Subrogation - Part 2

In part 1 of this discussion, we introduced the concept of subrogation, an important process for insurers. When properly used, it provides 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 and then use the next step of subrogation. It allows them to take over 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. The public good is served 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. Second, insurers make proper investments of 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.

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