Insurance Subrogation

With many types of insurance, the insurance company takes on the risk of paying the insured for damages caused by a third party. If a home catches on fire, the homeowner's property insurer will pay for damages caused by someone other than the insured started the fire, deliberately or negligently. If there had been no insurance, the homeowner would have had to sue the person who started the fire to be reimbursed for the damage. With an insurance contract, however, the insurance company pays the damage. The insurance company then can sue the person who started the fire to be reimbursed for the amount it paid its insured. The insurance company is subrogated to the insured because the company "stands in the place" of the insured in the lawsuit against the person at fault. As part of an insured's settlement with its insurance company, the insured will frequently sign a release to the benefit of the insurer, in which the insured assigns all of its rights against the wrongdoer related to this particular claim to the insurer. Among the rights frequently given the insurer in these subrogation/release documents is the right of the insurer to bring the action against the wrongdoer in the name of the insured, so that it will appear to a jury that the lawsuit is between two people, not between a defendant and an insurance company.

When the insurance company is subrogated to the insured, the insurance company takes on the insured's claim against the party at fault. The insurance company has the same rights as the insured party would have in the lawsuit. The insurance company can seek the same damages that the insured could have sought, limited by the amount it paid to the insured. If the insurance company collects more from the third party than the company paid out on the insurance claim, the company must pay the difference to the insured.

The insurance company also is subject to the same defenses the at-fault party could have asserted against the insured. For example, if the insured was partially at fault for the damage, the at-fault party could claim this as a partial or complete defense. If the insured had to provide notice of its intent to sue, such as in some lawsuits against a governmental agency, the insurance company also must give such notice.

The insurance company's right to subrogation limits the insured's rights in several ways. If the insured settles with an at-fault party without consulting with the insurance company, the insured has breached the insurance contract and may be liable to the insurance company. If the insured enters into a settlement knowing that the insurance company has a right to subrogate the claim, he or she may still be liable to the insurance company. It is important that the insured consult a lawyer before signing any releases absolving anyone from liability, especially if insurance might cover the damage.

The insurance company usually has the ultimate authority to decide when and how to proceed against the third party. The company may decide to sue a third party that the insured would prefer not to sue. The company may decide not to sue at all. In that instance, the insured may be able to get a waiver from the company that allows the insured to sue in his or her own right. If the company decides to settle for what it paid out on the claim, but the insured could have received more in the lawsuit, the insurance company may be found to have acted in bad faith. Furthermore, if an insurance company is found to have acted in bad faith in denying or delaying the insured's claim, it may be denied the right to be subrogated to the insured.

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