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Updated Apr 04, 2024

What Is Subrogation in Insurance?

Mark Fairlie
Mark Fairlie, Senior Analyst & Expert on Business Ownership

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Here’s a typical scenario: A worker gets injured on a sales call at a third party’s property, and the company’s insurance pays a workers’ compensation claim. Here’s where things stop being typical: After the compensation payout, the insurance company follows up by representing the injured worker in court to recover the money it paid on the workers’ compensation claim from the third party. This process is called subrogation.

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Through subrogation, an insurance company can recover money it paid out for insurance claims from the party that caused the injury or damage. Here’s a look at how subrogation clauses work in insurance and what a business owner should know. 

Did You Know?Did you know

Some business insurance costs are tax deductible, including insurance premiums in the tax year in which they apply.

What is a subrogation clause?

A subrogation clause allows insurance companies to pay their insured’s losses while still seeking payment or reimbursement from the third party that caused the incident. Several types of business insurance policies — primarily ones that cover commercial property, workers’ compensation, commercial auto and inland marine — can contain a subrogation clause.  

A subrogation clause allows the insurance company to recover money from the at-fault party or the at-fault party’s insurance company using a debt collection process or the court system. Subrogation clauses can be found in the policyholder’s insurance contract or may be added to existing contracts. 

Aside from slip-and-fall claims from employees on property owned by a third party, insurers can subrogate claims from accidents that involve machinery or equipment owned by a third party. Because businesses often rent equipment in their day-to-day operations, this aspect is crucial. 

How does subrogation work?

The subrogation process starts after an injured party files an insurance claim for damages or losses they’ve suffered.

If the insurer decides to pursue a subrogation claim from the at-fault party, the situation must meet the following three conditions:

  • The insurer has paid the injured party (in part or in full).
  • The insurer has received permission from the injured party to pursue subrogation. (They may have automatically consented when they agreed to the policy’s terms.)
  • The insurer has explained the subrogation process to the insured. (In most cases, the policy agreement documentation will already outline the process.)

Assuming these conditions are met, the insurer’s first task will be to determine who’s at fault. It will thoroughly investigate the claim event’s circumstances to establish responsibility. For example, in the case of an auto accident, the investigation will include examining accident reports, speaking with witnesses, and analyzing physical evidence from the scene.

Sometimes, fault can be shared. Using the auto accident example, the injured party’s insurer and the at-fault insurer will negotiate the share of the blame. The insurer will receive a settlement based on the proportion of fault ascribed to the injured party. (We’ll explain more about subrogation settlement negotiations later.)

The subrogation process can become highly complex when multiple parties are involved. If the other party’s insurer is uncooperative or behaves unreasonably (from the insurer’s perspective), the insurer may take the other party’s insurer to court.

The injured party’s involvement in the process will be minimal. However, they must be available to answer questions.

FYIDid you know

If the other party is uninsured, the injured party’s insurer may start a subrogation claim against them personally for the damage caused.

What is a waiver of subrogation?

A waiver of subrogation is an insurance endorsement that prohibits your insurance company from pursuing the at-fault party for compensation. For example, if you’re in an auto accident, you may choose to sign a waiver of subrogation if the at-fault driver prefers to settle. 

Businesses sometimes have compelling reasons to sign a waiver of subrogation. For example, say an accident occurred at a client’s site. With a subrogation clause, your insurer would have the right to recover the portion of the loss that was your client’s fault. But your client may want your business to waive the right of subrogation so they won’t be held liable for damages, even if they’re wholly or partially responsible for a loss. If you don’t waive the right of subrogation, your relationship with your client may suffer. 

Signing a waiver of subrogation may have these serious consequences: 

  • Signing a waiver of subrogation could potentially void your coverage or conflict with the terms of your policy. 
  • Granting your insurance company the right to subrogate may lower your premiums. However, waiving the right to subrogate may increase your premiums because the insurance company faces increased exposure. 

Some insurers prohibit their insureds from signing waivers of subrogation because they add to the insurance company’s risk. It’s crucial to consult your insurer, insurance broker or business attorney to evaluate your legal risks when you’re deciding whether waivers of subrogation will be to your advantage or disadvantage. 

FYIDid you know

Waivers of subrogation may or may not be permitted, depending on your insurance contract, type of insurance policy, and any endorsements, changes or additions to the standard policy.

Subrogation FAQs

Yes. Sometimes, negotiating and settling a subrogation claim is preferable for one or both parties. For example, an insurance company seeking subrogation may prefer a quick settlement. Or, as mentioned earlier, when fault is shared, an insurer may negotiate the insured’s share of the blame and arrive at a settlement based on their level of fault.

Not every policy or insurer asks for a subrogation clause. However, many do because these clauses reduce the insurer’s risk and help cover losses. Because of the reduced risk involved, an insured may enjoy a lower premium when they agree to a subrogation clause.

If you’re a business owner considering whether to include a subrogation clause, you must weigh the benefits of a reduced premium against the potential harm to customer relationships if your insurance company seeks compensation from them for damages.

You must exercise due diligence when deciding to waive or include a subrogation clause on your company’s insurance policy. It’s essential to consider your company’s inherent risk level, your industry’s risk exposure, and whether your company’s current risk management plan requires a waiver.

No. In many instances, the insurance company won’t pursue subrogation in potential cases for various reasons, including the following:

  • There isn’t proper documentation to show the defendant’s liability.
  • There’s no collection strategy in place on the part of the insurance carrier.
  • The carrier doesn’t have collections experience.
  • There’s no collections system in place to pursue the claim.
  • The insurance carrier doesn’t handle files properly, so there’s a very low probability of a win.

Waivers of subrogation clauses are common in the construction industry. For example, the “waiver of consequential damages” is standard in most construction contracts. This waiver helps prevent construction delays because of disputes and litigation resulting from damages covered in the business owner’s insurance policy.

Under this clause, the construction business owner waives the right to sue third parties in the project, including contractors and subcontractors, to help avoid the costs and time lost from litigation and negotiation.

An automobile accident is another example of when waivers of subrogation can be used. In some cases, settling a minor automobile accident with a third party is quicker than processing an insurance claim through the at-fault party’s insurer.

Some parties choose to use a waiver of subrogation in auto accidents because the incident could hurt the at-fault party’s insurance record and affect insurance premiums. As a result, the at-fault third party settles the issue without filing a claim with the at-fault party’s insurer by issuing a waiver of subrogation to the party that experienced the loss.

A surety bond is a legally enforceable three-party written agreement in which a neutral third party (surety), acting as the issuer of the bond, guarantees that one party (the principal) will perform the terms of the contract for the other party (the obligee).

There are numerous types of surety bonds. The most common small-business-related surety bonds include performance or contract bonds sold by insurance companies and banks. These surety bonds protect you from financial loss if a contractor fails to perform.

Subrogation occurs when the surety takes the place of the principal and assumes its claims and legal rights.

There are three primary types of subrogation:

  • Equitable subrogation: If you suffer damage through the fault of another, your insurer attempts to get a refund from the at-fault party or their insurer. For example, suppose a neighbor’s tree falls on your house due to their negligence, and your insurance pays for the repairs. In this case, your insurer might seek to recover those repair costs from your neighbor or their insurance, even though your policy terms don’t directly cover this action.
  • Contractual subrogation: Contractual subrogation is when your policy terms allow your insurer to recover costs from the party that’s responsible for an accident. For example, if you’re in a car accident that’s not your fault and your insurer pays for repairs, they can seek a “refund” for those costs from the at-fault party’s insurer. You give this right to your insurer in your policy, allowing it to get its money back.
  • Statutory subrogation: Statutory subrogation applies to statutory insurance, like workers’ compensation. For example, say one of your employees is injured on the job and receives a payment from the workers’ compensation insurer. If the injury was due to negligence, such as failing to maintain safe working conditions, the workers’ compensation insurer could then seek to recover the costs of the claim from you, as mandated by law.

The length of the subrogation process varies according to several factors, including a case’s complexity, the quality of cooperation between the involved parties, and the state where the incident occurred.

While simpler cases can take weeks, the most complex cases — where the fault is unclear or one party is uninsured — can take months, and sometimes years, to complete.

What are the benefits of subrogation?

The main benefit of subrogation to your business is that your premium may be unaffected after you’ve made a claim because your insurer recoups the cost from the at-fault party. Subrogation reduces the insurer’s losses from payouts and can boost the insurer’s profitability.

Nicole Urbanowicz contributed to this article.

Mark Fairlie
Mark Fairlie, Senior Analyst & Expert on Business Ownership
Mark Fairlie has written extensively on business finance, business development, M&A, accounting, tax, cybersecurity, sales and marketing, SEO, investments, and more for clients across the world for the past five years. Prior to that, Mark owned one of the largest independent managed B2B email and telephone outsourcing companies in the UK prior to selling up in 2015.
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