Your company is a contractor working on a renovation project. An employee of one of the other contractors bumps a ladder, sending one of your employees to the floor with broken bones.
Workers are welding on the property next to yours on a windy day. Sparks ignite a plastic tarp covering lumber in your yard. You suffer fire, smoke and water damage to your property.
In all of these scenarios, someone's carelessness will cost you for medical bills, repairs, or replacement of damaged property. If you have automobile collision, Workers' Compensation, and property insurance, your insurance company will pay for your losses (after deductibles.) You may think the careless person should pay instead.
Your insurance company could not agree with you more. That is why there is an insurance concept known as subrogation.
Subrogation means that, when an insurance company pays you for your property damage or injuries, and you have the right to recover that amount from someone else, the insurance company gets your right to recover from that person. Virtually every insurance policy that covers the policyholder's own losses (as opposed to losses the policyholder caused to someone else) requires this.
This provision commonly requires the policyholder to:
- Help the insurance company recover its payment,
- Not interfere with the insurer's rights after a loss occurs, and
- Hold onto the amount of the recovery and reimburse the insurer up to the amount it paid, if the policyholder recovers the payment.
In the situation where your employee is injured because another contractor's employee moved his ladder, your insurance company pays Workers' Compensation benefits to the injured worker. You and the injured worker have the right to sue the other contractor for the loss. However, because your insurance company paid for it, it gets your right to sue. It will request reimbursement from the contractor or its insurance company. Getting reimbursement can take a long time, as the other contractor's insurer will want to be certain its policyholder was legally liable for the accident.
If you have paid a deductible, your insurer may also attempt to recover the amount of your deductible from the other person or insurer. If it is successful, it will reimburse you for that amount. Most policies do not promise to do this, but in some circumstances insurers will do it voluntarily.
Why does subrogation matter to you?
- It is fair. Individuals who caused a loss are held responsible for paying for it.
- You receive prompt payment for your loss. Your insurer will not determine whether you were at fault. It will determine only whether your policy covers that property or injury and whether it covers the cause (fire, theft, flood, etc.). Conversely, an insurer will not pay a third party for an accident unless it is convinced that its policyholder was at fault. Reaching that conclusion takes time. Unless fault is obvious and the other person cooperates, it is often faster to obtain payment from your own insurer.
- When your insurer gets reimbursed for losses it pays to you, it normally will not consider those losses when it decides whether to renew your coverage in the future and what your premium should be.
Subrogation is a normal and essential part of the insurance system. It ensures that insurance companies meet their obligations to pay for losses while holding others responsible for meeting theirs. Without it, insurance would cost more because insurers would be unable to recover some of these losses. With it, insurance is readily available at a reasonable cost.