What Is Subrogation in Insurance?

Yes. Sometimes, negotiating and settling a subrogation claim is preferable for one or both parties. For example, an insurance company seeking subrogation may prefer a quick settlement. Or, as mentioned earlier, when fault is shared, an insurer may negotiate the insured’s share of the blame and arrive at a settlement based on their level of fault.

Not every policy or insurer asks for a subrogation clause. However, many do because these clauses reduce the insurer’s risk and help cover losses. Because of the reduced risk involved, an insured may enjoy a lower premium when they agree to a subrogation clause.

If you’re a business owner considering whether to include a subrogation clause, you must weigh the benefits of a reduced premium against the potential harm to customer relationships if your insurance company seeks compensation from them for damages.

You must exercise due diligence when deciding to waive or include a subrogation clause on your company’s insurance policy. It’s essential to consider your company’s inherent risk level, your industry’s risk exposure, and whether your company’s current risk management plan requires a waiver.

No. In many instances, the insurance company won’t pursue subrogation in potential cases for various reasons, including the following:

• There isn’t proper documentation to show the defendant’s liability.
• There’s no collection strategy in place on the part of the insurance carrier.
• The carrier doesn’t have collections experience.
• There’s no collections system in place to pursue the claim.
• The insurance carrier doesn’t handle files properly, so there’s a very low probability of a win.

Waivers of subrogation clauses are common in the construction industry. For example, the “waiver of consequential damages” is standard in most construction contracts. This waiver helps prevent construction delays because of disputes and litigation resulting from damages covered in the business owner’s insurance policy.

Under this clause, the construction business owner waives the right to sue third parties in the project, including contractors and subcontractors, to help avoid the costs and time lost from litigation and negotiation.

An automobile accident is another example of when waivers of subrogation can be used. In some cases, settling a minor automobile accident with a third party is quicker than processing an insurance claim through the at-fault party’s insurer.

Some parties choose to use a waiver of subrogation in auto accidents because the incident could hurt the at-fault party’s insurance record and affect insurance premiums. As a result, the at-fault third party settles the issue without filing a claim with the at-fault party’s insurer by issuing a waiver of subrogation to the party that experienced the loss.

A surety bond is a legally enforceable three-party written agreement in which a neutral third party (surety), acting as the issuer of the bond, guarantees that one party (the principal) will perform the terms of the contract for the other party (the obligee).

There are numerous types of surety bonds. The most common small-business-related surety bonds include performance or contract bonds sold by insurance companies and banks. These surety bonds protect you from financial loss if a contractor fails to perform.

Subrogation occurs when the surety takes the place of the principal and assumes its claims and legal rights.

There are three primary types of subrogation:

• Equitable subrogation: If you suffer damage through the fault of another, your insurer attempts to get a refund from the at-fault party or their insurer. For example, suppose a neighbor’s tree falls on your house due to their negligence, and your insurance pays for the repairs. In this case, your insurer might seek to recover those repair costs from your neighbor or their insurance, even though your policy terms don’t directly cover this action.
• Contractual subrogation: Contractual subrogation is when your policy terms allow your insurer to recover costs from the party that’s responsible for an accident. For example, if you’re in a car accident that’s not your fault and your insurer pays for repairs, they can seek a “refund” for those costs from the at-fault party’s insurer. You give this right to your insurer in your policy, allowing it to get its money back.
• Statutory subrogation: Statutory subrogation applies to statutory insurance, like workers’ compensation. For example, say one of your employees is injured on the job and receives a payment from the workers’ compensation insurer. If the injury was due to negligence, such as failing to maintain safe working conditions, the workers’ compensation insurer could then seek to recover the costs of the claim from you, as mandated by law.

The length of the subrogation process varies according to several factors, including a case’s complexity, the quality of cooperation between the involved parties, and the state where the incident occurred.

While simpler cases can take weeks, the most complex cases — where the fault is unclear or one party is uninsured — can take months, and sometimes years, to complete.