Conversely, some jurisdictions take the opposite view and state that where the insurer's right to subrogation is clearly stated in a policy, the policy language governs rather than the equitable rules of subrogation.

Finally, there is statutory subrogation, which is a right created by statute. Often, this takes the shape of statutes governing the scope of the subrogation process. For example, in California's Insurance Code, “The insurer paying a claim under an uninsured motorist endorsement or coverage shall be entitled to be subrogated to the rights of the insured to whom the claim was paid against any person legally liable for the injury or death to the extent that payment was made. The action may be brought within three years from the date that payment was made hereunder (West's Ann. Cal. Ins. Code § 11580.2(g)).” So, in the case of West American Insurance Company v. Chalk, 213 Cal. App. 3d 825 (1989), the court said the special period of limitations applicable solely to subrogation claims against uninsured motorists by insurers which had paid their insureds' claims took precedence over the statute of limitations applicable to any personal injury claims of the insureds. So, in this instance, the suit brought within three years against the tort-feasor was allowable, though a personal injury claim would have been limited by the one-year statute of limitations.

Subrogation may also be precluded by statute or by case law, as when a court determines that subrogation against an entity might violate public policy (see Public Policy and Subrogation).

Although, in the article that follows, we will be discussing subrogation with regard to insurance policies, bear in mind that state statute and case law often determine outcome.

Essential Elements

Certain elements are required before an insurer can be subrogated to its insured's claim against another party. These elements are as follows:

·Insured suffered a loss from which a third party is liable, either as the wrongdoer or because the defendant is legally responsible to the insured for the loss caused by the wrongdoer.

·Claimed loss must be one for which the third party, not the insurer was primarily liable.

·Insurer has compensated the insured in whole or in part for the same loss for which the third party is liable.

·Insurer must have been obliged to make this payment in order to protect its own interest, and not as a volunteer.

·Insured must have an existing cause of action against the third party which the insured could have asserted had it not been for the compensation for the loss by the insurer.

·The action must relate to the same loss as the insurer paid to the insured.

·Justice requires that the loss be entirely shifted from the insurer to the responsible third party.

Beyond these basic elements, there are three more elements needed in order to determine the dollar amount of recovery for the insurer. These elements are:

·The amount of the insurer's payment which is the general limit on the insurer's recovery.

·Whether the insured is required to contribute to the costs of recovering the funds from the third party.

·Whether the insured is entitled to be made “whole” in the sense of recovering all damages suffered before the insurer is allowed to recover funds. (Couch on Insurance, Third Edition, §223:1).

Once these elements have been reviewed, then the amount of subrogation for the carrier can be determined.

Subrogation in Whose Name?

Although, as noted, the insurer “steps into the shoes of” the insured, the insurer generally must subrogate in the insured's name, and not its own. This point was made in Liberty Mutual Insurance Co. v. Clark, 299 S.E.2d 76 (1983). Here, an auto insurer paid its insured for personal injuries and property damage caused by an uninsured motorist in Georgia. The court stated that the statute that provided for an insurer paying a claim on a policy issued or delivered in Georgia to be subrogated to the rights of the insured did not give the right of subrogation to an insurer paying a claim on a policy issued or delivered outside the state.

Therefore, the insurer did not have the statutory right of subrogation. However, the insurer did have another right of subrogation; in this case, conventional or contractual. The insurer had brought suit in its own name and not that of its insured. In this instance, the court held that the subrogation agreement entitled the insurer to a right of recovery, and not to the insured's right of action against the wrong-doer. Therefore, because suit against the wrong-doer had not been brought in the insured's name, the case was dismissed. The court pointed out (in a footnote) that it was saying that “the insurer can nevertheless be the operative plaintiff, so long as the insured is the named plaintiff.”

Reinforcement of this point was made in State Farm Mutual Auto Ins. Co. v. Cox, 515 S.E.2d 832 (1999). In circumstances similar to Clark (except, this time, the policy was issued in Georgia), State Farm brought subrogation action against Cox to recover uninsured motorists payments it had made to its insured, Jacobs. State Farm argued that the court had misinterpreted the statute in Clark, and that it was entitled to bring suit in its own name. No, said the court, the statute was clear in that although an insurer had the right of subrogation, the statute did not authorize the insurer to bring suit in its own name. The court pointed out that no determination of the alleged tortfeasor's (Cox's) liability had been made. Adjudication of the insurer's suit would require resolution of Cox's liability, which would of necessity involve Jacobs, the insured. Therefore, State Farm could not recover.

This is by no means a hard and fast rule, however. For example, an insurer bringing action against its own insured will do so in its own name. (For more on this topic, see Subrogation Against Own Insured?) But in the case of partial subrogation (that is, when both the insured and insurer retain an interest in the claim), there are two views: one being that a partially subrogated insurer is not the real party in interest; the opposing that the partially subrogated insurer is the real party in interest. In the first instance, some jurisdictions take the position that an insurer “which pays less than all of an insured's loss is not a real party in interest, and the right of action against a wrongdoer who caused the loss rests in the insured” (Couch on Insurance, Third Edition, § 241:36); that is, unless the insured has settled with the wrongdoer out of court and refuses to bring action or where there is no possibility of action.

In other jurisdictions, “in the case of partial indemnification, the insurer is entitled to bring an action against the tortfeasor in its own name and the insured cannot bring the action in his or her own name, nor is it required that suit be brought in the name of the insured for his or her own use and for the use of the insurer” (Couch on Insurance, Third Edition, § 241.35).

There may also be two parties in interest, as when an insurer satisfies its liability to the insured, but the insured sues and recovers his or her entire original loss, which may be much greater than the amount received from the insurer. In this case, “the insurer, by partial subrogation, owns that portion of the substantive right [that is, the amount it paid], and insured owns the remainder, so that there are two real parties in interest.” (See Poteet v. Sauter, 766 A.2d 150 (2001.)

To further complicate matters, in some jurisdictions it depends upon the given facts. Thus, in Oklahoma, “where an insured suffers a loss occasioned by the wrong of a third party and the insured stands fully compensated for the value of the loss by the insurer, the fully subrogated insurer as the real party in interest may bring an action in its own named to recover to the extent of its payment for the loss…. On the other hand, where the insured does not stand fully compensated for the value of the loss by insurer, Oklahoma decisions hold the insured, as a real party in interest, may properly bring an action in his own name and/or as trustee for the partially subrogated insurer.… In this vein, the decisions also recognize that the insured and the subrogated insurer may join as co-plaintiffs in the same action against the defendant to recover for the entire loss (Muskogee Title Co. v. First National Bank & Trust Company of Muskogee, 894 P.2d 1148 (1995).

And in the case of Erie Insurance Co. v. George, 681 N.E.2d 183 (1997), the court ruled that an auto insurer who had paid its insured's medical payments could not sue independently to enforce a personal injury claim absent an agreement with its insured. By bringing a separate subrogation suit against the tortfeasor, before the insured had resolved his suit against the tortfeasor, the insurer had “impermissibly split the insured's personal injury claim.” The court said “one estoppel-like exception exists to rule that insurers take their insureds' rights as they find them: insurers can protect their subrogation rights by providing notice to tortfeasor or its insurer, after payment to insured, of right to subrogation or reimbursement; where debtor has notice of such right, subrogee's interest cannot be defeated by release negotiated with subrogor alone.” Had the insurer paid the entire loss and been assigned the right to pursue any and all causes of action, then, said the court, the insurer would have had the right to sue in its own name.

If one thing stands out, it is that whoever is engaged in carrying out a subrogation action must carefully check the subrogation agreement, any statute, or any case law that might proscribe the various parties' rights.

Public Policy and Subrogation

Although it is common practice for an insurer to “step into the shoes” of the insured and recoup the amount it paid to an insured, based on the presumption that the party responsible for causing the loss should be the one to pay for it, a court could decide that the party responsible for the loss should not be held liable as a matter of public policy. This was an issue the court wrestled with in Beacon Bowl, Inc. v. Wisconsin Electric Power Company, 501 N.W.2d 288 (1993). Here, the insurers paid the insured, Beacon Bowl, for a fire at the bowling alley and brought action as subrogees against the electric utility and electrical wiring company. (The bowling alley caught fire when trees across the street from the alley contacted a feeder line, which in turn caused high voltage transients to be transmitted into the alley's electric distribution box. The extremely high voltage caused the insulation to fail, allowing for arcing and the ensuing fire.) The jury found that the power company was 85 percent negligent with respect to inspecting and trimming trees near power lines; the company that had installed electrical service to the alley was 10 percent negligent, and the city of New Berlin was 5 percent negligent in its inspection. The court awarded the insurer treble damages. (Note, this award would contravene the insurer “stepping into the insured's shoes,” since the insured did not receive triple damages. This part of the ruling was overturned.)

Needless to say, the utility company appealed, contending that as a matter of public policy the insurer's complaint should be dismissed. The Wisconsin Supreme Court disagreed. The factors upon which liability could be denied as against public policy included: the injury was too remote from the negligence; the injury was too wholly out of proportion to the culpability of the negligent tortfeasor (in other words, the injury was so great it probably could not have been caused by the tortfeasor's negligence); in retrospect it appeared too highly extraordinary that the negligence should have brought about the harm; allowance of recovery would place too unreasonable a burden on the negligent tortfeasor; the allowance of recovery would be too likely to open the door for fraudulent claims; or allowance of recovery would enter a field that has no sensible or just stopping point. None of those reasons for dismissing the suit applied. The court found that the jury had correctly concluded that the electricity supplied by the utility had been a cause of the fire. However, concluded the court, the insurer was not entitled to triple damages.

No Subrogation Clause

Generally, the courts do not look with favor upon subrogation when the particular policy in question does not contain a subrogation clause, even though, as earlier noted, the doctrine of equitable (or legal) subrogation, which is not dependent upon the contract, would generally appear to apply. This was the situation in Shumbert v. Time Insurance Company, 496 S.E.2d 653 (1998). Richard Shumbert purchased a health insurance policy from Time Insurance Company. He was seriously injured in an auto accident caused by another driver, and Time paid the medical bills. The Shumberts initiated a civil action against the at-fault driver, and their attorney received a letter from Time advising it had a right of subrogation. The Shumberts' attorney advised Time the Shumberts had reached a settlement with the at-fault driver, but added he did not believe equitable subrogation applied in a health insurance context. The circuit court concluded that Time was entitled to equitable subrogation.

The appellate court disagreed, and said that although the doctrine of equitable subrogation was invoked in property and casualty insurance, it was not universally applied to health insurance. Thus, absent a subrogation provision in the health insurance policy, the insurer was not entitled to a portion of the settlement. In reaching this conclusion, the court looked to Frost v. Porter Leasing Corp., 436 N.E.2d 387 (1982). Here, the court noted that the “reason for implied subrogation in insurance contracts is to prevent an unwarranted windfall to the insured. Subrogation returns any excess to the insurer, which can then recycle it in the form of lower insurance costs.” But, added the Frost court, the right of implied subrogation did not arise automatically under any contract of insurance, saying “If medical expenses are isolated from the other consequences of an accident, excess compensation of an insured accident victim may appear definite and quantifiable. However, when subrogation is based on broad principles of equity and efficiency, rather than on the contract of the parties, isolation of medical expenses is artificial, and the accident victim's position should be viewed as a whole. Subrogation played no part in the bargain between insurer and insured, and in the circumstance, the courts should not intervene to adjust the rights of the parties unless all the adverse consequences of the accident have been offset.” In other words, the courts in both Shumbert and Frost recognized that recovery for medical insurance and tort damages did not necessarily produce a windfall for the insured. Medical expenses could be accurately measured, but loss of wages, earning capacity, pain and suffering, and intangible losses could not, and thus equitable subrogation did not exist with respect to medical expense payments. (Note this decision is with respect to health insurance. Subrogation of medical expense payments as a part of auto insurance is a different matter.)

An early case from New York dealt with a fire policy that contained no subrogation clause. Here, the insured had two fire policies covering, respectively, a truck and a trailer. Each had a lienholder. The insured did not pay the premium and the insurer sent notice, but neglected to send it to the lienholder. The insurer paid the remaining balance on the outstanding loan, but did not pay anything to the policyholder. The lienholder assigned its rights to the insurer.

The insured then sued the insurer, claiming that the policy had been in force and he should have been paid as well as the lienholder for the interest he had in the truck and trailer. This was based on the provision that any loss would be paid to the insured and lienholder “as their interests might appear.” The insurer counterclaimed for the money it had expended on his behalf. (A discussion of suing one's own insured appears later in this article.) The court agreed with the insured that the policy's wording operated so that the debt to the lienholder was paid, but that did not give the insurer the right to be reimbursed by its insured. The provision granting the insurer “from the assured an assignment of all right of recovery against any party for loss or damage” was an assignment of a claim against some third party responsible for the damage. It was not a subrogation clause. The court also considered the principle of equitable subrogation, but said the insurer “satisfied its own obligation under a contract…. As to the equities of the situation, it was the insurer's own delinquency in failing to notify the vendor of the vendee's failure to pay the premium that was the proximate cause of the insurer's difficulties.” The case is Fields v. Western Mut. Fire Ins. Co., 48 N.E. 2d 489 (1943).

Waiver of Subrogation

The ISO homeowners forms contain a waiver of subrogation in the conditions applicable to both sections I and II: “An 'insured' may waive in writing before a loss all rights of recovery against any person. If not waived, we may ["may" in this usage means "have permission to," not "might or might not"] 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.” To see how this might work, say an insured leaves his belongings in a club locker when he goes out to play golf. While out, the locker is robbed. The insured is reasonably sure a club employee was the thief, but does not wish to make trouble for the club. He therefore turns in a claim for the theft, but asks that the insurer not pursue the thief. The insured is thus breaching two policy conditions: one, the requirement of a police report in event of a crime, and two, the insurer's right of subrogation if the thief is caught. The only way to circumvent the second condition is to furnish the insurer with a signed waiver prior to a loss's occurring—possibly at the start of the policy period—or to have signed a “hold-harmless” contract with the club. Note that the provision does not say that the insured must notify the insurer in writing prior to a loss that subrogation has been waived. Perhaps when the insured first joined the club as part of the membership application he agreed to hold the club harmless for any and all events that might cause or contribute to any loss or bodily injury. The waiver of subrogation is therefore a part of that agreement; the insurer would not even be aware of the contract until after a loss had occurred.

According to Couch on Insurance, Third Edition § 224:87, “the fact that pre-loss contractual waivers are drafted in broad language, necessitated by the fact that the original drafting is done in the abstract, at a time when the circumstances surrounding the loss are unknown, makes it even more important for the intent of the clause to be clear. For a contract to be given the effect of a pre-loss waiver of claim which bars an insurer's subrogation rights, a preexisting contract between the insured and the third party must clearly provide that the insurance was for the benefit of both parties or that there was an enforceable hold-harmless agreement.”

So, in the case of Home Insurance Company v. Bauman, 684 N.E.2d 828 (1997), the court found for Bauman and not the insurer, Home Insurance Company. The homeowners had signed a construction contract for a new addition with a contractor which contained a waiver agreement. The agreement said that the homeowners and the contractor each waived their rights to the extent that the perils were covered by insurance, namely, open perils coverage on the home including the work at the site. The contractor was required to obtain similar waivers from the subcontractors. When a subcontractor negligently started a fire that destroyed much of the home, the insurer as subrogee of the insured filed a complaint based on the subcontractor's negligence. In ruling for the contractor, the court noted that the contract obligated the homeowners to obtain insurance on the work that included the interest of the subcontractor. The plain language demonstrated that the intent of the parties was to “place the risk of loss regarding the Work on insurance… Section 17.3 also clearly demonstrates that the contracting parties intended to confer this benefit directly upon nonparty subcontractors.” Therefore, the homeowners subrogee could not recover.

A hold-harmless agreement, though, will not always survive the scrutiny of the court, which may find an entirely different outcome than could have been predicted at first glance. The court in Hanover Insurance Company v. Honeywell, 200 F.Supp.2d 1305 (2002) reviewed a case in which the insurer for the lessor of a warehouse sued the lesee to recover for losses sustained by the lessor when the warehouse was destroyed by fire. Here, Wolf Point Inc. owned a warehouse which it leased to Circle. Under the terms of the lease, Wolf Point was to insure the premises for fire. The lease contained an indemnity provision whereby Circle agreed to defend, indemnity, and hold Wolf Point harmless from any loss, cost, or expense resulting from personal injury, loss or life, or property; likewise, Wolf Point agreed to defend, indemnify, and hold its tenant harmless from any loss resulting from personal injury, loss of life or property.

Wolf Point's policy contained a subrogation provision. When a fire destroyed the warehouse, Wolf Point's insurer paid its insured for the loss, and then attempted to subrogate against Circle. The federal court applied Oklahoma law, and said that the fire insurance for the property protected the property interests of both parties. In other words, Circle was a coinsured even though it was not expressly identified as such. The court looked to an earlier case, Sutton v. Jondahl, 532 P.2d 478 (1975), in which the court had concluded that a tenant was a co-insured despite the fact that the tenant was not specifically named an insured under the policy. No subrogation could lie against a coinsured absent an express agreement to the contrary. Further, the court did not consider that the hold-harmless agreement referred to subrogation rights, or placed any requirement on Circle to buy its own insurance.

Subrogation against Own Insured?

As noted in Hanover, it is commonly held that an insurer cannot subrogate against its own insured. To do so would seem to negate the very reason an insured buys insurance—to protect him or herself from the possibility of loss. In the case of National Union Fire Insurance Co. of Pittsburgh, Pa. v. Engineering-Science, Inc., 673 F. Supp. 380 (1987), the insurer paid a claim on behalf of its insured, a contractor, under a builders risk policy. Engineering-Science, which designed the project, also was insured by National Union under an errors and omissions policy. Following the loss, National Union attempted to subrogate against
Engineering-Science, alleging faulty design. In finding for Engineering-Science, the court discussed its reasoning. It agreed that there would be a possible windfall for Engineering-Science's excess insurers if subrogation were prohibited. It also agreed that a prohibition against subrogating against one's own insured could indirectly adversely affect the contractor's loss experience. But, continued the court, the insured could also be adversely affected through future premium increases. The court concluded that the insurer had insured Engineering-Science against the “very liability for which it seeks recovery in its complaint in an amount in excess of the policy limits. As a matter of law, public policy concerns prohibit such a suit.”

Sometimes a case may turn on whether or not the person being subrogated against is an insured, and, as such, safe from subrogation. Johndahl, mentioned earlier, was one. In Reeder v. Reeder, 348 N.W.2d 832 (1984), the brother of the insured, his wife, and daughter occupied the insured's home after he moved to another city. The insured told his brother he would “leave my insurance policy that I had on it while he was in there.” The court found that the insurance was for the benefit of the guests to the same extent as it was for the insured, and the insurer had no right of subrogation against them for fire damage to the house. The reasoning underlying denial of subrogation in a landlord-tenant case such as Johndahl was even more compelling “when the relationship is that of host and guest, especially when the host has assured the guest that there is insurance coverage.”

But in Wasko v. Manella, 865 A.2d 1223 (2005), the insured brought action against a houseguest who accidentally burned down their vacation home. A lower court entered judgment against the houseguest, who appealed. The appellate court reversed. The case went to the Connecticut Supreme Court, which reversed and remanded to the appellate court.

This court said that despite the insured's testimony regarding expectations of coverage for the houseguest, the trial court had determined the houseguest was not a co-insured and so the insurer could pursue the subrogation action.

There are times, though, that an insurer can indeed subrogate against its own insured, notably when the insurer makes a payment it otherwise would not make. In the case of Travelers Insurance Company v. Nory Construction Co., Inc., 184 Misc.2d 366 (2000), an employee of Nory Construction was injured while working on a bridge reconstruction project. Nory had obtained an owners and contractors protective policy, which covered the state (the bridge's owner) for bodily injury claims. Nory also had a CGL for $1 million and an umbrella for $5 million. All of these policies were with Travelers. The employee sued the state, and Travelers defended. The court found for the employee; Travelers paid under the owners, contractors, and protective policy, but paid more than the $1 million limit of liability.

Travelers then brought action against Nory for the additional amount it had paid the state. The court said that generally the anti-subrogation rule (against one's own insured) would apply, but if an exclusion in the policy applied and the insurer paid a claim for protection of its own interests, then the insurer could subrogate. But in this instance, the court concerned itself only with the additional payment the insurer had made, and found that voluntary payments could not be recovered.

Two cases indicate that other courts follow the reasoning of Travelers in that subrogation against an insured is allowable if payment is made where the policy does not cover the risk. The first is LaSalle National Bank v. Massachusetts Bay Insurance Company, 958 F.Supp. 384 (1997). The court applied Illinois law, stating that the anti-subrogation rule did not bar the homeowners insurer from claiming against the insured husband to recoup payments made to the coinsured wife. The insurer alleged the husband had intentionally set the fire, and the policy expressly excluded loss caused by intentional acts. The court acknowledged that the law would forbid such an action if it were found that the husband had negligently, rather than intentionally, caused the fire.

And, in Allstate Insurance Company v. LaRandeau, 622 N.W.2d 646 (2001), the court said the insurer had a right to subrogate against its named insured, who committed arson, when it made a payment to the innocent coinsured spouse.

The insurer may also subrogate against its own insured when it denies its insured's claim but makes payment to the mortgagee. See, for example, Parasco v. Pacific Indemnity Co., 920 F.Supp. 647 (1996).

Who Is Entitled to Any Additional Amount Recovered?

Remember that the principle governing subrogation is that the insurer steps into the shoes of its insured for the amount it paid on behalf of its insured. The insurer's rights are derivative from that of the insured, and it cannot recover any amount beyond what it paid.

To allow the insurer to do so would be unjustified enrichment, something of which the courts take a dim view. The case of Commercial Union Insurance Company v. Minnesota School Board Association., 600 N.W.2d 475 (1999) turned on whether a health insurer could collect an amount not paid to the insured under that insured's underinsured motorist coverage. The court ruled that because the insured had waived her right to the additional underinsured motorist benefit available, the health insurer, as her subrogee, could not pursue the remaining amount.