What Does Subrogation Mean?

Scales of justice on a blue background
Image courtesy of [Jodie Coston] / Getty Images.

Subrogation is a legal concept that is particularly relevant to the insurance industry. It is based on the idea that if Party A accidentally injures Party B, and Party C compensates B for his injury, C can recover the amount of its payment to B by suing A.

The right of subrogation may derive from law or a contract. Many insurance policies contain a subrogation clause, which applies when the insurer has paid a loss to (or on behalf of) an insured.

The clause gives the insurer the right to recover the amount of its loss payment from the party that caused the loss. Insurers would likely have this right even if it was not stated in the policy. Most states have enacted subrogation laws that permit the insurer to pursue recovery once it has fully compensated the insured for the loss.

Typical Subrogation Clauses

Most commercial auto, liability, property and workers compensation policies contain a clause that addresses subrogation. This clause is usually located in the policy conditions. It is often entitled Transfer of Rights of Recovery Against Others to Us. Subrogation clauses may vary somewhat from one type of policy to another. Yet, they all have the same general intent, namely to allow the insurer to seek recovery from the negligent party.

Commercial Property Policy

Many commercial property policies contain a subrogation clause like the one found in the ISO property policy.

It states that if the insurer makes a payment to someone who has a right to recover damages from someone else, those rights are transferred to the insurer (to the extent of its payment). The following example demonstrates how this clause applies.

Jennifer owns a small commercial building that she uses to operate a pet grooming business.

Jennifer has insured the building under a commercial property policy. One day, Jennifer is busy with a furry customer when she hears a loud boom. A moment later, one wall of her building bursts into flames. The fire department soon arrives to extinguish the fire.

Jennifer's building has sustained significant fire damage. The fire was started accidentally by Bill, the owner of the building next door. Bill was using a welding torch to repair a pipe when he accidentally ignited a can of gasoline. Jennifer's property insurer pays for the damage to her building. It then subrogates against Bill. That is, it files a suit against Bill seeking recovery for the amount it paid to Jennifer. Because the insurer has indemnified (reimbursed) Jennifer for the loss, it assumes her right to sue Bill, who caused the fire. The insurer has the right to pursue Bill only for the amount it paid to Jennifer.

Liability Policy

Most business liability policies contain the same subrogation clause that appears the standard ISO general liability policy. The clause states that if the insured has rights to recover all or part of any payment the insurer has made under the policy, those rights are transferred to the insurer.

For example, Sallie owns a retail clothing store called Rags to Riches. One day, a store customer trips and falls on a loose floor tile, breaking her leg. The customer sues Rags to Riches for bodily injury. Sallie's liability insurer pays the claim. While investigating the incident, the insurer determines that the tile floor in Sallie's store was improperly installed. The faulty installation caused the floor tile to become loose, triggering the customer's fall. The insurer sues the contractor that installed Sallie's floor for the amount it paid the injured customer. Because the insurer has paid the claim against Sallie's business, it assumes her rights to sue the negligent contractor.

Auto Policy

Like property and liability policies, a commercial auto policy contains a "transfer of rights" clause.

It states that if any person or organization to (or for whom) the insurer makes payment under the policy has rights to recover damages from another, those rights are transferred to the insurer. In other words, if the insurer pays an auto liability or physical damage claim, and someone other than the insured is liable for the injury or damage, the insurer may sue that party to recover the amount of its payment. 

Workers Compensation

The standard NCCI workers compensation policy contains two separate subrogation clauses. The first appears under Part One, Workers Compensation. It is entitled Recovery From Others. This clause gives the insurer your rights, as well as the rights of your injured employee, to recover payments it has made from anyone liable for a worker's injury.

For example, suppose that your firm has purchased a workers compensation policy. One of your employees is injured in an auto accident, and your insurer pays the employee the benefits prescribed by state law. If someone other than the employee caused the accident, the insurer may sue that party to recover the cost of the benefits it paid to your employee. Alternatively, the worker may sue the negligent party and collect an award.

Most states prohibit workers from "double dipping" (receiving duplicate recovery for the same injury). Consequently, a worker who collects damages from the negligent party is usually required to reimburse the insurer for the cost of the workers compensation benefits he or she received from the insurer. Once the insurer has been reimbursed, the worker can usually retain any remaining damages.

A subrogation clause also appears in Part Two of the policy, Employers Liability coverage. It gives the insurer the right to seek recovery from anyone liable for an injury for which the insurer has paid damages under the policy.

You Must Preserve the Insurer's Rights

Once an insurer has paid a claim, it is entitled to whatever rights you have against the negligent party that caused the injury or damage. If you have relinquished your rights, then you have none to transfer to the insurer. For this reason, virtually all subrogation clauses include language requiring you to protect the insurer's right to sue the negligent party. Most clauses prohibit you from waiving (giving up) your right to sue the responsible party after a loss has occurred.

For example, suppose that you are driving a vehicle covered by your business auto policy when you are rear-ended by another driver. You will violate the subrogation clause if you promise the other driver that you won't pursue a claim against him or her for the damage he or she caused.

Most subrogation clauses permit you to waive your subrogation rights against another party before a loss has occurred. This means that you can sign a contract in which you promise not to sue someone, even if he or she is responsible for a loss. Waivers of subrogation are found in many types of business contracts.

Note that while commercial insurance policies generally permit you to waive your subrogation rights before a loss occurs, the permission to do so may not be obvious. Many liability policies prohibit post-loss waivers but are silent on waivers made before a loss. The general consensus is that pre-loss waivers are permitted if they are not specifically prohibited.

Exception to Post-Loss Waiver Rule

There is one exception to the post-loss waiver rule. The standard commercial property policy permits you to waive your rights after a loss if the waiver is made in favor of one of the following:

  • Another insured under the policy
  • A tenant of yours
  • A company that owns or controls your company
  • A company that you own or control