According to Black’s Law Dictionary (you know it’s serious when I quote a legal dictionary!), subrogation is defined as “the principle under which an insurer that has paid a loss under an insurance policy is entitled to all the rights and remedies belonging to the insured against a third party with respect to any loss covered by the policy.” (Black’s Law Dictionary, Abridged 7th ed., 2000). OK, now we’ve defined it, but what does that really mean? I will try to put subrogation in practical terms to show you how it works.
Let’s assume you have the unfortunate experience of a fire loss resulting from the electrical failure of a newly purchased and installed dishwasher. Your insurance company will pay for your loss per the terms and conditions of your insurance policy. Since the fire is a result of the dishwasher manufacturer’s negligence, that makes the manufacturer liable for your damages. Once your insurance company pays you for the loss, they become subrogated for those payments against the dishwasher manufacturer. Normally, you would have a claim against the dishwasher manufacturer but once your insurance company pays you for your damage, your claim against the manufacturer is transferred from you to your insurance company. This is called an assignment. Your insurance company then has the right to recover those payments they’ve made to you from the dishwasher manufacturer for their liability in causing the fire and resulting damage.
The insurance company will pay for covered damages minus your homeowner’s deductible. You will still have the right to recover your deductible as well as any other damages that were not paid by the insurance company from the dishwasher manufacturer. However, your insurance company will not likely be able to assist you in recovering any additional out-of-pocket losses not paid for under the insurance policy because they have no legal interest or recovery rights in those damages they did not pay.
Almost every insurance policy contains an insurance condition for subrogation. That condition will typically indicate if you have a right to waive subrogation prior to a loss and will indicate the insurance company’s right to an assignment against liable parties for losses the company pays for. Additionally, the subrogation condition will outline your responsibility in cooperating with the insurance company in their subrogation efforts for losses they paid. Your insurance company may have you sign a subrogation receipt once they have paid the claim which confirms the amount of the loss, the company’s assignment for what they paid and your agreement to assist the company in recovering their payments for the loss. When you are attempting to collect out-of-pocket expenses against someone responsible for your damage, make sure you do not release that party from any other damages they are responsible for. Doing so may prevent your insurance company from being able to pay your claim if their rights to recovery have been eliminated, violating your policy’s subrogation condition.
Hopefully I have provided some insight into the world of subrogation and what it may mean to you in the event of a loss. I would love to hear from you if you have experienced any losses involving subrogation to see how the claims process went for you.