Subrogation

An insurance policy, no matter what is being covered, 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 (injuries to other people and/or loss or damage to property that belongs to others). However, eligible losses are restricted to the policyholder’s legal responsibility. Many times, a loss is settled under a liability policy, but someone else may actually be responsible. Consider an example:

Jon and Jenny throw a huge party and invite all of their neighbors. One of the activities is volleyball, and they set up a net and space to play in their backyard.

During one game, an accident happens. Glen is injured while trying to block a ball at the net. The injury is severe, and Glen ends up paralyzed. He sues Jon and Jenny for his substantial medical costs, and Jon and Jenny’s insurance company settles the loss.

Later, it is discovered that Paul, who was on the opposing volleyball team, had grabbed and pulled Glen when they were battling at the net, causing Glen to lose his balance and fall. Jon and Jenny’s insurance company learns of this, and they sue Paul to recoup the money they paid for the loss.

The effort to recover payment made by Jon and Jenny’s insurance company illustrates “subrogation,” 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.

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 for injury or damage that can be attributed to another. The public good is served by ensuring 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 in 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 must protect their right to subrogation. For example, 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.