What Is Subrogation, and Why Does It Matter?

No matter what is being covered, an insurance policy is a contract between the insurance company and the party that wants protection.

When a policy involves liability coverage, the contract essentially means that the insurance company will handle losses, such as injuries to other people and/or loss or damage to property that belongs to others. However, eligible losses are restricted to those that are the legal responsibility of the policyholder. In many circumstances, a loss may be settled under a liability policy, but someone else may actually be responsible.

Consider this example: Jon and Jessica are new to a neighborhood. A month after moving in, they throw a huge party and invite all of their neighbors. They have food, beverages, music, and more. They even set up a volleyball net in their backyard.

The neighbors know each other well, and they are quite competitive. During one game, Glen, who lives three houses down, injures his neck while trying to block a ball at the net. The injury is so severe that Glen ends up paralyzed. He sues Jon and Jessica for his substantial medical costs, and their insurance company must settle the loss.

Later, it is discovered that Paul, who lives across the street, was on the opposing volleyball team and had grabbed Glen's hair and pulled roughly when they were battling at the net, which caused Glen to lose his balance and fall. Jon and Jessica's insurance company learns of this, and they sue Paul to recoup the money they paid for the loss.

The effort to recover the payment made by Jon and Jessica's insurance company illustrates why subrogation is an essential insurance policy provision. It is a legal right that allows the insurance company to take over a right held by its policyholder. Once an insurance company claims this right, it can pursue recovery from another person (including other entities such as partnerships or corporations) who is actually responsible for a loss.

When properly used, subrogation provides many benefits to insurance companies and their policyholders.

Preserves Policy Intent

The purpose of any insurance policy is to restore a party's financial position after an accidental loss. However, many losses are directly caused by a person or party's actions. An insurance company may pay for a loss upfront, then use subrogation as a next step. It allows them to overtake the policyholder's legal right and pursue repayment from a party that is legally responsible for a loss occurring. Subrogation helps maintain the intent of insurance policies to respond to accidents rather than to pay more injury or damage that can be attributed to another entity. This benefits the public good by making sure the parties who caused the loss are held accountable.

Controls Insurance Cost

When insurers practice subrogation, it benefits policyholders. Subrogation is the recovery of payments that were paid out in claims. Reduction in claims payments minimizes the need to raise insurance premiums. This makes insurance more efficient and affordable.

Assists with Insurer Profitability

Profitable insurance companies are the ones that can continue providing insurance protection. Profitability is created in several ways. The first is to make money by properly evaluating the business it agrees to insure. Securing more premiums than it pays out in losses is called underwriting profit. Insurers may also make proper investments with some of their funds. Investment profit is another source of income. Unknown to many, subrogation is the next primary method for an insurance company to be successful. Every dollar a company recovers through subrogation goes directly to its bottom line.

Subrogation is so important that policyholders are required to protect their right to subrogation. A policyholder may not waive the right without an insurance company's written permission. Further, a policyholder that harms (also known as prejudicing) that right could face consequences.

If you encounter a situation where you think subrogation may be applicable, let our team help you. The agents at Williams Insurance Fullerton are ready to right these wrongs.