Subrogation is often explained as the carrier stepping into the shoes of the insured; the carrier has paid out for the loss, therefore the carrier is allowed to pursue the at-fault party for reimbursement for that payment.
A few elements are critical. First, a third party must be responsible for the loss. Next, the insurer must have compensated the insured for damages that the third party is actually liable for, and the insurer must be obliged to make this payment to protect its own interest and not just pay it voluntarily.
Subrogation happens frequently when an insured doesn't want to wait for the other carrier to work through the claim; the insured can file the claim through his carrier, pay the deductible and let the carrier collect from the other party. When the carrier does that, the insured's deductible will be returned to him. This allows the insured to be made whole for his loss, the principle of indemnity. Subrogation is readily seen in auto claims, and many insureds prefer to have their own carrier pay them and wait on the deductible reimbursement.
Many policies allow insureds to have the right to waive rights of recovery against someone as long as the waiver occurs before the loss. If the rights are not waived, then the carrier may require an assignment of said rights to a loss for the amount the carrier has paid out. This assignment allows the carrier to pursue the at-fault party for the amount of the loss.
A repair shop employee crashed a car he was test driving following repairs. Can the claim be subrogated? (Photo: Shutterstock)
A question came in from a subscriber regarding equitable subrogation where the shop was test driving the insured vehicle after repairs and the shop employee had an accident in the insured's vehicle. The employee was at fault. The insured's carrier paid for the loss; the carrier is now looking to subrogate against the repair shop. However, the policy language states that the right to recover payment “does not apply under part D against any person using your covered auto with a reasonable belief that that person is entitled to do so.”
While the employee is a person who was using the vehicle with permission, he was doing so as an employee of the repair shop, and the repair shop is a separate entity. If the garage is not held accountable for the loss, then the garage is benefiting from the policy, and the policy has the standard “no benefit to bailee” language, and the repair shop was certainly the bailee of the auto. The insurer should be able to subrogate against the repair shop.
Another question we received dealt with the refund of the deductible when the insurer recovers subrogation funds from the at-fault party. A restaurant sustained a large fire loss and a third party was subrogated against. The insured's deductible was $1,000, and the amount of the loss was $650,000.
When the claim was subrogated the carrier was only able to recoup $30,000. The carrier stated that the deductible should be prorated against the recovery and gave the insured $70 towards the deductible. The subscriber contended that the insured should receive the entire $1,000 deductible. Without any policy language explaining how recovery of losses is to be handled, the insured should receive his deductible back first, and the carrier then receives the remaining recovery. The insured in entitled to be made whole for the loss, and the carrier is obligated to do so.
A subscriber was reviewing the business auto policy and had a question on transfer of rights of recovery against others to us clause. The subscriber wanted to know who the “person or organization” mentioned in the policy was referring to. The subscriber had always assumed it referred to the named insured's rights being transferred to the insurance company, but others in the office thought it was referring to others such as additional insureds.
In this situation the key is the word “any.” Any person or organization, including the named insured, other insureds, claimants, anyone to whom the insurer makes a payment is subrogated to the carrier. If the person or organization has rights against another entity, than those rights transfer to the carrier upon payment of the loss.
Subrogation did not apply to the medical payments of others in a case where a woman attacked her former mother-in-law. (Photo: Shutterstock)
Tenant's policy & subrogation
On a totally different note, an insured with a tenant's policy had his mother visiting, and the insured's estranged wife assaulted the mother. The mother pressed charges and the wife was ordered to pay $500 to cover medical costs. The bills actually came to $1400, and a claim was turned in to the insured's carrier.
The carrier denied the claim on two sides; one that the mother would be indemnified twice for the same loss, and second that the carrier had been precluded from subrogating against the wife because of the insured's actions. When looking at the policy, subrogation wasn't an issue since the conditions state that subrogation does not apply to medical payments to others. As far as the medical bills, the mother had only been compensated for part of the claim; the carrier should compensate her for the rest of the claim in order to make her whole. She would not be indemnified twice.
Because a third party who is liable for the loss is involved, subrogation can become incredibly complicated. The at-fault party may be difficult or impossible to identify, for example in hit and run claims. Unless there were witnesses or someone was able to get the tag number, the chances of finding the at-fault party is virtually impossible.
Christine G. Barlow, CPCU, (firstname.lastname@example.org) is managing editor with FC&S, the premier resource for insurance coverage analysis. She has an extensive background in insurance underwriting. For additional information on FC&S Online, visit www.NationalUnderwriter.com.