Taken from the dictionary, subrogation is defined as “the substitution of one person (or party) for another.” Going a step further, in an insurance sense, three parties will be involved: the insured, who has suffered a loss; the insurer, who has compensated the insured for all or part of their loss; and the tortfeasor, or party who is allegedly responsible for the damages, through negligence. The definition comes alive in the following scenario:
Let's say a manufacturing company hires a contracting firm to renovate its production plant. The repairs require extensive welding, during which sparks fly, igniting nearby materials and setting a fire that destroys a major portion of the plant. As the insured, the manufacturing firm is compensated for their losses by their insurance company. Under subrogation, the insurance company assumes the right of the manufacturer to sue the contractor—the tortfeasor—to the extent of the damages for which it has reimbursed the insured. The manufacturer also has the right to sue the contractor for any damages not covered by their insurance, which might be substantial if the firm was partially insured.Agent/Broker's Knowledge is Critical
As I indicated earlier, despite their knowledge of the subject, agents and brokers often lose sight of how important their understanding of subrogation can be to a client following a loss.
Insureds should be aware of the fact that it is a general tenet of tort law that an injured party can, if willing, bring an action for damages against a third party. Therefore, as an injured party, the insured who has suffered a loss is entitled to bring such an action. This recourse can be critical to full restoration when a loss is partially insured. Obviously, a client in any of these situations has a strong interest in examining the opportunity for a tort claim against the responsible party!
Along the same line, one of the most crucial aspects of an insurer's investigation immediately after a loss is determining cause and origin. Without such an investigation it might be impossible to determine whether a third party tortfeasor is responsible for the loss. If the insurer does not undertake such an investigation, it can be critical for the insured to do so. This includes hiring the necessary experts, such as cause and origin investigators, forensic investigators, etc. Without the agent/broker's guidance, the insured would probably not recognize the need to take such action.
Distributing Costs and Proceeds
Once the awareness of a claim possibility exists, the attention shifts to how the costs associated with pursuing the claim will be distributed—and the proceeds from the settlement or judgement, divided.
I should point out that this is not a concern if the client is on their own, without the involvement of an insurer having a right to subrogation; or if the insured has been fully compensated by the insurer and is only seeking the return of their deductible. In the
latter case, most insurance companies will agree up front to reimburse the insured for the deductible from the net proceeds recovered in subrogation. In all remaining cases where an insured and insurer pursue a claim against a third party, the distribution of costs and attorney's fees, and the division of proceeds, must be addressed at the outset of the subrogation process.
A Different Principle
The underlying principle behind insurance is to indemnify the insured against a loss. The principle behind the law of torts—under which subrogation falls—is to allocate responsibility for the loss among the parties involved. In an insurance context it means that the insurance company becomes subrogated to the rights of the insured, to the extent of the monies it paid to the insured as indemnification for a loss.
This distribution of a loss settlement by the legal system is known as the doctrine of equitable subrogation. The law recognizes this doctrine as a means of guarding against undue enrichment. A settlement would not be properly allocated if, upon suffering a loss, the insured was able to collect from their insurance company and then through litigation, also collect from a third party. This would amount to a double recovery—or undue enrichment. Most insurance policies contain a subrogation provision that contractually grants the insurer subrogation rights.
Each state has its own rules of law on subrogation, so it's important to understand how the courts in each