This month’s featured dispute demonstrates just how much insurers can be oblivious. The issue? One insurer’s attempt to claw back a claims payment it made. In this instance, it believed it could use subrogation.

A fire started at a business protected under a commercial property policy. The fire started when gas dripped from a car that was on a hoist for repairs. The gas fell onto a hot floor light and ignited. After paying more than $20,000 in property damage, the insurer sued the mechanic under the car owner’s auto policy. Both the mechanic and the car’s owner were employees of the business. The mechanic, as a favor, had put the car on the hoist to try to repair the gas leak.

The building’s insurer argued that the mechanic, due to the repair activity, was an additional insured under the auto policy. They claimed that he was responsible for the damages due to negligence. A trial court agreed with that reasoning.

Click below to see how a higher court interpreted the loss upon appeal.

In the selected court case, the initial claims payment represented precisely how property insurance should work. An eligible peril (fire) occurred, it caused tangible damage, and the affected property was eligible for protection under the policy.

The insurer promptly responded to an eligible loss so, everyone won and everything went back to normal after the repairs, right? Well…no! Not in this instance. After paying for the loss, the insurance company acted to recover its payment because it identified another party (the insured company’s employee) as being responsible for the loss.

Click here for information on what is protected under a Commercial Property policy. This information is from the Commercial Property Insurance Section of PF&M found in Advantage Plus.

The simple loss situation was complicated by the commercial property insurer. It fulfilled its contractual obligation to pay for an eligible loss. Of course, insurers have other rights including, indirectly, subrogation. Another name for that term is “Right of Recovery.”

Rather than a right belonging to an insurer, subrogation belongs to the insured entity. When an insurance company seeks reimbursement from a party that is at fault for a loss, it does so on behalf of its insured. Subrogation is both an efficient and lucrative process. It is the greatest source of insurer income after premiums and investments.

Click here to see additional information on this and other common property policy provisions. It is from Gordis on Insurance found in Advantage Plus.

Subrogation is an important reminder that insurers and insureds have active obligations to each other! The two parties must protect and preserve each other’s rights. Insurers (and their agents) can assist policyholders by making sure they are aware of important policy provisions. It is also important that insurers (and agents) know what is happening at the operations that they choose to insure. In this instance, it would have been helpful if the insured business did not allow repairs of employee vehicles. Making the insurer or agent aware of this exposure could have led to its elimination.

Further, due to an unknown exposure, the insurer made an odd attempt at subrogation by arguing that the mechanic was, somehow, covered by the other employee’s personal auto policy. A better educated commercial customer was the best source of risk management for all involved.

Click here to see an excerpted article on the importance of customer service and education. It is from the 12/21 issue of Rough Notes Magazine found in Advantage Plus.