Subrogation refers to a person following in another person’s footsteps. In the context of insurance, an insurer will attempt to recover the cost it paid for a loss if a third party was responsible for causing at least part of the loss.
There is often considerable confusion as to whether subrogation is based on equity or contract law. An insurance policy may modify implied contractual rights and rights arising from equity by the express terms of the contract.
The assignment applies only if the insured has been fully indemnified under the policy. But even if an ‘average’ or ‘taxable’ clause reduces the payment, this can still constitute full compensation under the policy and a transfer will take place.
Start an action
When exercising rights of recourse, the insurer must sue on behalf of the policyholder. In turn, compensation for the insured is limited to what the insured could have done against the third party who caused the damage. If the insurer can show that the claim was paid in good faith, the company can file a recourse action.
However, if the policyholder affects the insured’s right of subrogation, the compensation to be paid may be reduced. Most policies prevent entry against co-insured.
Obligations for both parties
If either the insurer or the insured initiates a recourse procedure, they have a duty to protect the rights of the other party. This means that the insured’s litigation cannot affect the insurer’s rights by only claiming damages in excess of the amount already indemnified under the policy.
Thus, while the insured may settle with a negligent third party only for his uninsured losses, this does not affect the insurer’s right to claim his indemnified loss under the policy. Similar obligations apply to the insurer.
And if the insured’s loss is greater than the indemnification provided for under the policy, he has priority over the insurer to recover his uninsured loss in any lawsuit. In such cases, both the insurer and the policyholder have an interest in the outcome of the procedure.
Recoveries are an important part of an insurer’s bottom line. If the insured’s loss exceeds the coverage and the policy is not helpful in establishing the rights of each party in the event of a transfer, careful negotiation is required to establish the rights of both parties and prevent further litigation from undermining a successful recovery.