What is Subrogation in Insurance Law?

Subrogation is a legal doctrine that enables an insurance company to step into the shoes of its insured party (the policyholder) after settling a claim. It empowers the insurer to recover the amount it paid to the insured from a third party responsible for causing the loss or damage. The key principle behind subrogation is that the party responsible for the loss should bear the financial burden, rather than the insurer or the policyholder.

Subrogation plays an important part in the insurance industry, protecting insurers’ interests and maintaining the balance of risk and coverage, yet it often goes unnoticed by policyholders until it directly affects them. In this comprehensive guide, we will demystify subrogation in insurance law, exploring its definition, principles, processes, and implications.

What Does Subrogation Mean in Insurance Law?

Subrogation originates from the Latin word “subrogare,” meaning to substitute. In the context of insurance, it refers to the process by which an insurance company seeks reimbursement from the party responsible for causing a loss to the insured. After compensating the insured for their loss, the insurer assumes the insured’s legal rights to pursue recovery from the at-fault party or their insurer.

Why Does Subrogation Happen?

The primary goal of subrogation is to ensure that the loss is ultimately borne by the party at fault, rather than the insurance company or the innocent insured. This principle serves multiple purposes:

Promoting Fairness and Equity: It upholds the principle that the party responsible for causing the damage should bear the cost of that damage.
Cost Control: Subrogation helps ​​by recovering the costs of claims from the at-fault parties, insurers can mitigate the impact of losses on their financial performance, which in turn helps in stabilizing premium rates for all policyholders.
Preventing Unjust Enrichment: It ensures that insured individuals do not profit from their insurance coverage by receiving a double recovery, i.e., compensation from both the insurance company and the at-fault party for the same loss.

What Is the Most Common Type of Subrogation?

Subrogation applies across various types of insurance policies, including auto, health, property, and workers’ compensation insurance. However, the specifics of how subrogation is applied can vary significantly depending on the type of insurance and the jurisdiction.

Auto Insurance: If you’re in an accident caused by another driver, your insurer might pay for your damages and then seek reimbursement from the at-fault driver’s insurance company.
Health Insurance: If you’re injured and your health insurer covers your medical expenses, they may subrogate against the party responsible for your injuries or their insurer.
Property Insurance: In cases of property damage, your insurer can pursue the party responsible for causing the damage after compensating you for your loss.

State Farm: A Subrogation Case Study

As an example of how subrogation litigation can work in the real world, consider this case where State Farm brought an action against their insured to recover the amount paid to their insured under collision coverage of automobile policy.

Paul Russak was insured by State Farm under an automobile policy. Janice, Mr. Russak’s wife, was involved in an automobile collision with a third party while she was operating an automobile owned by her husband. As a result of the collision, Mrs. Russak sustained personal injuries and Mr. Russak’s automobile was damaged.

Thereafter, Mr. Russak made a claim under the collision coverage with State Farm for the damage to his automobile. The auto damages claim was paid, and the company received from Mr. Russak a subrogation receipt in the usual form which specifically provided that

‘. . . no such settlement will be made nor release given by the undersigned without the written consent of the said insurer and the undersigned covenants and agrees to cooperate fully with said insurer in the prosecution of such claims . . .’.

Thereafter, Mr. Russak and his wife filed suit for personal injuries to the wife. Upon the settlement of the suit for personal injuries, Mr. Russak and his wife executed a general release specifically including property damage.

Then, State Farm, without knowledge of the general release, filed suit to enforce its subrogation rights. Upon the presentation of the general release, however, State Farm’s suit was voluntarily dismissed. [1]

State Farm brought an action against their insured to recover the amount paid to their insured under collision coverage of automobile policy.

The Court held that State Farm could recover the amounts paid where State Farm was prevented from enforcing its subrogation rights by the insured’s execution of a general release, including property damage, in violation of the subrogation agreement.

How Do Insurance Companies Handle Subrogation?

Insurance companies typically systematically handle subrogation to recover costs incurred due to claims paid out to their policyholders. They work to efficiently recover costs while minimizing legal expenses and maximizing the chances of a successful recovery.

Furthermore, they often rely on experienced professionals, such as claims adjusters, subrogation specialists, and legal counsel, to handle subrogation cases. Additionally, insurance companies may utilize technology and data analytics to streamline the subrogation process and identify opportunities for recovery more efficiently.

What Happens if I Receive a Subrogation Letter?

Suppose you receive a subrogation letter from your home or auto insurance company. In that case, it means that your insurer is seeking reimbursement for expenses they paid out on your behalf following an accident or incident covered under your policy. Here’s what typically happens in this situation:

Reception of a Subrogation Letter

The subrogation letter will notify you that your insurance company is seeking reimbursement for costs related to a claim they processed on your behalf. It will provide details about the incident, including the date, location, and nature, and the amount paid by your insurer. The subrogation letter may include documentation supporting the insurer’s claim for reimbursement, such as repair estimates, medical bills, and other relevant expenses incurred as a result of the incident.

Investigation

Your insurer may have already investigated the circumstances surrounding the incident to determine liability. This could involve gathering evidence, obtaining police reports, and assessing damages. It’s essential to cooperate with your insurer during the subrogation process. This may involve providing additional information, participating in negotiations with the other party’s insurance company, or assisting in any legal proceedings that may arise.

Resolution and/or Legal Action

The goal of the subrogation process is to recover the costs incurred by your insurer from the responsible party or their insurance company. This could involve reaching a settlement through negotiation or pursuing legal action.

If the responsible party disputes liability or refuses to pay, your insurance company may pursue legal action to recover the costs through the court system.

Finally, keep in mind that the outcome of the subrogation process could potentially impact your insurance premiums in the future.

What is the Subrogation Process Like for the Insured?

In the majority of cases, your involvement may be as little as providing documentation and/or signing an agreement with your insurer to allow them to pursue the claim on your behalf. On claims involving a significant dollar amount, you may be asked to sit for an examination under oath or deposition. Under rare circumstances, you may be called to testify at trial.

Indeed, the subrogation process can vary depending on the specific circumstances of your claim and the laws governing insurance and liability in your jurisdiction. Additionally, your involvement in the subrogation process may vary depending on the terms of your insurance policy and the decisions made by your insurance company.

How Do You Fight Subrogation?

Fighting subrogation, especially when you believe you are not liable for the damages or losses, can be challenging. Carefully read through the subrogation letter you received from your insurance company. Understand the details of the claim, including the incident, the damages or losses claimed, and the basis for seeking reimbursement. If you plan to fight subrogation it is essential you consult with an attorney as soon as possible after receiving the notification.

Fault Determination

Ultimately, fault determination is decided by the “finder of fact”, which may be a jury, judge, or arbitrator depending on the circumstances of your case. The facts used to decide your case are revealed and disclosed in the discovery process.

Policy Exclusions

Review your insurance policy to understand your rights and obligations regarding subrogation. Pay attention to any provisions that may limit or exclude your insurer’s right to subrogate.

Seek the advice of an experienced policyholder attorney to review your policy. It is NOT advised you rely on your own interpretation of your policy. Many policies contain changes and endorsements that change the terms and conditions contained within the policy.

Violation of Subrogation Rights

Violation of subrogation rights can have serious consequences, including potential legal action by the insurance company to enforce its rights and recover costs. It’s essential for insured individuals to understand their obligations regarding subrogation and to cooperate fully with their insurance company to facilitate the subrogation process. If there are any questions or concerns about subrogation rights or obligations, it’s advisable to seek guidance from a legal professional with experience in insurance law.

Examples of violations are settlement without consent, interference with investigation, fraud or misrepresentation, refusal to cooperate, and refusal to assign rights if required under the policy.

What is a Waiver of Subrogation?

Some insurance policies include a waiver of subrogation clause, which prohibits the insurer from pursuing subrogation against certain parties. Violating this clause by attempting to subrogate against a party protected by the waiver could constitute a violation of subrogation rights. The following bears repeating in this section.

Once again, it is not advised you rely on your own interpretation of your policy. Many policies contain changes and endorsements that change the terms and conditions contained within the policy. You also may not have a complete copy of the policy that was in effect on the date of the incident. Policies renew, often with changes, annually in most cases.

Gathering Evidence / Discovery

Discovery refers to the process by which parties involved in a subrogation claim gather information and evidence to support their respective positions. Discovery is a crucial part of the litigation process, allowing each party to learn about the facts and evidence that the other party possesses. In the context of subrogation, discovery may involve interrogatories, requests for production of documents, depositions, requests for admissions, expert witness discovery, and possibly physical or mental examinations if relevant.

The discovery process can be extensive and may vary depending on the specific circumstances of the subrogation claim and the rules of the jurisdiction where the litigation is taking place. It’s essential for parties involved in subrogation disputes to comply with discovery requests and to work with their legal representatives to gather and present evidence effectively. Failure to participate in discovery or comply with discovery requests can have serious consequences, including sanctions imposed by the court.

Attorneys have the resources and expertise to conduct thorough investigations into the circumstances surrounding your claim. They can gather evidence, interview witnesses, obtain expert opinions, and build a compelling case to support your claim.

Consulting with an Attorney

Attorneys specializing in insurance law have the knowledge and experience to interpret insurance policies, statutes, and case law, helping you understand your rights and options. An attorney can serve as your advocate in dealings with the insurance company. They can represent your interests effectively, negotiate with the insurer on your behalf, and challenge the denial through formal channels such as appeals or litigation if necessary.

Insurance companies may offer low settlements or wrongfully deny claims in an attempt to minimize their financial liability. An attorney can assess the value of your claim accurately, negotiate for fair compensation, and ensure that you receive the maximum benefits you are entitled to under your policy.

Dealing with an insurance claim denial can be stressful and overwhelming, especially if you’re already facing financial hardship due to the underlying incident. Hiring an attorney can provide peace of mind, knowing that you have a knowledgeable and experienced advocate working on your behalf to resolve the dispute.

If you plan to fight subrogation it is essential you consult with an attorney as soon as possible after receiving the notification.

We Are the Policyholder’s Advocate

The attorneys at Merlin Law Group are experts in policy interpretation and advocacy. Together we have helped countless insureds recover insurance proceeds from insurance companies who have underpaid and denied claims.

If you need someone to fight for your rights as a policyholder or target of a subrogation claim, reach out to us today. We have eleven offices nationwide and serve over twenty-five states.

[1] Russak v. State Farm Mut. Auto. Ins. Co., 281 So. 2d 541 (Fla. Dist. Ct. App. 1973)