jennifer. Because the insurance company has compensated (reimbursed) Jennifer for the loss, it is entitled to the right to pursue Bill, but it only has to do so for what it has paid Jennifer.
- Commercial Liability Policies
The majority of business liability policies include the same clause for subrogation as found in the ISO standard general liability insurance policy. The policy states that if an insured is entitled to seek the entire or a portion of any amount the insurer has paid in accordance with the policy the rights are transferable to an insurer. The following example shows the way this clause works.
Rhonda has a popular restaurant that has seating outside. Rhonda recently renovated the outdoor area with plants as well as a beautiful brick wall. A few customers are dining outside when the wall suddenly falls down. One of the customers is injured by falling bricks , and issuing Rhonda’s company for bodily injuries. The liability insurance company of Rhonda covers the claim and then sues the contractor in order to get its loss compensation. The insurer claims that the contractor erected the wall in a way that was not correct and its negligence was the cause of the injury to the customer. Since the insurance company has paid the claim on behalf of Rhonda the insurer assumes her right to sue the negligent construction company.
- Commercial Auto Policies
Standard automobile policy for business includes a subrogation clause like the one that is included within the ISO property policy. It says that if an insurer is liable for the amount of an automobile responsibility claim or damages claim and someone other than the insured party is responsible for the injury or loss, then the insurance company can sue the other person to recover the amount of the claim.
- Workers Compensation Policies
Standard NCCI worker’s compensation policy has two subrogation clauses. They are both called Recovery from Others.
The first clause is found within Part One, Workers Compensation. The clause grants the insurer your rights as well as the rights of the injured employee to seek compensation the insurer has received from any person who is liable for an injury to a worker. As an example, suppose that your business has purchased an insurance policy called a workers’ compensation insurance policy. Your employee has been injured in an auto crash that was caused due to negligence by a driver. Your insurance company pays workers’ compensation insurance to the employee and is then suing the negligent driver to recover the amount of the benefits.
In some states, an injured person could receive workers’ compensation benefits, and later bring a lawsuit against the negligent driver to recover damages. However, many states prohibit employees who are injured from “double-dipping” (receiving duplicate compensation for the same injury). These states require that a person who recovers damages from a negligent party is required to reimburse the insurance company for the amount of the benefits received. After the worker has repaid the insurance company, they can be allowed to keep the damages remaining.
A second subrogation clause is found under Part Two of Employers’ Liability Coverage. The clause grants the insurer the right to seek reimbursement from those who are responsible for injuries for which it has made a payment in accordance with the policies. If an insurer pays compensation in the event of an injury suffered by an employee, it can pursue a lawsuit to recover its money from the person who caused the injury.
Preserve the Insurer’s Rights
After an insurance company has paid an amount, it takes over your rights in the event of a negligent party. If you’ve renounced your rights, there is nothing to give to the insurance company. This is why nearly every subrogation clause contains clauses that require you to safeguard the insurer’s rights to sue the responsible party. A majority of clauses prevent you from abdicating (giving up) the right to bring a lawsuit against the party responsible following a loss that occurs.
In the scenario above let’s say that Rhonda has hired her brother, who is a construction contractor to build walls of brick. If the wall falls. Rhonda promises him that she will not be able to sue him for the damage. Rhonda has not followed through with the subrogation clause contained in her policy on liability.
Pre-Loss Waivers Permitted
A lot of commercial property policies allow the possibility to give up your right to subrogation prior to an event of loss has occurred. The majority of liability policies allow pre-loss waivers, therefore these waivers are typically allowed. You can therefore make a commitment in a contract that you agree not to sue anyone for the loss even though no loss has occurred. Subrogation waivers are included in a variety of forms of business contracts.
The section on conditions of the commercial property standard policy includes an exception for the post-loss waive rules. It permits you to waive subrogation rights following an event of loss, provided that the waiver is to benefit any of these:
- Another insured in the policy
- A tenant from yours
- A company that controls or owns your business
- A company you control or own
