Subrogation (Excerpt)

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 are new to the neighborhood. A month after moving in, they 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.

The neighbors know each other well, and they are quite competitive. 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.

When properly used, it provides benefits to insurance companies and their policyholders such as the following:

• Preserves Policy Intent
• Controls Insurance Cost
• Assists with Insurer Profitability

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.